UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K10-K/A

Amendment No. 1

 

(Mark one)

x

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended July 31, 20142015

or

¨

o

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                       to

Commission file number: 001-35577

 

KMG CHEMICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Texas

 

Texas

75-2640529

(State or other jurisdiction of


incorporation or organization)

(I.R.S. Employer


Identification No.)

9555 W. Sam Houston Parkway S., Suite 600

Houston, Texas 77099

(Address of principal executive offices, including zip code)

(713) 600-3800

(Registrant’s telephone number, including area code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE EXCHANGE ACT:

 

Title of Each Class

Name of each Exchange on which Registered

Common Stock, $.01 par value

The New York Stock Exchange

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE EXCHANGE ACT:

 

Title of Each Class

Name of each Exchange on which Registered

None

 

Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes   ¨o     No   x

Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes   ¨o     No   x

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes   x     No   ¨o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   ¨o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a non-accelerated filer.smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

¨

o

Accelerated Filer

x

Non-Accelerated Filer

¨

o

Smaller Reporting Company

¨

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   ¨o     No   x

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant computed by reference to the closing price of $15.66$20.92 on The New York Stock Exchange as of the last business day of our most recently completed second fiscal quarter (January 31, 2014)30, 2015) was $135.3$181.3 million.

As of October 24, 2014,December 8, 2015, there were 11,659,00111,715,586 shares of the registrant’s common stock, par value $0.01, per share outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

The proxy statement pertaining to our annual meeting of shareholders is incorporated by reference in Part III of this report.None.

 

 

 


EXPLANATORY NOTE

KMG Chemicals, Inc. (the “Company,” “we,” “us” or “our”), is filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to its Annual Report on Form 10-K for the fiscal year ended July 31, 2015, which was originally filed with the Securities and Exchange Commission (the “SEC”) on November 27, 2015 (the “Original Filing”), to include the information previously omitted from Part III. This information was previously omitted from the Original Filing in reliance on General Instruction G(3) to Form 10-K, which permits the information in the above-referenced items to be incorporated in the Form 10-K by reference from a definitive proxy statement if such statement is filed no later than 120 days after our fiscal year end. We are filing this Amendment to include Part III information in our Form 10-K because we did not file our definitive proxy statement containing this information before that date. The reference on the cover of the Original Filing to the incorporation by reference to portions of our definitive proxy statement into Part III of the Original Filing has been deleted. As a result of this Amendment, the Company is also filing as exhibits to this Form 10-K/A the certifications required under Section 302 of the Sarbanes-Oxley Act of 2002. Because no financial statements are contained within this Form 10-K/A, the Company is not including certifications pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 Except for the addition of the Part III information, the update to the cover page, and the filing of related certifications, this Amendment does not amend or otherwise update any other information in the Original Filing. This Amendment continues to speak as of the date of the Original Filing and the Company has not updated the disclosure contained herein to reflect events that have occurred since the filing of the Original Filing. Accordingly, this Amendment should be read in conjunction with the Original Filing and the Company’s other filings made with the SEC subsequent to the filing of the Original Filing, including amendments to those filings, if any.



1


TABLE OF CONTANTS


2


PART IIII

ITEM 1. BUSINESS

Item 10. Directors, Executive Officers and Corporate Governance.

The following table sets forth certain information with respect to each of our directors as of November 30, 2015, except with respect to Robert Harrer whose information has been updated to reflect his resignation as Vice President and Chief Financial Officer of Innophos Holdings, Inc. in December 2015.

Nominees for Director

Name and Age

Director
Since

Business Experience during the Past 5 Years and Other Information

Gerald G. Ermentrout

(67)

2008

Mr. Ermentrout has over 30 years of experience in industrial gases and electronic chemicals. He joined Air Products and Chemicals, Inc. in 1975 and held various positions until his retirement in early 2007. From 1996 to 2007, Mr. Ermentrout served as the Vice President and General Manager of the Electronic Chemicals Division, which included the high-purity process chemicals business that we acquired in December 2007. In that position, he managed Air Products’ global materials and equipment business serving the semiconductor and flat panel display industries, with responsibility for sales, marketing and operations. During his tenure at Air Products, Mr. Ermentrout also held positions where he managed oxygen, nitrogen and hydrogen plants and pipeline systems, as well as managed major acquisitions and divestitures. He served on the board of directors of AZ Electronic Materials, a public company previously listed on the London Stock Exchange from April 1, 2007 until June 1, 2014. He received a Bachelor of Science in Engineering from the United States Naval Academy and a Masters of Business Administration from Lehigh University. Mr. Ermentrout is the Lead Director on the our Board of Directors as well as the chair of the Risk Oversight Committee and a member of the Compensation and Development Committee. Mr. Ermentrout brings critical industry experience and specialized knowledge in electronic chemicals, our largest business segment, to our Board. That experience includes managing electronic chemical operations in North America and internationally, and pursuing merger and acquisition opportunities in that business.

Christopher T. Fraser

(57)

2008

Mr. Fraser is a director, Chairman of the Board, President and our Chief Executive Officer (“CEO”). He became President and CEO on an interim basis in July 2013, and was selected as our permanent President and CEO in September 2013. He has broad experience in the chemical industry, much of that experience with major, global participants. From 2006 to 2009, he was the President and CEO of Chemical Lime Company, the leading North American producer of calcium based (limestone) alkaline products with various industrial applications including the manufacture of steel, water treatment, flue gas desulphurization, and chemical production. Before joining Chemical Lime, Mr. Fraser was President and CEO of OCI Chemical Corporation, a wholly-owned subsidiary of DC Chemical Co., among the world’s leading producers of high quality soda ash and sodium percarbonate. Prior to joining OCI in 1996, Mr. Fraser held various positions of responsibility in sales, marketing, business development, operations and general management. In 2011, Mr. Fraser joined the Operating Partner Program of Advent International, and in that position he advises that global equity firm on investment opportunities in the industrial sector, focusing on chemicals and materials. Mr. Fraser holds Bachelor of Science in Chemistry and in Business Administration from the University of Connecticut, as well as a Masters of Business Administration from Pepperdine University. Prior to becoming our President and CEO, Mr. Fraser served as a director on our Board since 2008, and became Chairman of the Board in December 2012. His leadership, industry and governance experience as the CEO of chemical manufacturing companies, in mergers and acquisitions, and in creating and maintaining an appropriate corporate structure, have been a valuable resource to the Board.

3


Name and Age

Director
Since

Business Experience during the Past 5 Years and Other Information

James F. Gentilcore

(63)

2014

Mr. Gentilcore became a director in May of 2014. Most recently, Mr. Gentilcore was the chief executive officer of Edwards Group, a Nasdaq-listed, leading UK-based technology company that merged with Atlas Copco in January 2014. Mr. Gentilcore has served as a board member of Edwards Group since 2007, and currently sits on the boards of Entegris, a Nasdaq-listed company that specializes in purifying, protecting and transporting critical materials used in the semiconductor and other high-tech industries, and Milacron Holdings Corp., an NYSE-listed company, in the plastics processing field. Mr. Gentilcore also serves as an executive advisor to CCMP Capital Advisors LLC, a global private equity firm specializing in buyouts and growth equity. From 2009 until 2011, Mr. Gentilcore was CEO of Epac Technologies, Inc., a venture

capital-funded leader in logistics solutions for technology companies. Prior to his position at Epac Technologies, Mr. Gentilcore was the CEO of Helix Technology Corporation, a Nasdaq-listed company, and led its merger with Brooks Automation in 2005, where he continued as COO of the combined company. Mr. Gentilcore holds an MBA from Lehigh University and an undergraduate Engineering degree from Drexel University. Mr. Gentilcore is a member of the Nominating and Corporate Governance Committee and the Risk Oversight Committee. Mr. Gentilcore’s market knowledge and insights are of tremendous value to the Board as the Company pursues a long-term growth strategy.

George W. Gilman

(73)

1996

Mr. Gilman served as a director of our subsidiary KMG-Bernuth from 1995 until 1997 and became a director on our Board in 1996. Mr. Gilman has served as the CEO, President and as a director of Commerce Securities Corporation, a Financial Industry Regulatory Authority member firm, since 1982. He practiced law with the law firm of George Gilman, P.C. from 1986 to 1998, and since 1998 has practiced with the law firm of Gilman & Gilman, P.C. He also has been involved in the commercial real estate business since 1987, and currently through Gulf Equities Realty Corp. Mr. Gilman is a certified public accountant. Mr. Gilman is a member of the Audit Committee and a member of the Nominating and Corporate Governance Committee. Mr. Gilman’s knowledge of accounting and legal matters, and his experience in public company financing and investor relations, provide the Board an important resource.

Robert Harrer

(50)

2015

Mr. Harrer became a director in September 2015. From March 2014 until December 2015, Mr. Harrer was Vice President, Chief Financial Officer of Innophos, a leading producer of performance-critical specialty grade phosphate products and nutritional specialty ingredients. From 2010-2013, Mr. Harrer was Executive Vice President, Chief Financial Officer and Chief Administrative Officer of Avantor Performance Materials, a global manufacturer of performance materials and chemicals for leading-edge electronics, biopharmaceutical, laboratory and research applications. Avantor is owned by New Mountain Capital LLC, a private equity firm, for which Mr. Harrer worked as a business consultant prior to the acquisition of Avantor. From 2000-2009, Mr. Harrer worked for Rohm and Haas in various leadership positions, including Chief Financial Officer of the Electronic Materials business, Director of Finance of the European Region, and Corporate Controller and Director of Financial Planning at Rohm and Haas’ Philadelphia headquarter. Following The Dow Chemical Company’s acquisition of Rohm and Haas in 2009, Mr. Harrer served as division controller at Dow. Mr. Harrer earned his Master of Business Administration and Mathematics at Albert Einstein University in Ulm, Germany. Mr. Harrer is a member of the Audit Committee and a member of the Nominating and Corporate Governance Committee. His financial, chemical industry and executive experience are invaluable resources for the Board.

John C. Hunter, III

(68)

2011

Mr. Hunter has over 40 years of global chemical industry experience. He began his career in 1969 with Monsanto Company, and for the next three decades held positions of increasing responsibility in areas such as engineering, sales, and management. He was appointed Vice President and General Manager, Asia Pacific, for the Specialty Chemicals Division of Monsanto Chemical Company in 1989, and Vice President and General Manager, Fibers Division and Asia-Pacific for the Chemicals Group, an operating unit of Monsanto Company, in 1993. Mr. Hunter became President of the Fibers Business Unit in 1995. In September 1997, Monsanto spun off its chemicals business as Solutia Inc., and Mr. Hunter was appointed its President and Chief Operating Officer. He became President and Chief Executive Officer of Solutia in May 1999, and added the role of Chairman of the Board in December 1999. Mr. Hunter retired as Chairman, President and Chief Executive Officer of Solutia in 2004. Mr. Hunter is currently a member of the board of directors and chair of the compensation and nominating committee of Edgewell Personal Care. He received a B.S. degree in Chemical Engineering from the Georgia Institute of Technology and an M.B.A. from the University of Houston. Mr. Hunter is the Chair of the Nominating and Corporate Governance Committee and a member of the Compensation and Development Committee. His commercial, chemical industry and corporate governance experience as the CEO and Chairman of a major chemical manufacturing company are invaluable resources for the Board.

4


Name and Age

Director
Since

Business Experience during the Past 5 Years and Other Information

Fred C. Leonard, III

(70)

1996

Mr. Leonard served as a director of our subsidiary KMG-Bernuth from 1992 until 1997, and served as the Secretary of KMG-Bernuth from 1993 until 2001. From 1972 through April 2015, Mr. Leonard served as the Chair of the Board, CEO and President of Valves Incorporated of Texas, Inc. (“Val-Tex”), a manufacturing company located in Houston, Texas, prior to our acquisition of Val-Tex. Mr. Leonard also currently serves as a board member of Integrity Bank, SSB, an independent community bank in Houston, Texas, and DKI Investments Incorporated, a private Texas Corporation formed to acquire and operate companies. Mr. Leonard is the Chair of our Compensation and Development Committee and a member of our Audit Committee. He provides the Board with critical expertise in compensation systems and strategies, and as the long-time CEO of a private manufacturing company, he brings to the Board leadership experience and a broad-based expertise in a variety of business disciplines.

Karen A. Twitchell

(60)

2010

Ms. Twitchell is a member of the board of directors of Kraton Performance Polymers, where she is on the Audit and Compensation and Development Committees. In addition, she is on the board of Trecora Resources, where she is Chair of the Audit Committee and a member of the Compensation Committee. From 2010 to 2013, she was Executive Vice President and Chief Financial Officer of Landmark Aviation, where she was responsible for all financial and strategic planning functions. Previously, Ms. Twitchell was Vice President and Treasurer of LyondellBasell Industries from 2001 to 2009, where she was responsible for global treasury operations for this worldwide chemical and refining company. Before that, she had served as Vice President and Treasurer of Kaiser Aluminum Corporation and of Southdown Inc. Prior to joining Southdown, Ms. Twitchell was an investment banker with Credit Suisse First Boston in its corporate finance department. Ms. Twitchell holds a B.A. in Economics from Wellesley College and an M.B.A. from Harvard University. Ms. Twitchell is Chair of the Audit Committee and a member of the Risk Oversight Committee. She brings important experience to the Board in accounting matters, financings and capital structure, merger and acquisition transactions, investor relations and enterprise risk management.

Named Executive Officers Who Are Not Directors

The following table sets forth certain information with respect to our named executive officers who are not directors.

Name and Age

Business Experience during the Past 5 Years and Other Information

Roger C. Jackson

(64)

Mr. Jackson was elected Secretary in 2001, and became Vice President and General Counsel in 2002. Prior to then, Mr. Jackson had been a partner since 1995 in Woods & Jackson, L.L.P. and had been a partner in the Houston law firm Brown, Parker & Leahy L.L.P. beginning in 1985.

Ernest C. Kremling

(51)

Mr. Kremling became our Vice President-Operations in 2008. Prior to that, Mr. Kremling spent 20 years with the Dow Chemical Company in various manufacturing roles, which included project management and plant and site leadership. During the course of his employment with Dow, he worked in Asia for several years and held positions of global responsibility that covered Asia, Europe and South America.

Andrew C. Lau

(43)

Mr. Lau became Vice President of KMG Electronic Chemicals, Inc., our wholly owned subsidiary in 2013. Prior to that, Mr. Lau worked with Linde LLC where his assignments included President and General Manager of Linde Lien Hwa in Shanghai from 2010 to 2013 and Head of Global ESG Supply and Greater China Electronics in Taiwan from 2009 to 2010. He holds a Bachelor’s degree in Chemical Engineering from Columbia University, a Master’s degree in Chemical Engineering from the University of California at Berkeley and an MBA in Marketing from the University of Rochester’s William E. Simon Graduate School.

Malinda G. Passmore

(56)

Ms. Passmore became Vice President and Chief Financial Officer in January of 2014. She has 30 years of accounting, financial and IT systems experience, including 11 years at Commercial Metals Company, a Fortune 500 global steel manufacturer. At Commercial Metals, she served as corporate controller and chief accounting officer over a period of six years. Subsequently, she was vice president and chief information officer at Commercial Metals for five years. Most recently, Ms. Passmore was chief financial officer of Country Fresh, a fast-growing privately held wholesale food supplier. At Country Fresh, she was responsible for financial, tax and treasury reporting, as well as human resources, strategic planning and information systems. Prior to her employment at Country Fresh, Ms. Passmore was senior vice president finance for Archipelago Learning, a leading publicly traded international education company.

5


Communication with the Board

In order to provide our shareholders and other interested parties with a direct and open line of communication to the Board of Directors, the Board of Directors has adopted the following procedures for communications to directors. Shareholders and other interested persons may communicate with the Board or with our non-management directors as a group by written communications addressed in care of the Chair of our Nominating and Corporate Governance Committee or our Corporate Secretary, 9555 W. Sam Houston Parkway S., Suite 600, Houston, Texas 77099, but after January 15, 2016 all communications should be sent to 300 Throckmorton Street, Suite 1800, Fort Worth, Texas 76102.

All communications received in accordance with these procedures will be reviewed initially by senior management. Senior management will relay all such communications to the appropriate director or directors unless it is determined that the communication (i) does not relate to our business or affairs or the functioning or constitution of the Board of Directors or any of its committees; (ii) relates to routine or insignificant matters that do not warrant the attention of the Board of Directors; (iii) is an advertisement or other commercial solicitation or communication; (iv) is frivolous or offensive; or (v) is otherwise not appropriate for delivery to directors.

The director or directors who receive any such communication will have discretion to determine whether the subject matter of the communication should be brought to the attention of the full Board of Directors or one or more of its committees and whether any response to the person sending the communication is appropriate. Any such response will be made only in accordance with applicable law and regulations relating to the disclosure of information.

The Corporate Secretary will retain copies of all communications received pursuant to these procedures for a period of at least one year. The Board of Directors will review the effectiveness of these procedures from time to time and, if appropriate, recommend changes. As of November 30, 2015, no such communications had been received.

Board Meetings

The Board of Directors held twelve meetings in fiscal year 2015, including special meetings, and took action by unanimous consent in several instances. All directors attended all of the meetings, except one director did not attend one meeting. All Board members are expected to attend the Annual Meeting. Last year, all directors attended the Annual Meeting.

Stock Ownership Guideline for Non-Employee Directors

We have adopted a stock ownership guideline for non-employee directors. Non-employee directors are to own the greater of 4,000 shares or the number of shares of our Common Stock whose value equals three times the sum of their annual retainer plus the value of their equity awards. Non-employee directors have two years from their election to achieve the 4,000 shares level and five years from their election to achieve the 3x guideline. The Compensation and Development Committee may enforce the guideline by paying director compensation in restricted stock. As of July 31, 2015, each of our non-employee directors has satisfied the requirement as it may relate to them.

Board Committee Membership

The Board of Directors has four standing committees, an Audit Committee, a Nominating and Corporate Governance Committee (“Governance Committee”), a Compensation and Development Committee (“Compensation Committee”) and a Risk Oversight Committee. The Audit Committee, the Governance Committee and the Compensation Committee are composed entirely of non-employee directors whom the Board has determined are independent under the applicable committee independence standards of the New York Stock Exchange. The table below provides the current membership for the four standing committees.

Audit

Committee

Nominating &

Corporate Governance

Committee

Compensation &

Development

Committee

Risk Oversight

Committee

Gerald G. Ermentrout

X

  X*

James F. Gentilcore

X

X

George W. Gilman

X

X

Robert Harrer

X

X

John C. Hunter, III

  X*

X

Fred C. Leonard, III

X

  X*

Karen A. Twitchell

  X*

X

*

Committee Chair

6


Board Leadership Structure

The Board does not have a set policy on whether the roles of the chairman and CEO should be separate and, if separate, whether the chairman should be selected from the non-employee directors or be an employee. Rather, the Board makes this choice on the basis of what it believes is in our best interests at a given point in time. The Board has determined that it is currently in our best interests that Christopher T. Fraser serves as our Chairman, President and CEO. The Board believes that Mr. Fraser’s knowledge and past experience as a CEO will serve us well and that his insights have been, and will continue to be, invaluable to the Board.

We have designated a Lead Director to ensure the representation of the non-employee directors in our leadership structure. The responsibilities of the Lead Director include calling and setting the agenda for executive sessions and other meetings of the non-employee directors, serving as principal liaison for the non-employee directors with the Board Chair and the CEO, substituting for the Board Chair when he is unavailable, and serving as the contact for shareholder communication. Mr. Ermentrout is our current Lead Director.

The Board’s Oversight of Risk Management

Responsibility for risk oversight rests with the full Board. Three committees lend support to the Board in reviewing our consideration of material risks and overseeing our management of material risks. The Audit Committee makes inquiries of senior management about our risk assessment and risk management policies. These policies address our major financial risk exposures and the steps management has taken to monitor and mitigate these risks. The Compensation Committee reviews compensation policies and practices to ensure that our compensation policies are not reasonably likely to have a material adverse effect. We also have a Risk Oversight Committee to assist the Board with oversight of material risk generally, and specifically to assist with oversight of management’s responsibility to identify, assess, prioritize and manage material risks related to our business, and to ensure alignment between our risk-taking activities and our strategic objectives. We have an enterprise risk management steering committee which is comprised of senior executive management. The steering committee is responsible for the administration of our enterprise risk management process. The Risk Oversight Committee receives reports from our enterprise risk management steering committee, and reports regularly to the Board.

Committee Charters, the Code of Business Conduct and Corporate Governance Guidelines

The Audit, Governance, Compensation and Risk Oversight Committees have each adopted charters that have been approved by the Board of Directors. The Board of Directors has also adopted a Code of Business Conduct applicable to directors and all employees, including the CEO, the Chief Financial Officer (“CFO”) and other senior management. The Code of Business Conduct covers such topics as financial reporting, conflicts of interest, compliance with laws, fair dealing and use of our assets. The Code of Business Conduct satisfies the requirements of a “code of ethics” under Section 406(c) of the Sarbanes-Oxley Act of 2002, and requires that any waiver of those provisions as they relate to executive officers or directors may be made only by the Board of Directors and must be promptly disclosed to shareholders along with the reason for the waiver. The Board of Directors has also established Corporate Governance Guidelines covering, among other things, the duties and responsibilities and independence of our directors, director access to management and independent auditors, director compensation, performance reviews of our CEO and management succession planning.

The charters of the Audit, Compensation, Risk Oversight and Governance Committees, the Code of Business Conduct and the Corporate Governance Guidelines, are available on our website at kmgchemicals.com or by writing to Corporate Secretary, KMG Chemicals, Inc., 9555 W. Sam Houston Parkway S., Suite 600, Houston, Texas 77099, but after January 15, 2016 all communications should be sent to 300 Throckmorton Street, Suite 1800, Fort Worth, Texas 76102. These documents will be provided free of charge. Material contained on our website is not incorporated by reference in, or considered to be part of, this Amendment.

Audit Committee

The Audit Committee advises the Board and management from time to time with respect to internal controls, systems and procedures, accounting policies and other significant aspects of our accounting, auditing and financial reporting practices. The Audit Committee also monitors the preparation of our quarterly and annual reports and supervises our relationship with our external auditors. The Audit Committee met seven times during fiscal year 2015.

The Audit Committee operates under a charter approved by the Board of Directors and that satisfies the applicable SEC rules and regulations and the New York Stock Exchange Listed Company OverviewManual. The Audit Committee’s function under its written charter is to appoint the independent registered public accounting firm and auditors to audit our financial statements and perform other services related to the audit; review the scope and results of the audit with the independent accountants; review with management and the independent accountants our interim and year-end operating results; oversee our external reporting; consider the adequacy of the internal accounting procedures; provide oversight for the internal audit function; evaluate the independence of the external auditors; and approve and review any non-audit services to be performed by the independent accountants. The Audit Committee has also

7


established procedures for the receipt, retention, and treatment of complaints we receive regarding accounting, internal accounting controls or audit matters, and the confidential, anonymous submission to us by our employees of concerns regarding questionable accounting or auditing matters.

For most of fiscal year 2015 the Audit Committee consisted of three non-employee directors, George W. Gilman, Fred C. Leonard, III, and Karen A. Twitchell, who are all current members. Robert Harrer joined the Audit Committee upon his election to the Board in September 2015. Ms. Twitchell is the current Chair. Ms. Twitchell has served on our Board of Directors since 2010, and she is a certified public accountant. In the course of her career, Ms. Twitchell, has acquired (i) an understanding of generally accepted accounting principles and financial statements, (ii) the ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves, (iii) experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and complexity of issues that can reasonably be expected to be raised by our financial statements, (iv) an understanding of internal control over financial reporting, and (v) an understanding of audit committee functions. The Board of Directors has determined that Ms. Twitchell is an “audit committee financial expert” within the meaning of that term under the rules of the SEC and has the requisite financial management experience as defined under the New York Stock Exchange Listed Company Manual. The Board has also determined that all of the members of the Audit Committee are independent and financially sophisticated within the meaning of the listing standards of the New York Stock Exchange and as defined in Exchange Act Rule 10A-3.

Nominating and Corporate Governance Committee

The Governance Committee is responsible for developing and implementing policies and practices relating to corporate governance, including establishing and monitoring implementation of Corporate Governance Guidelines. The committee also plans for the succession of the CEO and other executives. The committee is responsible for identifying and assessing candidates for the Board of Directors, including making recommendations to the Board regarding candidates. During fiscal year 2015, the Governance Committee held two meetings. In fulfilling its duties, the Governance Committee, among other things:

·

identifies individuals qualified to be Board members consistent with criteria established by the committee, and with a view to selecting persons whose background and skills support our strategy for increasing shareholder value;

·

recommends to the Board nominees for the next annual meeting of shareholders; and

·

evaluates individuals suggested by shareholders.

In recommending director candidates to the Board, the Governance Committee charter requires the committee to select individuals who possess the highest personal and professional integrity. The selection process includes reviewing a candidate’s depth of experience and availability, the balance of the business interest and experience of the incumbent or nominated directors, and the need for any required expertise on the Board or one of its committees, including the expertise needed to support and oversee the execution of our corporate strategy. In making its nominations, the Governance Committee first evaluates the current Board members. The committee has also developed a matrix of desirable skills and experience to apply to director candidates, and in the appropriate case has retained a third party consulting firm that specializes in locating candidates for the boards of directors of public companies. The objective of this selection process is to assemble a group of Directors with diverse backgrounds and experience that can best represent shareholder interest through the exercise of sound judgment.

For fiscal year 2015 and currently, the Governance Committee consists solely of non-employee directors who are independent within the meaning of listing standards of the New York Stock Exchange and applicable SEC rules and regulations. Members of the Governance Committee for most of fiscal year 2015 and currently are Messrs. James F. Gentilcore, George W. Gilman, and John C. Hunter, III. Robert Harrer joined the Governance Committee upon his election to the Board in September 2015. Mr. Hunter is the Chair.

The Governance Committee will consider recommendations for director made by shareholders for fiscal year 2016. For information on recommending a candidate for nomination as a director, see “Shareholder Proposals for 2016 Annual Meeting” below. Recommendations by shareholders that are made in accordance with the procedures set forth under “Shareholder Proposals for 2016 Annual Meeting” below will receive equal consideration by the Governance Committee, although in fiscal year 2015 no such recommendations were received. Directors and members of management may also suggest candidates for director.

Risk Oversight Committee

The Risk Oversight Committee is responsible for leading the Board in reviewing our consideration of material risks, providing oversight of our management on material risks and making recommendations to the Board regarding material risks and risk mitigation where appropriate. The committee is composed of Gerald G. Ermentrout, James F. Gentilcore and Karen A. Twitchell. Mr. Ermentrout is the current Chair. The Risk Oversight Committee held three meetings during fiscal year 2015.

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Compensation and Development Committee

The Compensation Committee establishes compensation for our CEO and other executive officers, and makes recommendations to the Board of Directors regarding compensation of directors. The committee also administers our incentive compensation and other equity based compensation plans, which included in fiscal year 2015 our 2009 Long-Term Incentive Plan. The Compensation Committee is composed of three non-employee directors, Gerald G. Ermentrout, John C. Hunter, III and Fred C. Leonard, III. Mr. Leonard is the current Chair. The Board has determined that each of the members of the committee is independent within the meaning of the listing standards of the New York Stock Exchange and as defined in applicable SEC rules and regulations. During fiscal year 2015, the Compensation Committee held three meetings.

Section 16(a) Beneficial Ownership Reporting Compliance

Based solely on a review of Forms 3, 4 and 5 and amendments thereto furnished to us, we know of no failure in Section 16(a) beneficial ownership reporting compliance, except that Andrew Lau filed late for one transaction.

Item 11. Executive Compensation.

Compensation Discussion and Analysis

Introduction

This Compensation Discussion and Analysis (“CD&A”) contains the philosophy underlying our compensation strategy and the major elements of compensation paid to the persons included in our Summary Compensation Table. We refer to those persons as named executive officers (“NEOs”). For 2015, our NEOs were:

NEO

Title

Christopher T. Fraser

President and CEO

Malinda G. Passmore

Vice President and CFO

Roger C. Jackson

Vice President, General Counsel and Secretary

Ernest C. Kremling

Vice President, Operations

Andrew C. Lau

Vice President of KMG Electronic Chemicals, Inc.

Executive Summary

In this CD&A, we address the following:

·

the objectives underlying our executive compensation program;

·

what our compensation program is designed to reward;

·

the elements of compensation that make up our compensation program;

·

how we determine executive compensation; and

·

other important compensation policies.

Business Highlights – Financial & Strategic Accomplishments

·

Adjusted EBITDA* increased to $37.1 million, up 21% from $30.6 million last year.

·

Adjusted diluted earnings per share* was $1.21 vs. $0.81 per share reported in the prior year.

·

Long-term debt balance at year-end was $53 million, compared to $60 million at the close of fiscal 2014. During fiscal 2015, the company paid down debt by $30.5 million and borrowed $23.5 million to acquire Val-Tex

*See the discussion on page 20 of our Annual Report on Form 10-K under the caption “Adjusted EBIDTA, Adjusted Net Income and Adjusted Earnings Per Share” for a reconciliation of non-GAAP financial measures.

9


Compensation Program Highlights

·

NEO base salaries increased an average of 7.0%.  

·

Annual incentive awards to our NEOs paid out at 125.7% of target on average.

·

There were no payouts on performance-based long-term incentive awards for the three-year period ending July 31, 2015.  

CEO Pay At A Glance

The majority of CEO pay is variable and dependent upon achievement of specific performance goals and in fiscal year 2015 72.9% of his total direct compensation was variable. The chart below shows elements of CEO total direct compensation (base salary, annual incentive bonus, and probable value of annual equity grants) for Mr. Fraser for the past two years.

(1)

The information presented in the chart is derived from the Summary Compensation Table below.

Good Governance Policies

Below we highlight some of our executive compensation practices which we believe enforce alignment with shareholder interests:

What We Do

What We Don’t Do

R

Majority of NEO compensation is variable

Q

No excise tax gross-ups

R

Majority of long-term incentives performance-based

Q

No hedging transactions by officers or directors

R

Share ownership requirements for NEOs

Q

No share recycling under our amended LTI plan

R

Use an independent compensation consultant

Q

No single trigger change-in-control severance benefits

.

10


Objectives of Our Compensation Program

We manufacture, formulate and globally distribute specialty chemicals. We grow primarilyOur business strategy includes growing in a manner that increases shareholder value by purchasing additional product lines and businesses. We target for acquisition products and businesses in specialty chemicals that operate in segments of the specialty chemical industry that:

provide an opportunity to obtain a significant share of the market segmentleadership position through further acquisitionsacquisition and organic growth;

growth, are of a size that larger industry participants generallyoften find too small to be attractive;

attractive, have niche products with well-established and proven commercial uses;

offer products that have moved well beyond their discovery phase anduses, do not require little or nosubstantial on-going research and development expenditures;or capital expenditures, and

have strong cash flow and significant barriers to entry. To assist in carrying out this strategy, our Compensation Committee has designed our compensation program to:

·

reward executive officers for long-term strategic management and the enhancement of shareholder value;

·

integrate the compensation program with our short and long-term strategic business plans;

·

ensure the alignment of our NEOs with the interests of our shareholders over the long-term; and

·

attract, motivate, reward and retain experienced and highly qualified executive officers.

What Our Compensation Program Is Designed To Reward

Our compensation program is designed to reward executive officers who are capable of leading us in achieving our business strategy on both a short-term and long-term basis. When making compensation decisions, we consider:

·

overall Company performance;

·

individual performance of our executives;

·

relative internal relationships within the executive pay structure;

·

compensation at our peer companies; and

·

ability to pay.

The Elements of Our Compensation

In fiscal year 2015, we utilized the following elements of compensation to support our compensation program objectives:

·

base salary;

·

annual incentive compensation;

·

long-term incentive compensation;

·

other broad-based employee benefits; and

·

executive benefits and perquisites.

11


How We Determine Each Element of Compensation And Why We Pay Each Element

The Compensation Committee continues to weight at-risk performance-based incentives compensation of our NEOs more heavily than base salary. We believe that our compensation program will enhance our profitability and increase shareholder value by more closely aligning the financial interests of our executive officers with those of our shareholders. We believe that the achievement of long-term goals increases shareholder value to a greater degree than the achievement of short-term goals. Therefore, to recognize this philosophy, we intend that long-term incentives be weighted more heavily than either base salary or annual incentives. The pie charts below show the mix of actual direct compensation for our executives in fiscal year 2015, demonstrating the emphasis placed upon variable compensation and long-term incentive compensation in particular in our program:

CEO Pay Mix

Other NEO Pay Mix

About Our Executive Compensation Program

Base Salary

Base salary is compensation paid to an executive for performing specific job responsibilities and it represents the minimum income an executive might receive in any given year. Base salary is essential to attracting and retaining experienced and highly qualified executives, including our NEOs. We initially establish base salary based upon the abilities, accomplishments, and prior work experience and performance of the executive officer. Adjustments in base salary are considered on a discretionary basis, taking into account internal pay relationships and consistency, the executive’s historical contributions, and the experience, level of responsibility, changes in responsibilities, retention risk and market survey data.

We intend to pay base salaries that are within the market median range of national survey and peer group data. See “How We Determine Executive Officer Compensation — Benchmarking and Other Market Data.” Increases in base salary in fiscal year 2015 were driven by market adjustments for the compensation of the CEO and the other NEOs. In addition, increases in base salary reflect that our operations have acquiredgrown substantially in size and currently operate businesses sellingin complexity with recent acquisitions in our electronic chemicals business and the industrial wood treating chemicals. lubricants and sealants business.

Annualized Base Salaries of Named Executive Officers

Year

 

Fraser

 

 

Passmore

 

 

Jackson

 

 

Kremling

 

 

Lau

 

FY 2015

 

$

669,000

 

 

$

276,000

 

 

$

260,000

 

 

$

304,000

 

 

$

259,000

 

FY 2014

 

$

625,000

 

 

$

260,000

 

 

$

248,000

 

 

$

276,000

 

 

$

242,000

 

% Increase

 

 

7.0

%

 

 

6.2

%

 

 

4.8

%

 

 

10.1

%

 

 

7.0

%

12


Annual Incentive Compensation

General

Our annual incentive compensation is designed to focus and motivate our executives to achieve our strategic objectives.

The Compensation Committee administers our annual incentive awards to executives, but delegates to our CEO the day-to-day responsibility for the program with respect to the other executives. Annual incentive compensation rewards executives based upon achievement of the financial performance objectives and individual performance objectives that are established by the Compensation Committee, based upon the recommendation of the CEO for the other executive officers. The Compensation Committee establishes the financial and individual objectives for the CEO. The Compensation Committee evaluates each particular individual’s achievement or progress toward the objectives, and determines the degree to which the objectives have been achieved. The Compensation Committee may make adjustments to the objectives or weight given to a particular objective to take into account special or unforeseen circumstances.

Annual incentive compensation is paid as a percentage of base salary. The annual incentive is calculated for each performance objective using the formula: Base Salary × Annual Incentive Level at Target × % Objective Weight × Payout % for Objective Achieved. The Compensation Committee intends to set annual incentive compensation at approximately the median of national survey and peer group data.

Award Opportunity

Annual incentive compensation for our CEO and the other NEOs is subject to a potential range from threshold, to target, to maximum. The target level for the CEO is set at 90% of base salary and set for other NEOs at 50% of base salary. Threshold performance is set at 45% of base salary for our CEO and 25% of base salary for the other NEOs. The maximum award level is set for performance at 135% of base salary for our CEO and 75% of base salary for the other NEOs. The annual incentive compensation award is calculated as a percentage of actual base salary rather than annualized base salary. The following table describes the award opportunity, as a percentage of base salary, at the threshold, target and maximum levels (between threshold and target and between target and maximum, the award is interpolated based on the percentage of the objective determined by the Compensation Committee to have been achieved):

Award Opportunity as a Percentage of Base Salary for Objectives

for Fiscal Year 2015 for the NEOs

Name

 

Threshold

 

 

Target

 

 

Maximum

 

Christopher T. Fraser

 

 

45

%

 

 

90

%

 

 

135

%

Malinda G. Passmore

 

 

25

%

 

 

50

%

 

 

75

%

Roger C. Jackson

 

 

25

%

 

 

50

%

 

 

75

%

Ernest C. Kremling

 

 

25

%

 

 

50

%

 

 

75

%

Andrew C. Lau

 

 

25

%

 

 

50

%

 

 

75

%

Financial Performance Objectives

The Board of Directors establishes financial performance objectives based upon one or more of the following performance measures:

·

return on equity, assets, capital or investment;

·

revenue growth;

·

earnings per share growth;

·

earnings before interest, taxes, depreciation and amortization (“EBITDA”);

·

gross margin; and

·

operating cash flow or cash flow from operating activities.

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Financial performance metrics may be adjusted for acquisitions, restructuring expenses, CEO transition expenses, foreign exchange translation gains/losses, stock-based compensation and other items as determined to be appropriate by the Compensation Committee. The financial performance objectives may be identical for all executives or may differ among executives to reflect more appropriate measures related to a particular individual’s performance. Performance measures are adopted and weighted by the Compensation Committee annually to give emphasis to performance for which executives have the most direct control.

Each executive’s objectives have a threshold level below which no award will be payable, a target level and a maximum award level. The target level for financial objectives is generally set based on performance at 100% of budget for the fiscal year. Threshold and maximum are generally set at 80% and 120% of target, respectively. Each objective is given a weight relative to the other financial performance and personal objectives.

For fiscal year 2015, the table below lists the objectives and their relative weights used in determining the annual incentive compensation for our NEOs.

Annual Incentive Performance Objectives and Weightings in Fiscal Year 2015

for the Named Executive Officers

Performance Objective

 

Fraser

 

 

Passmore

 

 

Jackson

 

 

Kremling

 

 

Lau

 

Corporate EBITDA, adjusted

 

 

50

%

 

 

50

%

 

 

50

%

 

 

50

%

 

 

20

%

Return on Invested Capital, adjusted

 

 

20

%

 

 

20

%

 

 

20

%

 

 

20

%

 

 

10

%

Business Unit EBITDA, adjusted

 

 

0

%

 

 

0

%

 

 

0

%

 

 

0

%

 

 

40

%

Personal Objectives

 

 

30

%

 

 

30

%

 

 

30

%

 

 

30

%

 

 

30

%

For fiscal year 2015, our adjusted EBITDA performance objective at target was $36.6 million, and the performance objective for return on invested capital was 9.9% at target. For fiscal year 2015, our adjusted EBITDA was $40.2 million, or 110.0% of target (for a payout percentage of 124.8%). Threshold for adjusted EBITDA was $29.2 million, and maximum was $43.9 million. For the purpose of establishing annual incentive compensation for fiscal year 2015, the Compensation Committee determined that the adjusted return on invested capital was 12.8%, or 128.0% of target (for a payout percentage of 150.0%). Threshold for return on invested capital was 8.0%, and maximum was 12.0%. Return on invested capital for fiscal year 2015 was calculated by dividing adjusted operating income by total assets less accounts payable. For fiscal year 2015, adjusted electronic chemicals segment provides high puritybusiness unit EBITDA was achieved at 110.4% of target (for a payout percentage of 126.1%). Adjustments to EBITDA and ultra purity, wet process chemicalsto return on invested capital were made for currency exchange translation loss, stock-based compensation expense in excess of budet, acquisition of the industrial lubricants business and the disposition of the creosote distribution business, and an unused debt facility fee.

Individual Performance Objectives

Personal goals for NEOs are selected by the Compensation Committee based on input from the CEO, as to other executive officers, and the input of other Board members. The personal goals for each individual are generally selected from areas of our business where the executive has the most direct and substantial involvement, and number from four to seven items. They are often very specific, and usually include initiating or completing projects having an important strategic or operational impact.

Although achievement of personal goals is determined by the Compensation Committee most often on the basis of a subjective or qualitative analysis, the committee tries to define the goals in a way that they can readily determine that they have been met. When the goals lend themselves to a quantitative approach, that method is used. In fiscal year 2015, the personal goals of the NEOs were:

Christopher T. Fraser

·

Implementation of our strategy by successfully closing an acquisition, exploring a strategic disposition of our creosote business and evaluating strategic opportunities of regional importance.

·

Lead the successful integration of the UPC business and the restructuring of global manufacturing operations, optimization of supply chain and logistics to achieve operational and commercial synergies per plan.

·

Implement the new ERP system in the US, and then initiate its migration to other business units.

·

Address and relign certain product supply in our EC business.

14


Malinda G. Passmore

·

Improve the IT department as a foundation of growth and optimization, and improve internal customer satisfaction with its performance.

·

Improve the practices and processes in our treasury function.

·

Improve the financial planning and analysis function for the Company globally.

·

Restructure and improve our internal audit function.

Roger C. Jackson

·

Obtain a positive outcome for pentachlorophenol from the United Nations Persistent Organic Pollutant review process.

·

Upgrade the global records management function.

·

Improve timeliness of availability of certain Board materials.

·

Enhance our global contract management process.

·

Continue with ACC/Responsible Care requirements, including implementing current and next phase of codes.

·

Conduct legal and regulatory compliance training for our managers and key employees.

Ernest C. Kremling

·

Achieve target injury rate of less than 1.0/200,000 hours per year.

·

Achieve target process safety incidents of not more than three.

·

Continue development of executive capabilities in key areas.

·

Broaden key activities associated with Continual Improvement to become a focused effort under the umbrella of Operational Excellence.

·

Enhance supply chain capabilities of a key product to support current and future growth.

·

Support consolidation and organic growth in key areas to ensure accomplishment of plan, and expand geographic breadth of key global processes.

Andrew C. Lau

·

Enhance the EC business’ position in North America with product and supply source initiatives.

·

Continue to integrate successfully the EC business in Europe.

·

Accomplish the business development strategy designed for Asia.

·

Expand the Global Account Management approach to key customers, and achieve key supplier status with identified customers.

·

Continue development of executive capabilities in key areas.

15


For fiscal year 2015, the Compensation Committee determined that Mr. Fraser achieved his personal goals at 120.0% of target, thus earning a payout percentage of 150.0%. The Compensation Committee determined that the other NEOs achieved personal goals as a percentage of target and as a payout percentage, as follows: Jackson, 100.0%/100.0%; Kremling, 110.0%/125.0%; Lau, 100.0%/100.0%; and Passmore, 95.0%/88.0%.

Annual Incentives Earned

For fiscal year 2015, the annual incentive compensation actually earned by our CEO and CFO was 123.7% and 59.3% of actual base salary, respectively, and annual incentive compensation for the other NEOs ranged from 60.2% to 65.0% of their respective actual base salaries paid in the fiscal year. Mr. Fraser’s annual incentive compensation was $816,500, Ms. Passmore’s was $161,704, Mr. Jackson’s was $157,909, Mr. Kremling’s was $194,137 and Mr. Lau’s was $154.175. The table below indicates the annual incentive award paid to the semiconductor industry, primarilyNEOs as a percentage of base salary by performance objective for fiscal year 2015.

Award Level Paid as a Percentage of Base Salary for Fiscal Year 2015

Performance Objective

 

Fraser

 

 

Passmore

 

 

Jackson

 

 

Kremling

 

 

Lau

 

EBITDA, adjusted (1)

 

 

56.2

%

 

 

31.2

%

 

 

31.2

%

 

 

31.2

%

 

 

12.5

%

Return on Invested Capital, adjusted (1)

 

 

27.0

%

 

 

15.0

%

 

 

15.0

%

 

 

15.0

%

 

 

7.5

%

Business Unit EBITDA, adjusted

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

 

 

0.0

%

 

 

25.2

%

Personal Objectives

 

 

40.5

%

 

 

13.0

%

 

 

15.0

%

 

 

18.8

%

 

 

15.0

%

Total

 

 

123.7

%

 

 

59.2

%

 

 

61.2

%

 

 

65.0

%

 

 

60.2

%

(1)

EBITDA and return on invested capital was adjusted for currency exchange loss, stock-based compensation, acquisition of the industrial lubricants business and disposition of the creosote distribution business, and an unused debt facility fee.

Long-Term Incentive Compensation

General

We provide our NEOs with long-term equity compensation tied to cleanour performance. We believe that this aligns the financial interests of our shareholders and etch silicon wafersmotivates with the interests of our executives, and motivates our executive officers to enhance shareholder value. Additionally, the Compensation Committee believes that long-term equity compensation serves as an important retention tool. Long-term equity compensation should comprise the largest percentage of executive compensation. Long-term equity incentives are targeted above the market median, if performance objectives are achieved. The Compensation Committee currently administers equity incentives under our 2009 Long-Term Incentive Plan.

The Compensation Committee determines long-term incentive award levels and the types of awards from the financial results for the prior fiscal year. Long-term incentive grants vary in amount from year to year based on the performance of the executive, his or her expected role in our future performance and on our financial performance. In setting new long-term equity awards, the Compensation Committee also considers prior equity grants made to the executive officer, which were often made as new hire awards.

In fiscal year 2015, we granted both performance-based and time-based restricted stock awards to certain executives and key employees. Although we may consider grants of stock options in the productionfuture, we have not issued any stock options in recent years and there are currently none outstanding.

Performance-Based Restricted Stock Awards

In fiscal year 2015, the Compensation Committee chose to use performance-based restricted stock as one component of semiconductors. We arelong-term incentives. The Compensation Committee has designed the leading supplierperformance-based restricted stock awards to encourage retention of these wet process chemicalsexecutives by using three year overlapping performance periods.

Performance-based restricted stock awards were granted to each of the NEOs in fiscal year 2015. The awards were granted as Series 1 awards of shares of restricted stock, subject to performance vesting requirements. Performance under the awards is measured over a three-year period beginning August 1, 2014. The awards to the semiconductor industryNEOs granted up to an aggregate target amount of 108,747 shares of performance-based restricted stock. Shares for all recipients vest based on satisfaction of performance requirements at the end of the third fiscal year (July 31, 2017).

The fiscal year 2015 Series 1 awards granted to the NEOs up to an aggregate of 103,499 shares of restricted stock at target, subject to performance requirements of earnings per share growth and average return on invested capital (operating income divided by

16


average total assets less payables), for the three year measurement period. The individual awards to particular NEOs are described in the Grants of Plan Based Awards table.

When considering the individual awards, the Compensation Committee determines, based on market survey data, a target award level as a percentage of base pay appropriate for each executive. The value of the restricted stock used to calculate the number of shares then awarded may take into consideration anticipated share appreciation, and in fiscal year 2015 the Compensation Committee assumed a Common Stock price of $16.39 per share when establishing awards (at the beginning of the 3-year performance measurement period for the awards the actual share price was $16.77).The Grants of Plan Based Awards table sets forth the performance-based restricted stock awards made to the NEOs in fiscal year 2015.

In fiscal year 2015, no shares of restricted stock vested for the NEOs from the Series 1 performance-based restricted stock awards granted in fiscal year 2013.

Time-Based Awards

In fiscal year 2015, we granted time-based restricted stock awards to our NEOs that vest over a three-year period ending on July 31, 2017. In fiscal year 2015, we granted 17,347 shares, 3,146 shares, 2,974 shares 4,391 shares and 3,724 shares time-based restricted stock awards to Mr. Fraser, Ms. Passmore, Mr. Jackson, Mr. Kremling and Mr. Lau, respectively.

Broad-Based Employee Benefits

Our employee benefits are designed to allow us to be attractive to current and potential employees and to remain competitive in the market.

Health and Welfare Plans

We offer health and welfare benefits to substantially all employees, including executives. These benefits include medical, dental, life, accidental death, short and long-term disability, and long-term care coverage. Executives make the same contributions for the same type of coverage, and receive the same level of benefits as other employees for each form of coverage or benefit. We provide vacation and paid holidays to all eligible employees, including executives, that is comparable to other similarly sized companies.

Retirement Plans

We offer a defined contribution 401(k) plan to substantially all of our employees in the United States, have a significant presence in EuropeStates. In calendar years 2015 and an increasing presence in Asia. Our wood treating chemicals, pentachlorophenol, or penta, and creosote, are sold to industrial customers who use these preservatives primarily to extend the useful life of wood utility poles and railroad crossties. We are the only supplier of penta in North America, and we are the principal supplier of creosote in the United States to wood treaters who do not produce their own creosote.

For the twelve months ended July 31, 2014, we generated revenues of $353.4 million and net loss of $988,000. On July 31, 2014, we had total long-term debt, net of current maturities, of $60 million, cash and cash equivalents of $19.3 million and total stockholders’ equity of $120.2 million. On October 9, 2014 we refinanced our existing credit facility and put in place a new credit facility (“New Credit Facility”) that provides for a revolving loanparticipants may contribute up to $150 million, including an accordion feature that allows for$18,000 and $17,500 of their compensation, respectively. We make matching contributions under the plan up to 4% of the participant’s compensation. Employees age 50 or over are entitled to make an additional revolving loan increasepre-tax contribution of up to $100 million$6,000 per year. Employees are fully vested in employer contributions. The Summary Compensation Table reflects our contributions to the 401(k) Plan for each NEO.

Executive Benefits and Perquisites

Executive benefits or perquisites may be provided on a limited basis to attract and retain key executives. Currently, we do not offer executive benefits or perquisites with approval froma value over $10,000 to any executive other than as set forth below.  

Employment Agreements and Severance Plan

We currently have employment agreements with two of our lenders. The maturity dateNEOs, Mr. Fraser and Mr. Jackson. Mr. Fraser’s employment agreement continues until terminated. Mr. Jackson’s employment agreement automatically renews for one-year periods, and will continue to do so unless we provide at least 60 days prior written notice of non-renewal.

Mr. Fraser and three other NEOs may become entitled to severance payments under our executive severance plan along with three other employees, while Mr. Jackson would be entitled to severance payments in certain circumstances according to the terms of his employment agreement. Under the terms of Mr. Jackson’s employment agreement, if we terminate his employment (other than for cause or due to death or disability) or elect not to extend his employment for the revolving loan facilityrenewal term, or if he voluntarily terminates his employment for good reason following a change of control, then we must pay him a termination payment equal to a multiple of his base salary at termination. See “Potential Payments upon Termination or Change in Control” for additional information.

The employment agreement and severance plan contain provisions for the assignment to us of any right, title and interest in all works, copyrights, materials, inventions, ideas, discoveries, designs, improvements, trade secrets, patents and trademarks, and any applications related thereto, during their respective employment. In addition, each agreement contains provisions prohibiting the disclosure of confidential information.

17


Additionally, each executive signed an agreement with non-compete obligations prohibiting the executive from engaging and being financially interested in any business which is October 9, 2019. competitive with us during his term of employment and for a period of one year after his employment with us terminates, unless he first obtains our prior written consent. In the event an executive breaches any of these provisions, we may terminate any payments then owing to the executive and/or seek specific performance or injunctive relief for such breach or threatened breach.

Executive Severance Plan

The initial advanceBoard of Directors approved an executive severance plan in fiscal year 2009. The plan provides that any regular, full-time employee who is designated by the Compensation Committee may become a participant. Mr. Fraser and three other NEOs, Ms. Passmore and Messrs. Kremling and Lau, have been designated as participants under the plan. The Compensation Committee intends, in appropriate cases, to use the plan to offer severance to eligible employees, including future hires. In anticipation of additional participants, the Compensation Committee has established three participation levels.  Currently, three other employees have been made participants under the plan. The plan may also be used to offer severance payments in lieu of the severance payments under current employment agreement or severance plan to eligible employees wishing to convert to the plan.

The plan is designed to provide an eligible employee with a severance payment in the event of a qualifying termination, which is with respect to an eligible employee who (i) is affirmatively discharged from employment by us, other than a discharge for cause, or (ii) voluntarily terminates for good reason, as defined in the plan. The severance benefit is based on the participation level of the eligible employee as assigned by the Compensation Committee, and is calculated at a multiple of (i) base salary or (ii) base salary and annual incentive award at the target level. The severance benefit is paid in a lump sum.

For a qualifying termination occurring more than 30 days before a change of control, the severance benefit is 2.0x, 1.5x or 1.0x of base salary for the three participation levels. The highest participation level is for a CEO-participant, the second is for other senior executives who are participants and the third level is for all other participants. For a qualifying termination occurring within 30 days before or two years after a change of control, the benefit is 2.5x, 2.0x or 1.5x of base salary plus annual incentive compensation at the target level. If the qualifying termination was not for cause but was instead related to performance issues, the severance benefit is 1.0x, 0.75x or 0.5x of base salary only. In the case of a qualifying termination occurring within 30 days before or two years after a change of control or a qualifying termination occurring for good reason, the eligible employee is also paid a prorated portion of his or her annual incentive compensation.

In order for an eligible employee to receive severance benefits under the executive severance plan, he or she must execute and deliver an acceptable release of all claims.

Other Compensation

As part of his employment agreement, we provide Mr. Fraser an apartment near our headquarters and pay his commuting expenses to and from his permanent home to Houston. In 2015, these housing expenses totaled approximately $66,243 and the commuting expenses totaled approximately $35,454. In 2014, these housing expenses totaled approximately $73,449 and the commuting expenses totaled approximately $20,376. We agreed to provide these benefits to Mr. Fraser because our Board believed it was necessary to retain Mr. Fraser’s services despite the fact that his permanent home is outside the Houston area. The Board considered the value of this additional compensation in evaluating Mr. Fraser’s total compensation package.

How We Determine Executive Officer Compensation

Role of the Compensation Committee

The Compensation Committee is composed of independent, outside members of the Board of Directors in accordance with New Credit FacilityYork Stock Exchange rules, current SEC rules and regulations, and Section 162(m) of the Internal Revenue Code of 1986 (the “Code”), and is responsible for establishing, reviewing, approving and monitoring the compensation paid to the NEOs.

Role of Executive Officers in Setting Compensation

Our CEO provides input on the Compensation Committee agenda, including background information regarding our strategic objectives, suggestions on annual performance targets and reports on his evaluations of the other executive officers. He makes recommendations with respect to merit increases and annual incentive goals for such other executive officers that are then reviewed by the Compensation Committee prior to final approval. Since our CEO is a member of the Board, he has input on the overall compensation program. The Compensation Committee makes the decision related to the CEO’s compensation.

18


The Compensation Committee meetings are attended by the committee members, and as needed, by other directors, the CEO, CLO, CFO, and outside advisors, including our compensation consultant. The Compensation Committee regularly meets in executive session without any members of management present.

Role of the Independent Consultant

The Compensation Committee has the sole authority, to the extent deemed necessary and appropriate, to retain and terminate any compensation consultants and has the sole authority to approve related fees and other retention terms. In fiscal year 2015, the Compensation Committee engaged Pearl Meyer & Partners (“Pearl Meyer”) to advise it on executive compensation for fiscal year 2015 and for fiscal year 2016. Pearl Meyer is independent of us, reports directly to the Compensation Committee, and has no other business relationship with us other than assisting the committee with its executive compensation and board compensation practices. The independence of the consultant is considered annually by the committee. In fiscal year 2015, we incurred expense of approximately $53,378 with Pearl Meyer. The Compensation Committee and Pearl Meyer review salaries based on our current and projected company size and annual and long-term incentive programs established for each executive’s position based on data from general industry surveys and our peer companies relating to our current and projected company size.

Benchmarking and Other Market Data

Pearl Meyer analyzed comparative data from the national surveys and data from a peer group of publicly-traded chemical companies of base salaries, annual and long-term incentive targets. We collectively refer to the national surveys and peer group information as “market survey data” in this discussion. The composition and performance of the peer group is reviewed each year. For fiscal year 2015, three new companies were added for a peer group of fifteen publicly-traded chemical companies having comparable annual revenues and a comparable value for ongoing operations: Aceto Corp., American Vanguard Corporation, Balchem Corporation, Cabot Microelectronics Corp., Cambrex Corportion, Entegris, Inc., Hawkins Inc., Innophos Holdings, Inc., Innospec, Inc., Landec Corporation, Oil-Dri Corporation, Omnova Solutions, Inc., Park Electrochemical Corp., Quaker Chemical Corp., and Rogers Corp. The 25th, 50th and 75th percentiles for the data sources were analyzed to gain an understanding of the range of competitive pay practices. Although the 50th percentile of the combined data was used by the Compensation Committee as a reference point for establishing base salary, annual incentive targets and total direct compensation, the compensation of individual executives may vary above or below the reference point because of the background, personal performance, skills and experience, the comparative compensation of our executives and our ability to repayprovide certain compensation within our budgetary constraints.

Other Important Compensation Policies

Stock Ownership Requirements for Named Executive Officers

We have adopted a stock ownership requirement for certain executives that is measured as of the end of each fiscal year. The requirement calls for stock ownership related to base salary to equal three times base salary for the CEO, two times base salary for the VP-Operations, CFO and Chief Legal Officer and one time base salary for other designated executives. Executives covered by the requirement must achieve the stock ownership within five years of becoming an executive. Among the measures the Compensation Committee may consider if the required stock ownership level is not met by an executive, the after-tax portion of a cash bonus due to that executive may be paid in full the $20.0 million outstanding indebtedness undershares of our note purchase agreement with The Prudential Insurance Company of America and Pruco Life Insurance Company, and we refinanced $38.0 million then outstanding on our then existing revolving loan facility.Common Stock. As a result, we reclassified these notes as long-term obligations as of July 31, 2014. See Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Business Strategy

We seek to build long-term shareholder value through smart and efficient management2015, all of our existing operations, and throughexecutives had satisfied the rapid integration and optimizationstock ownership requirement as it applies to them.

Consideration of acquired businesses. We favor businessesRisk

The Compensation Committee, with stable markets, providing opportunities for harvesting operational synergies and enhancing margins. We focus on mature, specialty chemicals that large companies often ignore. Our actions are guided by our core values, which emphasize a passion for excellence, that we value our people, and that character and teamwork are critical. Three fundamental principles are atassistance of its independent compensation consultant, reviewed the coreelements of our strategy:

Operate. We seek to maximize cash flow by managing our plants with the best-available technology. We enhance the value of our operations by concentrating on customer satisfaction and efficient management of our resources to increase our profitability and cash flows.

Acquire. The cash flows generated by the businesses that we operate provide us with the ability to pursue further acquisitions in order to build on our existing segments, or to establish a new business platform for future growth. We employ a methodical approach to identify and evaluate potential acquisitions, only pursuing those that meet our financial and strategic criteria. Our discipline throughout the acquisition process maximizes the chances of long-term success.

Integrate. We have consistently improved our ability as an organization to integrate progressively larger and more complex acquisitions. Our focus is to maintain reliable service to our customers during the integration period, identify and harvest the long-term synergies, and efficiently absorb acquired businesses into our operations. An effective integration strategy is an essential precondition for our operational success.

Business Segments

Electronic Chemicals.Our electronic chemicals business sells high purity and ultra purity wet process chemicals primarilyexecutive compensation during fiscal year 2015 to determine whether any portion of executive compensation encouraged excessive risk taking. Management assessed risk with respect to the semiconductor industry. These chemicals are used to cleancompensation of other employees. Management 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. 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 chemicals business from OM Group, we now manage the chemicals usage of semiconductor customers at their sites in Singapore, a service known as Total Chemical Management. Our electronic chemicals business accounted for 71.8% of our net sales in fiscal year 2014, 63.0% of our net sales in fiscal year 2013, and 58.5% in fiscal year 2012.

Wood Treating Chemicals.We supply penta and creosote to industrial customers who use these products to pressure treat wood products, primarily utility poles and railroad crossties to extend their useful life. 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. We sell solid penta to our customers, or dissolve it to make concentrated solutions of penta at our Matamoros, Mexico and Tuscaloosa, Alabama facilities. We sell penta products in the United States and in Canada. The hydrochloric acid we produce as a byproduct of penta production is primarily sold in Mexico for use in the steel and oil well service industries. Creosote is a wood preservative used to treat utility poles and railroad crossties. Creosote is produced by the distillation of coal tar, a by-product of the transformation of coal into coke. In the last five years, production of wood crossties in North America has averaged 21.5 million ties annually. Almost all wood crossties are treated with creosote. WeCompensation Committee 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% ofrisks arising from our net sales in fiscal year 2014, 37.0% of our net sales in fiscal year 2013,compensation policies and 41.5% in fiscal year 2012.

Suppliers

In electronic chemicals we rely on a variety of supplierspractices for our raw materials, some of which we purchase on open accountexecutive officers and others which we purchase under supply contracts. The number of suppliers is often limited, particularly asother employees are not reasonably likely to the specific grade of raw material required by us to supply high purity and ultra purity products to our customers.

In our wood treating chemical segments, we 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, 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. 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 2014, 2013 and 2012. No other customer accounted for 10% or more of our revenue in fiscal years 2014, 2013 or 2012. The loss of Intel would have a material adverse effect on sales of our electronic chemicals business.

On October 24, 2014us. In addition, 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 orbelieve that the terminationmix and design of the agreement willelements of compensation do not encourage management to assume excessive risks.

Financial Restatement

The Compensation Committee does not have a material adverse effect onpolicy in place governing modifications to compensation where the operations andpayment of such compensation was based upon the achievement of specific results that were subsequently subject to restatement. If the Compensation Committee deems it appropriate, however, to the extent permitted by governing law, we will seek to recoup amounts determined by a financial performance of our wood treating chemicals business.restatement to have been inappropriately paid to an executive officer. Our performance-based restricted stock awards include a provision authorizing recoupment.

Marketing19


We sell to our electronic chemicals customers through a combination of strategic account managers and other sales personnel organized by geographic region.Trading in Our wood treating chemicals are sold in the United States and Canada through an internal sales force.

Geographical Information

Sales made to customers in the United States were 60.2% of total revenues in fiscal year 2014, 76.0% in 2013 and 84.0% in 2012. 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, our property, plant and equipment were allocated, based on net book value, 53.8% in the United States and 46.2% elsewhere.

Competition

There are only a few firms competing with us in the sale of our products. We compete by selling our products at competitive prices and maintaining a strong commitment to product quality and customer service.

In electronic chemicals in North America, we believe that we have the largest 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 users are penta, creosote and chromated copper arsenate, or CCA. We supply United States industrial users with both penta and creosote, but not CCA. We are the only manufacturer of penta in North America. Penta is used primarily to treat electric, telephone and other utility poles, to protect them from insect damage and decay. 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. 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.Stock Derivatives

Our wood treating chemicals must be registered prior to sale under United States law. See “EnvironmentalInsider Trading Policy prohibits directors and Safety MattersLicenses, 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,employees from purchasing 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 modificationselling options on our competitive position.

Employees

As of the end of fiscal year 2014, we had a total of 733 full-time employees. We employed 624 employeesCommon Stock, engaging in our electronic chemicals segment, 65 employees in wood treating and 44 employees in administration and corporate. Approximately 18.3% of our employees are represented by labor unions, workers councils or comparable organization, 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, 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.

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

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 personsshort sales with respect to the release into the environmentour Common Stock, or trading in puts, calls, straddles, equity swaps or other derivative securities that are directly linked to our Common Stock.

Tax and Accounting Implications of specified substances, including under CERCLA those designated as “hazardous substances.” These persons include the present and certain former owners or operatorsour Forms of Compensation

Section 162(m) of the site whereCode limits the release occurreddeductibility of certain compensation to $1 million per year for our CEO and those that disposed or arrangedour three other most highly compensated executive officers. There is an exception to the $1 million limit for compensation meeting certain requirements. With the disposalexception 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 courseMr. Fraser, none of our operations, we generated materials that fall within CERCLA’s definition of hazardous substances. We mayexecutive officers currently receives compensation exceeding the limits imposed by the Code. While the Compensation Committee cannot predict with certainty how our executive compensation might 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 and offsite facilities to which our wastes were transported and for associated damages to natural resources.

Resource Conservation and Recovery 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 designatedaffected in the future as hazardous wastes under RCRA or other applicable statutesby the Code, the committee intends to try to preserve the tax deductibility of executive compensation while maintaining an executive compensation program consistent with our compensation philosophy.

Our compensation program contains the following tax and therefore, may be subject to more rigorous and costly treatment, storage and disposal requirements. Governmental agencies (andaccounting implications:

·

Salary is expensed when earned, but it is not deductible over $1 million for our covered employees (our CEO and our three other highest paid executives).

·

Annual incentives paid under our shareholder-approved 2009 Long-Term Incentive Plan prior to December 8, 2014 in which the aggregate compensation was less than $1.0 million for covered employees met the requirements of Section 162(m) of the Code and are deductible. Any portion paid under non-objectively verifiable criteria is not deductible over $1 million under Section 162(m) of the Code for covered employees.

·

Our 2009 Long-Term Incentive Plan has been approved by shareholders, and performance-based awards are deductible under Section 162(m) of the Code.

·

Performance-based restricted share awards are expensed over the performance and service period when payout is probable. Our plan has been approved by shareholders and compensation is deductible under Section 162(m) of the Code. No dividends are paid on performance restricted stock until shares are actually issued.

·

Our 401(k) contributions are accrued and expensed in the year of service.

2014 Advisory Vote on Executive Compensation

The Compensation Committee considered the results of the 2014 advisory, non-binding “say-on-pay” proposal in the case of civil suits, private parties in certain circumstances) can bring actions for failure to complyconnection 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. The federal Clean Water Act imposes restrictions and strict controls regarding the discharge of wastes and fill materials into watersits responsibilities. Because 98.1% of our shareholders voting on the “say on pay” proposal approved the compensation of the United States. Under the Clean Water Act, and comparable state laws, the government (andNEOs described 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 we 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.

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.

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.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. 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.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 for our 2014 Annual Meeting of Shareholders, the Compensation Committee did not implement significant changes 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, orexecutive compensation program 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 continueshareholder advisory vote. The Board currently intends 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 railroads could have a material adverse effect on demand for our wood treating chemicals.

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 treating 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 integrate the UPC subsidiaries acquired from OM Group at the end of May 2013. The size and complexity of that effort is 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 allow us to achieve important advantages for our business and financial results, particularly from product sourcing and supply chain optimization. We currently anticipate that this integration effort will be completed in fiscal year 2015, and 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. 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 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 considerationask 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.advisory, non-binding vote on compensation each year.

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.20


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.

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:

we must dedicate a substantial portion of our cash flows from operations to the payment of our indebtedness, reducing the funds available for future working capital requirements, capital expenditures, acquisitions or other general corporate requirements;

a significant portion of our borrowings are, and will continue to be, at variable rates of interest, which may result in higher interest expense in the event of increases in interest rates;

we may be more vulnerable to a downturn in the segments in which we operate or a downturn in the economy in general;

we may be limited in our flexibility to plan for, or react to, changes in our businesses and the segments in which we operate;

we may be placed at a competitive disadvantage compared to our competitors that have less debt;

we may be limited in our ability to react to unforeseen increases in certain costs and obligations arising in our businesses, including environmental liabilities;

we may determine it to be necessary to dispose of certain assets or one or more of our businesses to reduce our debt; and

our ability to borrow additional funds may be limited.

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 acceleration 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 treatment, storage and disposal of wastes;

the investigation and remediation of contaminated soil and groundwater;

the discharge of effluents into waterways;

the emission of substances into the air; and

other matters relating to environmental protection and various health and safety matters.

The EPA and other federal and state agencies, as well as comparable agencies in Mexico, Italy and in other countries where we 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 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. 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 were eligible for re-registration, but the EPA proposed new restrictions on the use of those products 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 be 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.

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.

Our profitability could 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 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 were to occur at one or more of those locations, 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” 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 closed our terminal in New Orleans, Louisiana temporarily 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.

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 is somewhat seasonal, with greater demand in the summer than in the winter because of the effects of weather on timber harvest. 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 Electronic Chemicals, Michael Hoffman, our Vice President and General Manager of Wood Treating Chemicals, Christopher 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% 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.

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.

ITEM 2. PROPERTIES

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

Location

Primary Use

Approximate SizeOwned/
Leased
Lease Expiration
Date
Houston, TexasCorporate Office17,527 square feetLeasedJanuary 2017
Tuscaloosa, AlabamaFormulation and Distribution: Penta2.0 acresOwnedN/A
Hollister, CaliforniaManufacture and Warehouse: Electronic Chemicals4.4 acresOwnedN/A
Pueblo, ColoradoManufacture and Warehouse: Electronic Chemicals37.4 acresOwnedN/A
Elwood, KansasManufacture and Warehouse: Leased to unrelated party.14.9 acresOwnedN/A
Rousset, FranceWarehouse and adjacent land: Electronic Chemicals1.2 acresLeasedDecember 2014 and
December 2015
St. Cheron, FranceManufacture and Warehouse: Electronic Chemicals4.0 acresOwnedN/A
St. Fromond, FranceManufacture and Warehouse: Electronic Chemicals71.6 acresOwnedN/A
Milan, ItalyManufacture and Warehouse: Electronic Chemicals7.3 acresOwnedN/A
Johor Bahru, MalaysiaSales office1,360 square feetLeasedMarch 2016
Johor Bahru, MalaysiaWarehouse750 square feetLeasedMay 2015
Matamoros, MexicoManufacture and Warehouse: Penta13.0 acresOwnedN/A
Singapore

Warehouses (2):

Electronic Chemicals

12,240 square
meters
LeasedAugust 2016 and
March 2017
Riddings, UKManufacture and Warehouse: Electronic Chemicals4.2 acresLeasedAugust 2025

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.

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.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUES PURCHASER 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, there were 11,659,001 shares of common stock issued and outstanding held by approximately 436 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 2014 and fiscal year 2013. The table also shows quarterly dividends we declared and paid during fiscal years 2013 and 2012.

   Common Stock Prices   Dividends Declared and Paid 
   High   Low   Per Share   Amount 

Fiscal 2014

        

First Quarter

  $24.17    $19.20    $0.03    $347,000  

Second Quarter

   20.27     14.79     0.03     348,000  

Third Quarter

   17.18     14.47     0.03     349,000  

Fourth Quarter

   18.50     14.99     0.03     349,000  

Fiscal 2013

        

First Quarter

  $19.55    $16.68    $0.03    $342,000  

Second Quarter

   19.74     16.43     0.03     345,000  

Third Quarter

   20.82     17.31     0.03     345,000  

Fourth Quarter

   23.72     18.40     0.03     346,000  

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 2015 of $0.03 per share, or approximately $349,000. 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 2014 or 2013.

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

Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
Weighted-average
exercise price of
outstanding options,
warrants and rights
Number of securities
available for future
issuance under equity
compensation plans
(excluding securities reflected
in column (a))
(a)(b)(c)

Plan Category Equity compensation plans approved by security holders(1)

—  $—  385,547

Equity compensation plans not approved by security holders

—  —  —  

Total(1)

—  $—  385,547

(1)Includes 36,174 shares from the 2004 Long-Term Incentive Plan which was terminated on October 14, 2014.

ITEM 6. SELECTED FINANCIAL DATA

The following table shows selected historical consolidated financial data for the five fiscal years ended July 31, 2014. The consolidated statements of income and cash flow data for each of the three fiscal years ended July 31, 2014, and the balance sheet data as of July 31, 2014 and 2013, 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, 2011 and 2010, and the balance sheet data as of July 31, 2012, 2011 and 2010 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.

   Year Ended July 31, 
   2014  2013  2012  2011  2010 

Statement of Income Data(1)

      

Net sales

  $353,406   $263,311   $272,700   $255,596   $197,997  

Operating income

   3,951    17,180    25,437    17,022    26,731  

Income/(loss) from continuing operations

   (988  9,486    14,315    9,418    15,177  

Net/(loss) income

   (988  9,348    13,825    9,729    15,330  

Earnings per share from continuing operations-basic

  $(0.09 $0.82   $1.26   $0.83   $1.36  

Income/(loss) per share from discontinued operations-basic

   —      (0.01  (0.04  0.03    0.01  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Earnings per share-basic

  $(0.09 $0.81   $1.22   $0.86   $1.37  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Earnings per share from continuing operations-diluted

  $(0.09 $0.82   $1.24   $0.82   $1.33  

Income/(loss) per share from discontinued operations-diluted

   —      (0.01  (0.04  0.03    0.01  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Earnings per share-diluted

  $(0.09 $0.81   $1.20   $0.85   $1.34  
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Cash Flow Data(1)

      

Net cash provided by operating activities

  $40,358   $20,272   $25,249   $12,713   $14,948  

Net cash provided by (used in) investing activities

   (9,274  (68,113  4,043    (8,007  (29,677

Net cash provided by (used in) financing activities

   (26,065  59,992    (29,275  (7,823  12,616  

Payment of dividends

   1,393    1,378    1,249    1,017    894  

Balance Sheet Data(1)

      

Total assets

  $250,858   $262,015   $167,690   $185,378   $176,021  

Long-term debt

   60,000    85,000    24,000    41,279    51,333  

Total stockholders’ equity

   120,206    117,240    106,767    96,530    84,778  

(1)Our historical results are not necessarily indicative of results to be expected for any future period. The comparability of the data is affected by our acquisitions during the fiscal years 2010 and 2013; and our restructuring and realignment of operations during the fiscal year 2014 as described in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

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. 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, penta and creosote, are used by industrial customers primarily to extend the useful life of utility poles and railroad crossties.

In fiscal year 2014, approximately 71.8% of our revenues were from electronic chemicals and 28.2% were from industrial wood preservation chemicals.

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

fluctuations in sales volumes;

raw material pricing and availability;

our ability to acquire and integrate new products and businesses; and

the difference between prices received by us for our specialty chemical products and the costs to produce those products.

Acquisition

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.

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 production to our facilities in France and the United Kingdom. We will continue to operate a warehouse facility in Milan. We have begun decommissioning certain manufacturing equipment in Milan, and are transitioning products from there to other sites in Europe. Our global restructuring remains on schedule.

Total costs related to restructuring incurred for fiscal year 2014 was $3.9 million and an additional $2.4 million related to accelerated depreciation. We estimate that restructuring charges, exclusive of accelerated depreciation, will range between $7.0 million and $9.0 million cumulatively over fiscal years 2014 and 2015, and that accelerated depreciation with respect to the Fremont and Milan facilities will be approximately $4.0 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 renew the toll manufacturing agreement with Chemtrade Logistics (“Chemtrade”) under which it produces hydrofluoric acid for us at its 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. 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 and recorded depreciation expense of $1.0 million against that obligation, and the Company recognized $0.8 million of accelerated depreciation. 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. See Note 15 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 and 2013 for our President and 2012. The segment data should be read in conjunction withCEO, our consolidated financial statementsVice President and related notes included elsewhere in this report.CFO, our former Vice President and CFO, and our other three NEOs.

Summary Compensation Table

 

   Year Ended July 31, 
   2014   2013   2012 
   (Amounts in thousands) 

Sales:

      

Electronic chemicals

  $253,754    $165,755    $159,451  

Wood treating chemicals

   99,514     97,185     113,034  
  

 

 

   

 

 

   

 

 

 

Total sales for reportable segments

  $353,268    $262,940    $272,485  
  

 

 

   

 

 

   

 

 

 

Name and Principal Position

 

Year

 

Salary

($)

 

 

Bonus

($) (1)

 

 

Stock

Awards

($) (2)

 

 

Non-Equity

Incentive Plan

Compensation

($) (3)

 

 

All Other

Compensation

($) (4)

 

 

Total

($)

 

Christopher T. Fraser (5)

 

2015

 

 

660,336

 

 

 

 

 

 

1,809,562

 

 

 

816,500

 

 

 

116,099

 

 

 

3,402,497

 

Director, President and CEO

 

2014

 

 

596,171

 

 

 

 

 

 

2,507,800

 

 

 

512,156

 

 

 

117,383

 

 

 

3,733,510

 

 

 

2013

 

 

28,642

 

 

 

 

 

 

 

 

 

 

 

 

1,146

 

 

 

29,788

 

Malinda G. Passmore

 

2015

 

 

272,600

 

 

 

 

 

 

282,953

 

 

 

161,704

 

 

 

10,480

 

 

 

727,737

 

Vice President and CFO

 

2014

 

 

125,000

 

 

 

 

 

 

184,229

 

 

 

98,865

 

 

 

44,800

 

 

 

452,894

 

Roger C. Jackson

 

2015

 

 

258,047

 

 

 

 

 

 

267,507

 

 

 

157,909

 

 

 

3,205

 

 

 

686,668

 

Vice President, General

 

2014

 

 

246,642

 

 

 

 

 

 

118,951

 

 

 

89,149

 

 

 

9,866

 

 

 

464,608

 

Counsel and Secretary

 

2013

 

 

239,462

 

 

 

500

 

 

 

 

 

 

42,142

 

 

 

8,724

 

 

 

290,828

 

Ernest C. Kremling

 

2015

 

 

298,930

 

 

 

 

 

 

394,905

 

 

 

194,137

 

 

 

11,921

 

 

 

899,893

 

Vice President — Operations

 

2014

 

 

272,650

 

 

 

500

 

 

 

317,837

 

 

 

113,899

 

 

 

10,096

 

 

 

714,982

 

 

 

2013

 

 

253,888

 

 

 

500

 

 

 

 

 

 

73,245

 

 

 

9,251

 

 

 

336,884

 

Andrew C. Lau

 

2015

 

 

256,105

 

 

 

 

 

 

334,938

 

 

 

154,175

 

 

 

9,427

 

 

 

754,645

 

Vice President — Electronic Chemicals

 

2014

 

 

241,939

 

 

 

500

 

 

 

191,148

 

 

 

119,825

 

 

 

30,082

 

 

 

583,494

 

 

 

2013

 

 

35,077

 

 

 

 

 

 

 

 

 

 

 

 

31,403

 

 

 

66,480

 

Segment Sales

(1)

A holiday bonus given to employees.

(2)

Stock awards reflect the grant date fair value of awards granted in each of the respective fiscal years calculated in accordance with accounting principles generally accepted in the United States. Performance-based stock awards represent the fair value of the award on the date of grant based on the probable outcome of the performance conditions for performance awards. Amounts included here reflect the expected vesting for each of the Series 1 performance awards of 135%, 100%, and 0% of the target award for Series 1 for fiscal years 2015, 2014, and 2013, respectively, based in each case on performance through July 31, 2015. The assumptions used in calculating those amounts are set forth in note 11 of our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended July 31, 2015. See also the table respecting Grants of Plan-Based Awards for the fiscal year 2015 award. When Mr. Fraser became the permanent CEO in fiscal year 2014, he was issued 50,000 shares of Common Stock and the grant date value of that award is included in the table. It was also agreed at that time that Mr. Fraser would be granted Series 3 performance-based restricted stock awards for 50,000 shares to be based on achieving financial goals to be established, and be granted Series 3 awards for 20,000 shares to be based on achieving organizational goals to be established. One-fifth of each of these performance-based awards was granted in fiscal years 2015 and 2014, and an equal amount will be granted in each of the succeeding three fiscal years. The fiscal year 2014 award for financial metrics did not vest, but the fiscal year 2014 award for organizational metrics vested at 100%. Based on the probable outcome of the financial and organizational objectives for Mr. Fraser’s fiscal year 2015 awards, we assumed that 100% of the fiscal year 2015 award for financial objectives will vest and assumed that 100% of the fiscal year 2015 award for organizational metrics will vest. We granted time-based awards in fiscal year 2015 of 17,347, 3,146, 2,974, 4,391 and 3,724 shares to Mr. Fraser, Ms. Passmore, Mr. Jackson, Mr. Kremling and Mr. Lau, respectively. We granted time-based awards in fiscal year 2014 of 30,000, 4,000, 6,600 and 3,000 shares to Mr. Fraser, Ms. Passmore, Mr. Kremling and Mr. Lau, respectively. In addition, Mr. Kremling received a one-time grant of 3,400 fully vested shares as additional incentive compensation.

(3)

Non-equity incentive plan compensation represents payments under our annual incentive plan. See the discussion of our incentive plan under the Compensation Discussion and Analysis section of this Amendment.

(4)

Under our 401(k) plan for United States based employees, we match up to 4% of participant’s compensation. Matching contributions to our 401(k) plan are included in all other compensation. All other compensation for Mr. Fraser includes $101,697 in fiscal year 2015 for commuting to our corporate office in Houston and for housing in Houston, including a tax gross up of approximately $14,295 for housing expenses. Ms. Passmore became the CFO in January 2014. She received a signing bonus of $40,000 which is included in all other compensation. All other compensation for Mr. Lau includes $30,000 for relocation in fiscal year 2013 and $20,405 for relocation in fiscal year 2014.

(5)

Mr. Fraser served as interim CEO beginning in July 2013 until September 2014 when he became the permanent CEO, and the amounts included in this table for fiscal year 2014 and 2013 reflect compensation to him as interim CEO. Compensation to him as a director in fiscal year 2013 is reflected in the Director Compensation table in this Amendment.

21


The following table presents information respecting grants of plan based awards for fiscal year 2015.

Grants of Plan-Based Awards

 

 

 

 

Estimated Future Payouts

Under Non-Equity

Incentive Plans (1)

 

 

Estimated Future Payouts

Under Equity Incentive Plan

Awards (#) (1)(2)(3)

 

 

All

Other

Stock

 

Grant

Date Fair

Value of

Stock

 

Name

 

Grant Date

 

Threshold

 

 

Target

 

 

Maximum

 

 

Threshold

 

 

Target

 

 

Maximum

 

 

Awards

 

Awards (4)

 

Christopher T. Fraser

 

 

 

294,880

 

 

 

589,759

 

 

 

884,639

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12/9/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18,215

 

 

 

52,042

 

 

 

86,911

 

 

 

 

 

1,547,885

 

 

 

12/9/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17,347

 

 

 

17,347

 

 

 

17,347

 

 

 

 

 

308,950

 

 

 

12/9/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

5,000

 

 

 

10,000

 

 

 

10,000

 

 

 

 

 

178,100

 

 

 

12/9/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,000

 

 

 

4,000

 

 

 

4,000

 

 

 

 

 

71,240

 

Malinda G. Passmore

 

 

 

67,700

 

 

 

135,400

 

 

 

203,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12/9/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,303

 

 

 

9,438

 

 

 

15,761

 

 

 

 

 

280,703

 

 

 

12/9/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,146

 

 

 

3,146

 

 

 

3,146

 

 

 

 

 

56,030

 

Roger C. Jackson

 

 

 

64,154

 

 

 

128,308

 

 

 

192,462

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12/9/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,123

 

 

 

8,923

 

 

 

14,902

 

 

 

 

 

265,405

 

 

 

12/9/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,974

 

 

 

2,974

 

 

 

2,974

 

 

 

 

 

52,967

 

Ernest C. Kremling

 

 

 

73,935

 

 

 

147,869

 

 

 

221,804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12/9/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,610

 

 

 

13,172

 

 

 

21,997

 

 

 

 

 

391,767

 

 

 

12/9/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

4,391

 

 

 

4,391

 

 

 

4,391

 

 

 

 

 

78,204

 

Andrew C. Lau

 

 

 

63,537

 

 

 

127,074

 

 

 

190,610

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12/9/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,910

 

 

 

11,172

 

 

 

18,658

 

 

 

 

 

332,299

 

 

 

12/9/2014

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3,724

 

 

 

3,724

 

 

 

3,724

 

 

 

 

 

66,324

 

(1)

See the discussion of our incentive plan under the Compensation Discussion and Analysis section of this Amendment.

(2)

On December 9, 2014, the NEOs in the above table were granted Series 1 performance-based restricted stock awards. The Series 1 awards are subject to a performance requirement composed of adjusted annual compound earnings per share (diluted) growth with annual return on invested capital measured across a three-year period beginning August 1, 2014. A threshold of 15.0% of the award vests, if the adjusted earnings per share growth rate over the measuring period is at least 5.0%. If adjusted return on invested capital is at least 8.0% a threshold award of 20.0% vests. The maximum award of 167.0% vests, if the earnings per share growth rate over the measuring period is at least 20.0% and the average annual return on invested capital is at least 15.0%.  

(3)

On December 9, 2014, Mr. Fraser was granted Series 3 performance-based restricted stock awards: 10,000 shares of the Series 3 awards are subject to a performance requirement for net debt repayments with a threshold vesting of 50% at not less than $10.0 million repaid and a maximum award vesting at $14.0 million repaid; and 4,000 of the Series 3 awards are subject to a requirement to meet organizational goals.  

(4)

This amount represents the aggregate grant date fair value at December 9, 2014 of $17.81 per share at the maximum award. See note 11 to our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended July 31, 2015.

22


The following table presents information respecting outstanding equity awards at July 31, 2015. As of July 31, 2015, we did not have any outstanding stock option awards.

Outstanding Equity Awards at Fiscal Year-End

 

 

Stock Awards (1)

 

Name

 

Equity Incentive Plan Awards:

Number of Unearned Shares,

Units or Other Rights That

Have Not Vested

(#)

 

 

Equity Incentive Plan Awards:

Market or Payout Value of

Unearned Shares, Units or

Other Rights That

Have Not Vested

($) (2)

 

Christopher T. Fraser

 

 

70,257

 

(3)

 

1,533,710

 

 

 

 

17,347

 

(4)

 

378,685

 

 

 

 

45,879

 

(5)

 

1,001,539

 

 

 

 

24,000

 

(6)

 

523,920

 

Malinda G. Passmore

 

 

12,741

 

(3)

 

278,136

 

 

 

 

3,146

 

(4)

 

68,677

 

 

 

 

8,381

 

(5)

 

182,957

 

 

 

 

2,000

 

(6)

 

43,660

 

Roger C. Jackson

 

 

12,046

 

(3)

 

262,964

 

 

 

 

2,974

 

(4)

 

64,922

 

 

 

 

7,994

 

(5)

 

174,509

 

Ernest C. Kremling

 

 

17,782

 

(3)

 

388,181

 

 

 

 

4,391

 

(4)

 

95,856

 

 

 

 

11,360

 

(5)

 

247,989

 

 

 

 

3,300

 

(6)

 

72,039

 

Andrew C. Lau

 

 

15,082

 

(3)

 

329,240

 

 

 

 

3,724

 

(4)

 

81,295

 

 

 

 

9,846

 

(5)

 

214,938

 

(1)

Stock awards reflect grants of performance-based restricted stock awards and time-based restricted stock awards under our 2009 Long-Term Incentive Plan. See the Compensation Discussion and Analysis section of this Amendment and note 11 of our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended July 31, 2015.

(2)

Market value is calculated based on our closing stock price on July 31, 2015 of $21.83.

(3)

Represents fiscal year 2015 awards under our 2009 Long-Term Incentive Plan of Series 1 performance-based restricted stock. Awards vest July 31, 2017 if performance requirements are satisfied. The table reflects our estimate that 135.0% of the Series 1 awards will vest. See note 11 of our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended July 31, 2015. See the table “Grants of Plan Based Awards.”

(4)

Represents fiscal year 2015 awards under our 2009 Long-Term Incentive Plan of time-based restricted stock. Awards vest July 31, 2017. The table reflects our estimate that 100.0% of the time awards will vest. See note 11 of our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended July 31, 2014. See the table “Grants of Plan Based Awards.”

(5)

Represents fiscal year 2014 awards under our 2009 Long-Term Incentive Plan of Series 1 performance-based restricted stock. Awards vest July 31, 2016, if performance requirements are satisfied. The table reflects our estimate that 100.0% of the Series 1 awards will vest. See note 11 of our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended July 31, 2014.

(6)

Represents fiscal year 2014 awards under our 2009 Long-Term Incentive Plan of time-based restricted stock. Awards vest generally on anniversary of hire date. The table reflects our estimate that 100.0% of the time awards will vest. See note 11 of our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended July 31, 2014. See the table “Grants of Plan Based Awards.”

23


The following table presents information respecting options exercised and stock vested by NEOs during fiscal year 2015.

Option Exercises and Stock Vested

 

 

Option Awards

 

 

Stock Awards

 

Name

 

Number of Shares

Acquired on

Exercise (#)

 

 

Value Realized

On

Exercise ($)

 

 

Number of Shares

Acquired

on Vesting (#)

 

 

Value Realized

On

Vesting ($)

 

Christopher T. Fraser

 

 

 

 

 

 

 

 

20,000

 

 

 

399,920

 

Malinda G. Passmore

 

 

 

 

 

 

 

 

2,000

 

 

 

41,340

 

Roger C. Jackson

 

 

 

 

 

 

 

 

 

 

 

 

Ernest C. Kremling

 

 

 

 

 

 

 

 

3,300

 

 

 

70,620

 

Andrew C. Lau

 

 

 

 

 

 

 

 

1,500

 

 

 

44,565

 

Potential Payments upon Termination or Change in Control

The following describes the payments and benefits that would be provided to each NEO in the event that this employment is terminated with us for any reason, including death, disability, retirement, voluntary termination, termination for cause and termination without cause, with and without a change in control.

We have an employment agreement that contains severance provisions with Mr. Jackson, one of our NEOs. In fiscal year 2014, net sales from electronic chemicals2015, four NEOs, Mr. Fraser, Ms. Passmore, Mr. Kremling and Mr. Lau are participants in our Executive Severance Plan (the “ESP”) along with one other employee. Under the terms of Mr. Jackson’s employment agreement, if we terminate his employment (other than for cause or due to death or disability) or elect not to extend his term of employment for the renewal term, or if he voluntarily terminates his employment for good reason due to a change of control, then we must pay Mr. Jackson a termination payment equal to three times base salary. The termination payments are paid in equal annual payments, if the termination is not within one year of a change of control. If the termination or election not to extend the employment agreement by us or voluntary resignation for good reason by the executive occurs within one year of a change of control, then any option to acquire shares of our Common Stock held by the executive becomes fully vested as of the date of termination, and are exercisable for a period of two years. Under the ESP, participants are paid severance equal to a pro-rated portion of annual incentive compensation. Ms. Passmore, Mr. Kremling and Mr. Lau also would be paid a lump sum payment of 1.5 times base salary if the termination of employment was not in connection with a change of control, or 2.0 times the sum of base salary and target annual incentive, if it was in connection with a change of control. For Mr. Fraser, the multiples were $253.8 million,2.0 times base salary, or 2.5 times the sum of base salary and target annual incentive. Performance-based restricted awards do not vest on termination, except upon death, total and permanent disability or retirement. On death and total and permanent disability, performance-based restricted awards vest proportionally based on months of service in the three year performance measurement period, but based on performance achieved as of the termination. On retirement, the awards vest 100%, subject to satisfaction of the performance criteria at the end of the performance measurement period. Resignation by the executive for “good reason” includes failure to pay any amount due to such executive, demotion, relocation or an increaseuncured breach of $88.0 million,the employment agreement by us. Performance-based awards to vest on a change of control. A “change of control” includes, among other events, the acquisition by an individual or 53.1%, over net salesgroup of $165.8 millionbeneficial ownership of more than 50% of the combined voting power of our then-outstanding Common Stock.

24


The table below presents information respecting amounts payable upon a death, disability, or termination of NEOs, or a change of control, as of July 31, 2015. See “Executive Benefits and Perquisites-Executive Severance Plan.”

Name

 

Death ($)

 

 

Disability

($)

 

 

Voluntary

Termination

($) (1)

 

 

Termination

For Cause

($)

 

 

Termination

Without Cause

But No Change

of Control ($)

 

 

Termination

Without

Cause but

with a

Change of

Control ($)

 

 

Change of Control

 

Christopher T. Fraser

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incentive Bonus (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

816,500

 

 

 

816,500

 

 

 

 

Cash Severance (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,320,672

 

 

 

3,136,596

 

 

 

 

Value of Unvested Stock Awards (4)

 

 

1,613,322

 

 

 

1,613,322

 

 

 

 

 

 

 

 

 

 

 

 

4,302,191

 

 

 

4,302,191

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Malinda G. Passmore

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incentive Bonus (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

161,704

 

 

 

161,704

 

 

 

 

Cash Severance (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

408,900

 

 

 

817,800

 

 

 

 

Value of Unvested Stock Awards (4)

 

 

270,323

 

 

 

270,323

 

 

 

 

 

 

 

 

 

 

 

 

730,825

 

 

 

730,825

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Roger C. Jackson

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incentive Bonus (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

157,909

 

 

 

157,909

 

 

 

 

Cash Severance (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

774,141

 

 

 

774,141

 

 

 

 

Value of Unvested Stock Awards (4)

 

 

225,635

 

 

 

225,635

 

 

 

 

 

 

 

 

 

 

 

 

651,997

 

 

 

651,997

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ernest C. Kremling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incentive Bonus (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

194,137

 

 

 

194,137

 

 

 

 

Cash Severance (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

448,395

 

 

 

896,790

 

 

 

 

Value of Unvested Stock Awards (4)

 

 

377,700

 

 

 

377,700

 

 

 

 

 

 

 

 

 

 

 

 

1,020,072

 

 

 

1,020,072

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Andrew C. Lau

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incentive Bonus (2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

154,175

 

 

 

154,175

 

 

 

 

Cash Severance (3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

384,158

 

 

 

768,315

 

 

 

 

Value of Unvested Stock Awards (4)

 

 

280,139

 

 

 

280,139

 

 

 

 

 

 

 

 

 

 

 

 

811,006

 

 

 

811,006

 

(1)

Any retirement would be treated as a voluntary termination, except for performance-based awards as described above.

(2)

The amount is the actual incentive award for fiscal year 2015.

(3)

Multiple of base salary or the sum of base salary and target incentive bonus for the year in which the termination occurs for Mr. Fraser, Ms. Passmore, Mr. Kremling and Mr. Lau, and a multiple of base salary for Mr. Jackson.

(4)

For unvested stock awards, the service period requirement is prorated as of July 31, 2015 for death and disability, and the performance objectives are estimated as described in notes 2 and 3 to the Outstanding Equity Awards at Fiscal Year — End table. Performance-based and time-based awards vest at maximum on a change of control, and the amount is is calculating based on our closing stock price on July 31, 2015 of $21.83.


25


The table below presents information respecting compensation paid to directors in fiscal year 2013. In2015 who, except for Mr. Fraser, were not NEOs. We also reimburse our directors for travel, lodging and related expenses incurred in attending Board, committee or other business meetings.

Director Compensation

Name

 

Fees Earned

Or Paid in

Cash

($) (1)

 

 

Stock

Awards

($) (2)

 

 

Option

Awards

($)

 

 

Non-Equity

Incentive Plan

Compensation

($)

 

 

All Other

Compensation

($)

 

 

Total

($)

 

Gerald G. Ermentrout

 

 

71,800

 

 

 

64,956

 

 

 

 

 

 

 

 

 

 

 

 

136,756

 

James F. Gentilcore

 

 

50,900

 

 

 

64,956

 

 

 

 

 

 

 

 

 

 

 

 

115,856

 

George W. Gilman

 

 

59,300

 

 

 

64,956

 

 

 

 

 

 

 

 

 

 

 

 

124,256

 

John C. Hunter, III

 

 

42,400

 

 

 

64,956

 

 

 

 

 

 

 

 

 

 

 

 

107,356

 

Fred C. Leonard, III

 

 

61,200

 

 

 

64,956

 

 

 

 

 

 

 

 

 

 

 

 

126,156

 

Stephen A. Thorington (3)

 

 

24,800

 

 

 

27,046

 

 

 

 

 

 

 

 

 

 

 

 

51,846

 

Karen A. Twitchell

 

 

62,200

 

 

 

64,956

 

 

 

 

 

 

 

 

 

 

 

 

127,156

 

(1)

Each director is paid a fee of $2,000 for each regular or special meeting of the Board of Directors, and paid an annual retainer of $30,000 per year. Directors are also paid $1,500 for attending committee meetings and business meetings, and the Chair of each committee is paid a retainer of $6,000 per year, except for the Chair of the Audit Committee who is paid a retainer of $11,000 per year and the Chair of the Compensation Committee who is paid a retainer of $7,500 per year. Mr. Ermentrout was selected as Lead Director in fiscal year 2014. The Lead Director is paid an annual retainer of $15,000. Annual retainers are paid quarterly. Directors are reimbursed for out-of-pocket expenses incurred in attending meetings and for other expenses incurred in performing in their capacity as directors.

(2)

This amount represents the aggregate grant date fair value, which we expense in our financial statements. See note 11 of our audited consolidated financial statements in our Annual Report on Form 10-K for the year ended July 31, 2015.

(3)

Mr. Thorington left the Board of Directors at the conclusion of his term in December 2014.

Compensation Committee Interlocks and Insider Participation

During fiscal year 2013, net sales2015, none of the members of the Compensation Committee have served as officers or employees of the Company or of any of our subsidiaries or had a relationship requiring disclosure under this caption.

During fiscal year 2015, none of our executive officers served as a member of a compensation committee or board of directors of any other entity that has an executive officer serving as a member of our Compensation Committee or Board of Directors.

Mr. Leonard, the Chair of the Compensation Committee, was a party to the transaction described in “Transactions with Related Persons” below.

Compensation Committee Report

The Compensation Committee has reviewed and discussed with management the foregoing Compensation Discussion and Analysis. Based on this review and discussion with management, the Compensation Committee recommended to the Board of Directors that the Compensation Discussion and Analysis be included in the electronic chemicals segment increased $6.3 million,Company’s 2015 Proxy Statement.

The Compensation Committee:

Gerald G. Ermentrout

John C. Hunter, III

Fred C. Leonard, III, Chair


26


Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

The following table sets forth certain information as of November 30, 2015 with regard to the beneficial ownership of Common Stock by (i) each person known to us to be the beneficial owner of 5% or 4.0%more of our outstanding Common Stock, (ii) our named executive officers and the directors individually and (iii) our officers and directors as a group. All addresses are in care of KMG Chemicals, Inc., over net sales9555 W. Sam Houston Parkway S., Suite 600, Houston, Texas 77099.

Name

 

Common Stock

Beneficially

Owned

Excluding

Options

 

 

Shares Including

Options Exercisable

Within 60 Days

 

 

Percent

of Total

Beneficial

Shares

(%) (1)

 

Directors and Named Executive Officers

 

 

 

 

 

 

 

 

 

 

 

 

Gerald G. Ermentrout

 

 

26,293

 

 

 

26,293

 

 

*

 

Christopher T. Fraser

 

 

94,576

 

 

 

94,576

 

 

*

 

James F. Gentilcore

 

 

8,658

 

 

 

8,658

 

 

*

 

George W. Gilman

 

 

63,689

 

 

 

63,689

 

 

*

 

Robert Harrer

 

 

515

 

 

 

515

 

 

*

 

John C. Hunter, III

 

 

14,356

 

 

 

14,356

 

 

*

 

Roger C. Jackson

 

 

72,553

 

 

 

72,553

 

 

*

 

Ernest C. Kremling

 

 

22,771

 

 

 

22,771

 

 

*

 

Andrew C. Lau

 

 

2,058

 

 

 

2,058

 

 

*

 

Fred C. Leonard, III

 

 

483,131

 

 

 

483,131

 

 

 

4.1

%

Malinda G. Passmore

 

 

5,138

 

 

 

5,138

 

 

*

 

Karen A. Twitchell

 

 

18,340

 

 

 

18,340

 

 

*

 

Directors and Named Executive Officers as a Group (12 persons)

 

 

812,078

 

 

 

812,078

 

 

 

6.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

Five Percent Shareholders

 

 

 

 

 

 

 

 

 

 

 

 

David L. Hatcher (2)

   19 Briar Hollow Lane, Suite 290, Houston, TX 77027

 

 

2,007,497

 

 

 

2,007,497

 

 

 

17.1

%

Trigran Investments, Inc. Douglas Granat, Lawrence Oberman and Steven

   Simon (3) 630 Dundee Road, Suite 230, Northbrook, IL 60062

 

 

1,429,484

 

 

 

1,429,484

 

 

 

12.2

%

T. Rowe Price Associates, Inc. (4)

   100 E. Pratt Street, Baltimore, MD 20202

 

 

1,325,782

 

 

 

1,325,782

 

 

 

11.3

%

*

Less than 1%.

(1)

This table is calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Under Rule 13d-3(d), shares not outstanding which are subject to options, warrants, rights, or conversion privileges exercisable within 60 days are deemed outstanding for the purpose of calculating the number and percentage owned by a person, but not deemed outstanding for the purpose of calculating the number and percentage owned by any other person listed. As of November 30, 2015, we had 11,715,586 shares of Common Stock outstanding.

(2)

Based on the Schedule 13G/A filed with the Securities and Exchange Commission (the “SEC”) on February 17, 2015 by David L. Hatcher.

(3)

Based on the Schedule 13G/A filed with the SEC on February 13, 2015 by Trigran Investments, Inc., Douglas Granat, Lawrence Oberman and Steven Simon, which indicated that the reporting persons share dispositive and voting power over the indicated number of shares, and the Schedule 13G/A filed with the SEC on February 13, 2015 by Trigran Investments, L.P. (which owns 714,839 shares representing 6.1% of the shares outstanding), to which Trigran Investments, Inc. serves as investment advisor with power to direct investments and/or sole power to vote the shares.

(4)

Based on the Schedule 13G/A filed with the SEC on October 31, 2015 jointly by T. Rowe Price Associates, Inc. (“Price Associate”) and T. Rowe Price Small-Cap Value Fund, Inc. (“Price Small-Cap”).  These shares are owned by various individual and institutional investors including Price Small-Cap (which owns 1,194,312 shares representing 10.2% of the shares outstanding), to which Price Associates serves as investment adviser with power to direct investments and/or sole power to vote the shares.  For purposes of the reporting requirements of the Exchange Act, as amended, Price Associates is deemed to be a beneficial owner of such shares; however Price Associates expressly disclaims that it is, in fact, the beneficial owner of such shares.

27


Item 13. Certain Relationships and Related Transactions, and Director Independence.

Review, Approval or Ratification of $159.5 millionTransactions with Related Persons

Our Code of Business Conduct prohibits employees, officers and directors from having a personal, financial or family interest that could in fiscal year 2012.any way prevent the individual from acting in our best interests (a “conflict of interest”) and provides that any conflict of interest waiver relating to Board members or executive officers may only be made after review and approval by the Board.  In both fiscals year 2014addition, the Board reviews certain relationships and 2013,related party transactions with respect to directors, as part of its assessment of each director’s independence.  The related party transaction described below was reviewed and approved by the increaseBoard in net sales from the prior year came primarily fromaccordance with these policies.

Transactions with Related Persons

On May 1, 2015, we completed the acquisition of Val-Tex, a privately held Texas corporation. Fred C. Leonard III was the UPC business subsidiariesmajority shareholder, president and chief executive officer of OM GroupVal-Tex. He is also a director on May 31, 2013.

Net salesour Board. The aggregate merger consideration paid to the former shareholders of wood treating chemicals increased by $2.3 million, or 2.4%, to $99.5Val-Tex consisted of $23.7 million in fiscal year 2014 from $97.2 million in fiscal year 2013. Net salescash plus 606,875 shares of wood treating chemicals in fiscal year 2013 decreasedour Common Stock that were exchanged for an equivalent number of shares held by $15.8 million, or 14.0%, from $113.0 million in fiscal year 2012. The increase in fiscal year 2014 in wood treating productsVal-Tex (no additional 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 amountshares were issued). Mr. Leonard received 401,465 shares of creosote used in each tie.

Segment Income from Operations

Income from operations of the electronic chemicals segment was $14.1 million in fiscal year 2014, as compared to $14.0 million in fiscal year 2013our Common Stock and approximately $13.4 million in cash in the transaction. In addition, George W. Gilman, a director on our Board, is an indirect owner, through a family trust, of equity interests in Aeneas, L.C., a former shareholder of Val-Tex. Aeneas, L.C. received 12,091 shares of our Common Stock and approximately $402,000 in cash in the transaction.

Director Independence

The Board of Directors is currently composed of seven non-employee directors and one employee director. The Board of Directors has established that eight directors will be the number of directors that will constitute the full Board of Directors at the time of the 2015 Annual Meeting. Under our guidelines and the listing requirements of the New York Stock Exchange, at least a majority of our Board of Directors must be independent. The Board of Directors has determined that all seven of its current non-employee directors meet the New York Stock Exchange requirement of independence. The Board of Directors has also determined that all non-employee directors who served during fiscal year 2012. Income from operations of electronic chemicals increased by $100,000 in fiscal year 2014 as compared to2015 met the prior year period,New York Stock Exchange independence requirement.

Item 14. Principal Accounting Fees and increased by $600,000, or 4.5%, in fiscal year 2013 as compared to the prior year period.Services.

The fiscal year 2014 improvement in income from operations in electronic chemicals was primarily due to the effect of the acquisition of the UPC business net of integration expense of approximately $1.2 millionaggregate fees billed by our independent registered public accounting firm and additional depreciation and amortization of $5.4 million. Integration expenses in fiscal year 2014 were primarilyauditor, KPMG LLP, 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 expenserendered to us for the electronic chemicals segment for fiscal year 2014 includes accelerated depreciation of assets of $261,000 at our Fremont, California facility, $0.8 million at the Bay Point, California facility, and $2.1 million at our Milan, Italy facility, as well as depreciation related to asset retirement obligations at Bay Point of $1.0 million. We ceased operations at Fremont in fiscal year 2014, and have announced that we will exit from our toll manufacturing arrangement and cease operations at the Bay Point facility in March 2015. We have also announced that we will close 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, income from operations of the wood treating segment was $8.4 million as compared to $10.5 million in fiscal year 2013 and $15.6 million in fiscal year 2012. Income from operations for the wood treating segment 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.

In fiscal year 2014, creosote and penta volume improved approximately 3.6% and 9.4%, respectively, but operating income in wood treating 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 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 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%, 82% and 79% of our distribution expense in fiscal years 2014, 2013 and 2012, 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.

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 Group acquisition 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 adjusted EBITDA, which excludes the effect of acquisition-related restructuring, the realignment of the hydrofluoric acid business, integration and CEO transition expenses, was $30.6 million, an increase of $1.2 million, or 4%, as compared to $29.4 million in fiscal year 2013. The improvement in fiscal 2014 adjusted EBITDA reflects operational synergies and commercial benefits related to the UPC acquisition and subsequent rationalization of our North American electronic chemicals assets, partially offset by reduced margins related to our creosote product in our wood treating chemicals segment.

In fiscal year 2014 adjusted earnings per share was $0.81, compared to $1.11 in fiscal year 2013. The decrease in fiscal 2014 in adjusted earnings per share primarily reflects increased depreciation and amortization expenses primarily due to the UPC acquisition and higher corporate expenses including costs incurred for audit and other professional services.

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 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 nonrecurring 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. GAAP definitions of cash flow from operations or net income (loss). Adjusted net income adjusts net income for acquisition and integration expenses, restructuring and realignment charges and other nonrecurring 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. GAAP measures of performance.

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

   Year Ended July 31, 
   2014  2013  2012 
   (Amounts in thousands) 

Operating income

  $3,951   $17,180   $25,437  

Other income/(expense)

   (831  (208  (269

Depreciation and amortization

   18,327    8,295    7,018  
  

 

 

  

 

 

  

 

 

 

EBITDA

   21,447    25,267    32,186  

Acquisition and integration expenses

   1,249    2,637      

CEO transition costs

   1,280    1,516      

Restructuring charges, excluding accelerated depreciation

   3,925          

Impairment charges

   2,741          
  

 

 

  

 

 

  

 

 

 

Adjusted EBITDA

  $30,642   $29,420   $32,186  
  

 

 

  

 

 

  

 

 

 

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

   Year Ended July 31, 
   2014  2013   2012 
   (Amounts in thousands, except per share) 

Net income/(loss)

  $(988 $9,348    $13,825  

Items impacting pre-tax income, net of tax:

     

Restructuring and realignment charges

   7,069    —       —    

Acquisition and integration expenses

   812    2,446     —    

CEO transition costs

   832    1,014     —    

Restructuring income tax expense

   1,725    —       —    
  

 

 

  

 

 

   

 

 

 

Adjusted net income including discontinued operations

  $9,450   $12,808    $13,825  

Diluted adjusted earnings per share(1)

  $0.81   $1.11    $1.20  

Weighted average diluted shares outstanding

   11,644    11,578     11,528  

(1)Potentially dilutive shares are included in the weighted average diluted shares outstanding for the computation of diluted adjusted earnings per share.

Interest Expense

Interest expense was $2.9 million in fiscal year 2014, $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, we paid $25.0 million towards our revolving loan facility and reduced the debt from $85.0 million at the beginning of the fiscal year to $60.0 million at July 31, 2014.

Income Taxes

We had income tax expense from continuing operations of $1.3 million, $5.7 million and $8.8 million in fiscal years 2014, 2013 and 2012, respectively. Our effective tax rate was 471.4% in fiscal 2014, 37.6% in fiscal year 2013 and 37.9% in fiscal year 2012. In general, differences between these effective tax rates and the United States statutory rate of 35.0% are primarily due to statutory rates in our foreign jurisdictions, 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 benefit from adjustments of foreign operations.

Discontinued Operations

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

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 thetwo fiscal years ended July 31, 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, 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.

Liquidity and Capital Resources

Cash Flows

Net cash provided by operating activities was $40.4 million in fiscal year 2014, $20.3 million in fiscal year 2013 and $25.2 million in fiscal year 2012.

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 treating 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.

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, cash flows from operating activities were favorably impacted by a decrease in accounts receivable of $6.8 million, primarily due to lower sales of creosote during the fourth quarter of fiscal year 2012 as compared to the prior year fourth fiscal quarter, and to a lesser extent because of the sale of the animal health business and currency translation adjustments of our Italian subsidiary’s accounts receivable balance on lower currency exchange rates. Cash flows were also favorably impacted by an increase in accrued liabilities and a decrease in other receivables of $1.9 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 health business which reduced our working capital requirements.

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 which was for electronic chemicals production and distribution equipment. The remainder of our additions to property was capital expenditures for normal equipment and system upgrades and purchases at our different locations. We received $10.2 million of proceeds for the sale of our animal health business during fiscal year 2012.

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

In fiscal year 2013, net cash from 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 2014 and 2013, and paid dividends of $1.2 million in fiscal year 2012.

Working Capital

We refinanced and amended the loan facility we had in place at July 31, 2014 with our New Credit Facility, but as of July 31, 2014 we had $40.0 million outstanding under a then existing revolving line of credit of $110.0 million. The maximum borrowing capacity under that revolving loan was $46.6 million, after giving effect to a reduction of $3.4 million for unused letters of credit. The amount available under that revolving facility at July 31, 2014 was limited, however, to approximately $35.0 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.

Long Term Obligations

Our long-term debt and current maturities as of July 31, 2014 and July 31, 2013 consisted of the following (in thousands):

   July 31,
2014
   July 31,
2013
 

Senior Secured Debt:

    

Note Purchase Agreement, maturing on December 31, 2014, interest rate of 7.43%

  $20,000    $20,000  

Revolving Loan Facility, maturing on April 30, 2018, variable interest rates based on LIBOR plus 2.0% and 1.50% at July 31, 2014 and 2013, respectively

   40,000     65,000  
  

 

 

   

 

 

 

Total debt

   60,000     85,000  

Current maturities of long-term debt

   —      —   
  

 

 

   

 

 

 

Long-term debt, net of current maturities

  $60,000    $85,000  
  

 

 

   

 

 

 

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. 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 existing revolving loan facility and entered into the New Credit Facility on October 9, 2014. The New Credit Facility is 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 New 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 New 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 New Credit Facility at October 9, 2014 was limited, however, to approximately $44.2 million, because of a loan covenant restriction respecting funded debt to EBITDA. The maturity date for the New Credit Facility is October 9, 2019.

The revolving loan under the New 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.

Ratio of Funded Debt to EBITDA

Margin

Equal to or greater than 3.0 to 1.0

1.875%

Equal to or greater than 2.75 to 1.0, but less than 3.0 to 1.0

1.625%

Equal to or greater than 2.50 to 1.0, but less than 2.75 to 1.0

1.500%

Equal to or greater than 2.25 to 1.0, but less than 2.50 to 1.0

1.375%

Equal to or greater than 2.00 to 1.0, but less than 2.25 to 1.0

1.250%

Equal to or greater than 1.50 to 1.0, but less than 2.00 to 1.0

1.125%

Less than 1.50 to 1.0

1.000%

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 New Credit Facility are secured by our assets, including stock in subsidiaries, inventory, accounts receivable, equipment, intangible assets, and real property. The New 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.

After considering the New Credit Facility, at July 31, 2014, principal payments due under our long-term debt agreements as of July 31, 2014 for the fiscal years ended July 31 were as follows (in thousands):

   Total   2015   2016   2017   2018   2019   Thereafter 

Long-term debt

  $60,000    $—      $—      $—      $—      $—      $60,000  

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 $2.7 million in fiscal year 2014, $1.3 million in fiscal year 2013 and $2.2 million in fiscal year 2012.

We expensed approximately $667,000 for testing, data submission and other costs associated with our participation in product task forces in fiscal year 2014, and approximately $522,000 and $802,000 in fiscal years 2013 and 2012, respectively. We estimate that we will continue to incur additional testing, data submission and other costs of approximately $586,000 in fiscal year 2015. 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, 2014 are summarized in the following table (in thousands):

   Payments Due by Period (in thousands) 
   Total   1 Year   2-5 Years   More than 5 Years 

Long-term debt(1)

  $60,000    $—      $—      $60,000  

Estimated interest payments on debt(2)

   4,340     1,102     3,109     129  

Operating leases

   17,512     5,333     9,253     2,926  

Other long-term liabilities(3)

   2,421     224     1,021     1,176  

Purchase obligations(4)

   129,146     56,087     73,059     —    
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $213,419    $62,746    $86,442    $64, 231  
  

 

 

   

 

 

   

 

 

   

 

 

 

(1)On October 9, 2014, we refinanced amounts outstanding under our existing revolving credit agreement and the Prudential term notes with the New Credit Facility.
(2)Estimated payments are based on interest rates in effect as of the end of July 2014.
(3)Includes postretirement benefit obligations for a supplemental executive retirement plan for one of our former United States executives and in connection with benefit obligations of our foreign subsidiary; and estimated unused commitment fees on our revolving credit facility.
(4)Consists primarily of raw materials purchase contracts. These are typically not fixed prices arrangements. The prices are based on the prevailing prices.

Outlook for Fiscal Year 2015

Our electronic chemicals business is closely tied to global semiconductor production. In calendar 2014, the global semiconductor market has benefited from relative strength in the mobile, industrial and automotive markets, while the personal computer market has shown signs of stabilization in Western Europe and North America. According to industry forecasts, the global semiconductor market is anticipated to grow approximately 6% in calendar 2014, followed by more moderate growth of 3% in calendar 2015.

Within our wood treating chemicals segment, we expect solid market demand for utility poles treated with penta, as utilities in the Western United States continue upgrading their distribution infrastructure, and as poles near the end of their service life are regularly replaced. However, the railroad crosstie market is likely to remain challenged by increased competition for the hardwood timbers used for crossties. In addition, Class I railroads continue to specify that wood crossties be treated with borates, thus reducing the amount of creosote used to treat each crosstie. These factors are likely to contribute to excess creosote supply and exert downward pressure on prices in fiscal 2015.

Overall, we project consolidated net 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 treating chemicals segment due to continued challenges in the rail tie market.

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 and $224,000 at July 31, 2014 and 2013, respectively.

Goodwill —The carrying value of goodwill is reviewed at least annually, and if this review indicates that it will not be recoverable, our carrying value of goodwill will be adjusted to fair value. Based on an assessment of qualitative factors 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 applicable reporting unit was less than the carrying value as of July 31, 2014 and 2013. Accordingly, we determined that as 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.

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 Company 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 its decision to exit the Bay Point facility, in fiscal year 2014 the Company recognized $3.7 million in asset retirement obligations related to the decommissioning, decontamination, and dismantling costs. See Note 15 to the consolidated financial statements included in item 8 of Part II of this report.

Income Taxes —Deferred income taxes and liabilities are determined using the asset and liability method in accordance with accounting principles generally accepted in the United States of America. We have deferred tax assets that are reviewed periodically for recoverability. These assets are evaluated by 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 statutory tax rates and our future taxable income levels. With the consolidation of our European manufacturing facilities, it is more likely than not that our subsidiary in Italy will not generate a sufficient profit in the near future to recover restructuring charges. The impact on our Italian subsidiary’s tax provision was approximately $1.7 million, and was recorded in the second quarter of fiscal year 2014.

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—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, 2014 and 2013, we recognized inventory valuation (gain)/loss of $634,000 and $(355,000), respectively. As of July 31, 2014 and 2013, we had $290,000 and $180,000, respectively, of reserves for inventory obsolescence.

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 loss of primary customers;

our ability to implement productivity improvements, cost reduction initiatives or facilities expansions;

market developments affecting, and other changes in, the demand for our products and the entry of new competitors or the introduction of new competing products;

availability or increases in the price of energy, our primary raw materials and active ingredients;

the timing of planned capital expenditures;

our ability to identify, develop or acquire, and market additional product lines and businesses necessary to implement our business strategy and our ability to finance such acquisitions and development;

our ability to realize the anticipated benefits of business acquisitions and to successfully integrate previous or future business acquisitions;

the condition of the capital markets generally, which will be affected by interest rates, foreign currency fluctuations and general economic conditions;

cost and other effects of legal and administrative proceedings, settlements, investigations and claims, including environmental liabilities which may not be covered by indemnity or insurance;

the effects of weather, earthquakes, other natural disasters and terrorist attacks;

the ability to obtain registration and re-registration of our products under applicable law;

the political and economic climate in the foreign or domestic jurisdictions in which we conduct business; and

other United States or foreign regulatory or legislative developments which affect the demand for our products generally or increase the environmental compliance cost for our products or impose liabilities on the manufacturers and distributors of such products.

The information contained in this report, including the information set forth under the heading “Risk Factors”, identifies additional factors that could cause our results or performance to differ materially from those we express in our forward-looking statements. Although we believe that the assumptions underlying our forward-looking statements are reasonable, any of these assumptions and, therefore, the forward-looking statements based on these assumptions, could themselves prove to be inaccurate. In light of the significant uncertainties inherent in the forward-looking statements which are included in this report and the exhibits and other documents incorporated herein by reference, our inclusion of this information is not a representation by us or any other person that our objectives and plans will be achieved.

ITEM 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, our fixed rate debt consisted of $20.0 million of term notes with an interest rate of 7.4%, maturing on December 31, 2014.

Our variable rate debt as of July 31, 2014 consisted of a revolving loan advanced under the credit facility we had in place at that time with an interest rate of 2.155% (2.0% plus LIBOR), maturing on April 30, 2018. On July 31, 2014, we had $40.0 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%.

Based on the outstanding balance of our variable rate debt at July 31, 2014 and our applicable interest rate on the New Credit Facility, a 1.0% change in the interest rate as of July 31, 2014 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 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. Dollar 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 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, the cumulative foreign currency translation gain reflected in accumulated other comprehensive income/(loss) was $645,000.

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 losses during fiscal year 2014 were $484,000.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Index to Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firm

28

Consolidated Balance Sheets as of July 31, 2014 and 2013

30

Consolidated Statements of Income for the Years Ended July 31, 2014, 2013 and 2012

31

Consolidated Statements of Comprehensive Income for the Years Ended July 31, 2014, 2013 and 2012

32

Consolidated Statements of Stockholders’ Equity for the Years Ended July 31,  2014, 2013 and 2012

33

Consolidated Statements of Cash Flows for the Years Ended July 31, 2014, 2013 and 2012

34

Notes to Consolidated Financial Statements

35

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

KMG Chemicals, Inc.:

We have audited the accompanying consolidated balance sheets of KMG Chemicals, Inc. and subsidiaries (the “Company”) as of July 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended July 31, 2014. In connection with our audits of the consolidated financial statements, we also have audited the related financial statement Schedule II. These consolidated financial statements and the related financial statement Schedule II are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of KMG Chemicals, Inc. and subsidiaries as of July 31, 2014 and 2013, and the results of their operations and their cash flows for each of the years in the three-year period ended July 31, 2014, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the related financial statement Schedule II, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), KMG Chemicals, Inc.’s internal control over financial reporting as of July 31, 2014, based on criteria established inInternal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated October 28, 2014 expressed an unqualified opinion on the effectiveness of KMG Chemicals, Inc.’s internal control over financial reporting.

/s/ KPMG LLP
Houston, Texas
October 28, 2014

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders

KMG Chemicals, Inc.:

We have audited KMG Chemicals, Inc.’s internal control over financial reporting as of July 31, 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). KMG Chemicals, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on KMG Chemicals, Inc.’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, KMG Chemicals, Inc. maintained, in all material respects, effective internal control over financial reporting as of July 31, 2014, based on criteria established in Internal Control—Integrated Framework (1992) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of KMG Chemicals, Inc. and subsidiaries as of July 31, 2014 and 2013, and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended July 31, 2014, and our report dated October 28, 2014 expressed an unqualified opinion on those consolidated financial statements.

/s/ KPMG LLP
Houston, Texas
October 28, 2014

KMG CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

AS OF JULY 31, 2014 AND 2013

(In thousands, except for share and per share amounts)

   2014   2013 

Assets

    

Current assets

    

Cash and cash equivalents

  $19,252    $13,949  

Accounts receivable

    

Trade, net of allowances of $272 at July 31, 2014 and $224 at July 31, 2013

   40,176     41,935  

Other

   1,904     4,210  

Inventories, net

   45,268     53,387  

Current deferred tax assets

   1,577     1,400  

Prepaid expenses and other

   3,476     3,955  
  

 

 

   

 

 

 

Total current assets

   111,653     118,836  

Property, plant and equipment, net

   92,450     96,688  

Deferred tax assets

   442     1,069  

Goodwill

   12,595     10,929  

Intangible assets, net

   28,353     29,261  

Restricted cash

   1,000     1,000  

Other assets, net

   4,365     4,232  
  

 

 

   

 

 

 

Total assets

  $250,858    $262,015  
  

 

 

   

 

 

 

Liabilities & stockholders’ equity

    

Current liabilities

    

Accounts payable

  $36,690    $35,492  

Accrued liabilities

   16,986     8,362  

Employee incentive accrual

   4,575     1,989  
  

 

 

   

 

 

 

Total current liabilities

   58,251     45,843  

Long-term debt

   60,000     85,000  

Deferred tax liabilities

   9,881     11,462  

Other long-term liabilities

   2,520     2,470  
  

 

 

   

 

 

 

Total liabilities

   130,652     144,775  

Commitments and contingencies

    

Stockholders’ equity

    

Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued

   —      —   

Common stock, $.01 par value, 40,000,000 shares authorized, 11,649,001 shares issued and outstanding at July 31, 2014 and 11,522,321 shares issued and outstanding at July 31, 2013

   116     115  

Additional paid-in capital

   28,886     26,689  

Accumulated other comprehensive income/(loss)

   645     (2,504

Retained earnings

   90,559     92,940  
  

 

 

   

 

 

 

Total stockholders’ equity

   120,206     117,240  
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

  $250,858    $262,015  
  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

KMG CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

FOR THE YEARS ENDED JULY 31, 2014, 2013 AND 2012

(In thousands, except per share amounts)

   2014  2013  2012 

Net sales

  $353,406   $263,311   $272,700  

Cost of sales

   249,907    186,841    195,635  
  

 

 

  

 

 

  

 

 

 

Gross profit

   103,499    76,470    77,065  
  

 

 

  

 

 

  

 

 

 

Distribution expenses

   50,251    30,312    26,770  

Selling, general and administrative expenses

   38,421    28,978    24,858  

Restructuring charges

   6,359    —      —    

Realignment charges

   4,517    —      —    
  

 

 

  

 

 

  

 

 

 

Operating income

   3,951    17,180    25,437  
  

 

 

  

 

 

  

 

 

 

Other income/(expense)

    

Interest expense, net

   (2,854  (1,771  (2,099

Other, net

   (831  (208  (269
  

 

 

  

 

 

  

 

 

 

Total other expense, net

   (3,685  (1,979  (2,368
  

 

 

  

 

 

  

 

 

 

Income from continuing operations before income taxes

   266    15,201    23,069  

Provision for income taxes

   (1,254  (5,715  (8,754
  

 

 

  

 

 

  

 

 

 

Income/(loss) from continuing operations

   (988  9,486    14,315  

Discontinued operations

    

Income/(loss) from discontinued operations, before income taxes

   —      (203  (711

Income tax benefit

   —      65    221  
  

 

 

  

 

 

  

 

 

 

Loss from discontinued operations

   —      (138  (490
  

 

 

  

 

 

  

 

 

 

Net income/(loss)

  $(988 $9,348   $13,825  
  

 

 

  

 

 

  

 

 

 

Earnings/(loss) per share

    

Basic

    

Income/(loss) from continuing operations

  $(0.09 $0.82   $1.26  

Loss from discontinued operations

   —      (0.01  (0.04
  

 

 

  

 

 

  

 

 

 

Net income/(loss)

  $(0.09 $0.81   $1.22  
  

 

 

  

 

 

  

 

 

 

Diluted

    

Income/(loss) from continuing operations

  $(0.09 $0.82   $1.24  

Loss from discontinued operations

   —      (0.01  (0.04
  

 

 

  

 

 

  

 

 

 

Net income/(loss)

  $(0.09 $0.81   $1.20  
  

 

 

  

 

 

  

 

 

 

Weighted average shares outstanding

    

Basic

   11,615    11,487    11,363  

Diluted

   11,615    11,578    11,528  

See accompanying notes to consolidated financial statements.

KMG CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

FOR THE YEARS ENDED JULY 31, 2014, 2013 AND 2012

(In thousands)

   2014  2013   2012 

Net income/(loss)

  $(988 $9,348    $13,825  

Other comprehensive income/(loss)

     

Foreign currency translation gain/(loss)

   3,149    1,835     (3,106
  

 

 

  

 

 

   

 

 

 

Total other comprehensive income/(loss)

   3,149    1,835     (3,106
  

 

 

  

 

 

   

 

 

 

Total comprehensive income

  $2,161   $11,183    $10,719  
  

 

 

  

 

 

   

 

 

 

See accompanying notes to consolidated financial statements.

KMG CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

FOR THE YEARS ENDED JULY 31, 2014, 2013 AND 2012

(In thousands)

   Common Stock   Additional
Paid-In
Capital
  Accumulated
Other
Comprehensive
Income (Loss)
     Total
Stockholders’
Equity
 
   Shares
Issued
   Par
Value
     Retained
Earnings
  

BALANCE AT JULY 31, 2011

   11,319    $113    $25,256   $(1,233 $72,394   $96,530  
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Cash dividends ($0.11 per share)

         (1,249  (1,249

Stock options/warrants exercised

   37       55      55  

Restricted stock issued

   50     1     (1    —   

Stock-based compensation expense

       714      714  

Tax benefit from stock-based awards

       41      41  

Other

       (43    (43

Net income

         13,825    13,825  

Loss on foreign currency translation

        (3,106   (3,106
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

BALANCE AT JULY 31, 2012

   11,406    $114    $26,022   $(4,339 $84,970   $106,767  
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Cash dividends ($0.12 per share)

         (1,378  (1,378

Stock options/warrants exercised

   70       70      70  

Restricted stock issued

   46     1     (1    —   

Stock-based compensation expense

       446      446  

Tax benefit from stock-based awards

       529      529  

Other

       (377    (377

Net income

         9,348    9,348  

Gain on foreign currency translation

        1,835     1,835  
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

BALANCE AT JULY 31, 2013

   11,522    $115    $26,689   $(2,504 $92,940   $117,240  
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Cash dividends ($0.12 per share)

         (1,393  (1,393

Stock options/warrants exercised

   47          —    

Restricted stock issued

   80     1     (1    —    

Stock-based compensation expense

       2,231      2,231  

Tax benefit from stock-based awards

       328      328  

Other

       (361    (361

Net loss

         (988  (988

Gain on foreign currency translation

        3,149     3,149  
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

BALANCE AT JULY 31, 2014

   11,649    $116    $28,886   $645   $90,559   $120,206  
  

 

 

   

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

See accompanying notes to consolidated financial statements.

KMG CHEMICALS, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED JULY 31, 2014, 2013 AND 2012

(In thousands)

   2014  2013  2012 

Cash flows from operating activities

    

Net income /(loss)

  $(988 $9,348   $13,825  

Adjustments to reconcile net income/(loss) to net cash provided by operating activities

    

Depreciation and amortization

   14,117    8,295    7,018  

Depreciation related to restructuring and realignment

   4,210    —      —    

Non-cash Impairment charges

   2,741    —      —    

Amortization of loan costs included in interest expense

   60    41    124  

Stock-based compensation expense

   2,231    446    714  

Bad debt expense

   128    208    —   

Allowance for excess and obsolete inventory

   634    (355  371  

(Gain) loss on sale of animal health business

   —      57    (90

(Gain) loss on disposal of property

   (28  59    99  

Deferred income tax expense/(benefit)

   (2,227  1,247    929  

Tax benefit from stock-based awards

   (328  (529  (41

Changes in operating assets and liabilities, net of effects of acquisition

    

Accounts receivable — trade

   2,137    1,813    6,810  

Accounts receivable — other

   746    (2,593  2,186  

Inventories

   7,861    (1,018  (5,545

Other current and non-current assets

   822    (654  (223

Accounts payable

   398    5,301    (2,801

Accrued liabilities and other

   7,844    (1,394  1,873  
  

 

 

  

 

 

  

 

 

 

Net cash provided by operating activities

   40,358    20,272    25,249  
  

 

 

  

 

 

  

 

 

 

Cash flows from investing activities

    

Additions to property, plant and equipment

   (9,497  (5,505  (5,193

Disposals to property, plant and equipment

   74    —      —    

Acquisition of Ultra Pure Chemicals, net of cash acquired

   149    (62,608  —    

Proceeds from sale of animal health business

   —      —      10,203  

Proceeds from sale of property

   —      —      33  

Change in restricted cash

   —      —      (1,000
  

 

 

  

 

 

  

 

 

 

Net cash provided by/(used in) investing activities

   (9,274  (68,113  4,043  
  

 

 

  

 

 

  

 

 

 

Cash flows from financing activities

    

Net borrowings/(payments) under revolving loan facility

   (25,000  61,000    (13,946

Deferred financing costs

   —      (229  —    

Principal payments on borrowings on term loan

   —      —      (11,333

Book overdraft

   —      —      (2,852

Proceeds from exercise of stock options and warrants

   —      70    64  

Tax benefit from stock-based awards

   328    529    41  

Payment of dividends

   (1,393  (1,378  (1,249
  

 

 

  

 

 

  

 

 

 

Net cash provided by/(used in) financing activities

   (26,065  59,992    (29,275

Effect of exchange rate changes on cash

   284    165    (210
  

 

 

  

 

 

  

 

 

 

Net increase (decrease) in cash and cash equivalents

   5,303    12,316    (193

Cash and cash equivalents at the beginning of year

   13,949    1,633    1,826  
  

 

 

  

 

 

  

 

 

 

Cash and cash equivalents at end of year

  $19,252   $13,949   $1,633  
  

 

 

  

 

 

  

 

 

 

Supplemental disclosures of cash flow information

    

Cash paid for interest

  $2,562   $1,709   $1,896  

Cash paid for income taxes

  $865   $5,854   $5,009  

Supplemental disclosure of non-cash investing activities

    

Purchase of property, plant and equipment through accounts payable

  $1,135   $649   $—   

See accompanying notes to consolidated financial statements.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

General— KMG Chemicals, Inc. (the “Company”) is involved principally in the manufacture, formulation and distribution of specialty chemicals in carefully focused markets through its two wholly-owned subsidiaries, KMG Electronic Chemicals, Inc. (“KMG EC”) and KMG-Bernuth, Inc. (“KMG Bernuth”).

In its electronic chemicals business, the Company sells high purity wet process chemicals to the semiconductor industry, and in the wood treating chemicals business the Company sells two industrial wood treating chemicals, pentachlorophenol (“penta”) and creosote. The Company operates its electronic chemicals business through KMG EC in North America and through KMG Italia, S.r.l. (“KMG Italia”) and KMG Electronic Chemicals Holdings S.a.r.l (“KMG Lux”) (and its subsidiaries) in Europe and Asia. That business has facilities in the United States, the United Kingdom, France, Italy and Singapore. In the wood treating business the Company manufactures penta at its plant in Matamoros, Mexico through KMG de Mexico (“KMEX”), a Mexican corporation which is a wholly-owned subsidiary of KMG Bernuth. The Company sells its wood treating chemicals in the United States, Mexico and Canada. The electronic chemicals and wood treating businesses constitute two reportable segments. See Note 13.

Principles of Consolidation— The consolidated financial statements include the accounts of KMG Chemicals, Inc. and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

Use of Estimates— The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Reclassifications— Certain reclassifications of prior year amounts have been made to conform to current year presentation.

Cash and Cash Equivalents— The Company considers all investments with original maturities of three months or less when purchased to be cash equivalents.

Restricted Cash— Restricted cash includes cash balances which are legally or contractually restricted to use. The Company’s restricted cash as of July 31, 2014 and 2013 includes proceeds that were placed in escrow in connection with the sale of the animal health business. See Note 12.

Fair Value of Financial Instruments— The carrying value of financial instruments, including cash and cash equivalents, accounts receivable, and accounts payable approximate fair value because of the relatively short maturity of these instruments. The fair value of the Company’s debt at July 31, 2014 and 2013 approximated its carrying value since the debt obligations bear interest at a rate consistent with market rates.

Accounts Receivable— The Company’s trade accounts receivables are primarily from wood-treating customers and from electronic chemical customers worldwide. The Company extends credit based on an evaluation of the customer’s financial condition, generally without requiring collateral. Exposure to losses on receivables is dependent on each customer’s financial condition. At July 31, 2014 there was one customer that represented approximately 15% of the Company’s accounts receivable. At July 31, 2013 there were two customers that represented approximately 12% and 14%, respectively, of the Company’s accounts receivable.

The Company records an allowance for doubtful accounts to reduce accounts receivable when the Company believes an account may not be collected. A provision for bad debt expense is recorded to selling, general and administrative expenses. 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 our assessment of future bad debt exposure. Historically, write offs of accounts receivable balances have been insignificant. The allowance was $272,000 and $224,000 at July 31, 2014 and 2013, respectively.

Inventories— 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 the Company utilizes a weighted-average cost. The Company records inventory obsolescence as a reduction in its inventory when considered not salable.

Property, Plant, and Equipment— Property, plant, and equipment are stated at cost less accumulated depreciation and amortization. Major renewals and betterments are capitalized. Repairs and maintenance costs are expensed as incurred.

Depreciation for equipment commences once placed in service, and depreciation for buildings and leasehold improvements commences once they are ready for their intended use. Depreciable life is determined through economic analysis. Depreciation for financial statement purposes is provided on the straight-line method.

The estimated useful lives of classes of assets are as follows:

Asset Class

Life (Years)

Building

15 to 30

Plant

10 to 18

Equipment

3 to 15

Leasehold improvements

Remaining life of the lease

Depreciation expense was approximately $16.5 million (including accelerated depreciation of $4.2 million), $7.7 million and $6.5 million in fiscal years 2014, 2013 and 2012, respectively. See Notes 4 and 15.

Intangible Assets— Identifiable intangible assets with a defined life are amortized using a straight-line or accelerated method over the useful lives of the assets. Identifiable intangible assets of an indefinite life are not amortized. These assets are required to be tested for impairment at least annually. If this review indicates that impairment has occurred, the carrying value of the intangible assets will be adjusted to fair value. Based on an assessment of qualitative factors, in accordance with GAAP, it was determined that there were no events or circumstances that would lead the Company to a determination that is more likely than not that the fair value of the applicable assets was less than its carrying value as of July 31, 2014 and 2013. The Company therefore concluded that its indefinite lived intangible assets were not impaired as of July 31, 2014 and 2013. It is the Company’s policy to expense costs as incurred in connection with the renewal or extension of its intangible assets.

Goodwill— The Company has goodwill of $3.8 million and $8.8 million, respectively, associated with its wood treating and electronic chemicals segments. The carrying value of the Company’s goodwill is reviewed at least annually, and if this review indicates that it will not be recoverable the Company’s carrying value of goodwill will be adjusted to fair value. Based on an assessment of qualitative factors it was determined that there were no events or circumstances that would lead the Company to a determination that is more likely than not that the fair value of the applicable reporting unit was less than its carrying value as of July 31, 2014 and 2013. Accordingly, the Company determined that as of July 31, 2014 and 2013, goodwill was not impaired.

Asset retirement obligation The Company measures 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 its estimates, the Company 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 its decision to exit the Bay Point facility, in fiscal year 2014 the Company recognized $3.7 million in asset retirement obligations related to the decommissioning, decontamination, and dismantling costs for which it is obligated under its manufacturing agreement. See Note 15.

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. The determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and 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. The Company recognized an impairment loss in fiscal year 2014 of $2.7 million on certainlong-lived assets at the Bay Point, California facility where Chemtrade toll manufactures for the Company.

Revenue Recognition— The Company’s 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. The Company also recognizes service revenue in connection with technical support services and chemicals delivery and handling at customer facilities. Revenue is recognized as those services are provided.

Cost of Sales— Cost of sales includes inbound freight charges, purchasing and receiving costs, depreciation, inspection costs and internal transfer costs. In the case of products manufactured by the Company, direct and indirect manufacturing costs and associated plant administrative expenses are included as well as laid-in cost of raw materials consumed in the manufacturing process.

Distribution Expenses— These expenses include outbound freight, depreciation, storage and handling expenses and other miscellaneous costs (including depreciation and amortization) associated with product storage, handling and distribution.

Selling, General and Administrative Expenses— These expenses include selling expenses, corporate headquarters’ expenses, amortization of intangible assets and environmental regulatory support expenses.

Shipping and Handling Costs— Shipping and handling costs are included in cost of sales and distribution expenses. Inbound freight charges and internal transfer costs are included in cost of sales. Product storage and handling costs and the cost of distributing products to the Company’s customers are included in distribution expenses.

Income Taxes— The Company files a consolidated United States federal income tax return, and for financial reporting purposes, provides income taxes for the differences between the financial statement carrying amounts of assets and liabilities and their tax bases in accordance with GAAP. See Note 5.

Earnings Per Share— Basic earnings per common share amounts are calculated using the average number of common shares outstanding during each period. Diluted earnings per share assumes the issuance of restricted stock awards and the exercise of stock options having exercise prices less than the average market price during the applicable period, using the treasury stock method.

Foreign Currency Translation— The functional currency of the Company’s Mexico operations is the U.S. Dollar. As a result, monetary assets and liabilities for KMEX are re-measured to U.S. dollars at current rates at the balance sheet dates, income statement items are re-measured at the average monthly exchange rates for the dates those items were recognized, and certain assets (including plant and production equipment) are re-measured at historical exchange rates. Foreign currency transaction gains and losses are included in the statement of operations as incurred along with gains and losses from currency re-measurement. These gains and losses were nominal in fiscal years 2014, 2013 and 2012.

The Company’s international operations in the electronic chemicals business are in Europe and Singapore, and use local currencies as the functional currency, including the GB Pound, Euro and Singapore Dollar. The translation adjustment resulting from currency translation of the local currency into the reporting currency (U.S. Dollar) is included as a separate component of stockholders’ equity. The assets and liabilities have been translated from local currencies into U.S. Dollars using exchange rates in effect at the balance sheet dates. Results of operations have been translated using the average exchange rates during the period. Foreign currency translation resulted in a translation adjustment 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 are included in accumulated other comprehensive income/(loss) in the consolidated balance sheets.

Stock-Based Compensation— The Company’s stock-based compensation expense is based on the fair value of the award measured on the date of grant. For stock option awards, the grant date fair value is measured using a Black-Scholes option valuation model. For stock awards, the Company’s stock price on the date of the grant is used to measure the grant date fair value. For awards of stock which are based on a fixed monetary value the grant date fair value is based on the monetary value. Stock-based compensation costs are recognized as an expense over the requisite service period of the award using the straight-line method.

Recent Accounting Standards

The Company has considered all recently issued accounting standards updates and SEC rules and interpretive releases.

In April 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No. 2014-08, “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This ASU changes the requirements for reporting discontinued operations. Under the ASU, discontinued operations are defined as either a component of an entity or group of components that has been disposed meets the criteria to be classified as held-for sale, or has been abandoned/spun-off, and represents a strategic shift that has (or will have a major effect on an entity’s operations and financial results,) or a business or nonprofit activity that, on acquisition, meets the criteria to be classified as held-for sale. This ASU is effective for interim periods beginning after December 15, 2014, is applied prospectively and early adoption is permitted. This ASU does not have an impact on our year-to-date period ending July 31, 2014. The impact on the Company will be dependent on any transaction that is within the scope of the new guidance.

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The new guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently assessing the potential impact of ASU No. 2014-09 on its financial statements.

2. ACQUISITIONS

On May 31, 2013, the Company completed its acquisition of the ultra pure chemicals (“UPC”) business subsidiaries of OM Group, Inc. (“OM Group”) located in the United States, Europe and Singapore. The subsidiaries sell high purity and ultra pure, wet process chemicals to the semiconductor industry. The Company completed the acquisition by borrowing $65.0 million on the revolving loan under its revolving credit facility on May 31, 2013. See Note 7 for further discussion of the Company’s revolving credit facility. During 2014, the Company entered into a settlement agreement with OM Group to finalize working capital adjustments related to the purchase price. The final purchase price of the UPC acquisition totaled $63.2 million. The Company received a net payment of $149,000 as part of the settlement of working capital adjustments.

The Company accounted for the acquisition under the acquisition method of accounting in accordance with GAAP. The Company expensed transaction and acquisition-related costs of approximately $2.1 million in fiscal year 2013, which is included in selling, general and administrative expenses on the Company’s consolidated statement of income.

The following table summarizes final acquired assets and assumed liabilities and the acquisition accounting for the fair value of the assets and liabilities recognized in the consolidated balance sheets at the acquisition date (in thousands):

Cash

  $689  

Accounts receivable

   14,698  

Inventory

   11,047  

Other current assets

   1,963  

Property, plant and equipment

   28,939  

Intangible assets:

  

Value of product qualifications

   12,800  

Non-compete agreement

   1,900  

Transition services

   154  
  

 

 

 

Total intangible assets

   14,854  
  

 

 

 

Total assets acquired

  $72,190  
  

 

 

 

Current liabilities

   11,401  

Other long-term liabilities

   6,206  
  

 

 

 

Total liabilities assumed

   17,607  
  

 

 

 

Net assets acquired

  $54,583  
  

 

 

 

The following table sets forth pro forma results for the fiscal years ended July 31, 2013 and 2012 had the acquisition occurred as of the beginning of fiscal year 2012. The unaudited pro forma financial information is not necessarily indicative of what our consolidated results of operations would have been had we completed the acquisition as of the dates indicated.

   (Unaudited) (in thousands,
except per share data)
 
   2013   2012 

Revenues

  $340,427    $366,882  

Operating income

   15,955     26,083  

Net income

   9,123     13,056  

Earnings per share — basic

  $0.79    $1.15  

The Company recognized $16.0 million of net sales and net income of $979,000, and integration costs of $577,000 related to the acquired business, in its consolidated statements of income for the fiscal year ended July 31, 2013.

The supplemental pro forma information includes incremental interest expense from the Company’s revised credit facility of $1.0 million and $1.6 million for the years ended July 31, 2013 and 2012, respectively, excludes $2.1 million of acquisition-related costs incurred in fiscal year 2013, and includes incremental depreciation and amortization expense of approximately $3.1 million and $3.3 million for the years ended July 31, 2013 and 2012, respectively.

3. INVENTORIES

Inventories are summarized as follows at July 31, 2014 and 2013 (in thousands):

   2014  2013 

Raw materials and supplies

  $7,914   $8,003  

Work in process

   1,508    1,382  

Supplies

   1,793    1,730  

Finished products

   34,343    42,452  

Less reserve for inventory obsolescence

   (290  (180
  

 

 

  

 

 

 

Inventories, net

  $45,268   $53,387  
  

 

 

  

 

 

 

4. PROPERTY, PLANT AND EQUIPMENT

Property, plant, and equipment and related accumulated depreciation and amortization are summarized as follows at July 31, 2014 and 2013 (in thousands):

   2014  2013 

Land

  $15,763   $15,620  

Buildings and improvements

   42,664    41,273  

Equipment

   77,557    66,807  

Leasehold improvements

   143    143  
  

 

 

  

 

 

 
   136,127    123,843  

Less accumulated depreciation and amortization

   (52,972  (36,933
  

 

 

  

 

 

 
   83,155    86,910  

Construction-in-progress

   9,295    9,778  
  

 

 

  

 

 

 

Property, plant and equipment, net

  $92,450   $96,688  
  

 

 

  

 

 

 

5. INCOME TAXES

The Company is subject to United States federal, state and foreign taxes on its operations. The geographical sources of income from continuing operations before income taxes for each of the three years ended July 31 are as follows (in thousands):

   2014  2013   2012 

United States

  $1,923   $12,033    $21,789  

Foreign

   (1,657  3,168     1,280  
  

 

 

  

 

 

   

 

 

 

Income from continuing operations before income taxes

  $266   $15,201    $23,069  
  

 

 

  

 

 

   

 

 

 

The components of income tax expense/(benefit) from continuing operations for the years ended July 31 consisted of the following (in thousands):

   2014  2013  2012 

Current:

    

Federal

  $2,582   $2,833   $5,639  

Foreign

   1,071    1,437    686  

State

   603    197    1,071  
  

 

 

  

 

 

  

 

 

 
   4,256    4,467    7,396  
  

 

 

  

 

 

  

 

 

 

Deferred:

    

Federal

   (1,978  1,426    1,441  

Foreign

   (897  (282  (104

State

   (127  104    21  
  

 

 

  

 

 

  

 

 

 
   (3,002  1,248    1,358  
  

 

 

  

 

 

  

 

 

 

Total

  $1,254   $5,715   $8,754  
  

 

 

  

 

 

  

 

 

 

The Company allocated income tax benefit of $65,000, and $221,000 to discontinued operations for the fiscal years ended July 31, 2013 and 2012, respectively.

Deferred income taxes are provided on all temporary differences between financial and taxable income. The following table presents the components of the Company’s deferred tax assets and liabilities at July 31, 2014 and 2013 (in thousands):

   2014  2013 

Deferred tax assets:

   

Current deferred tax assets:

   

Bad debt expense

  $326   $259  

Inventory

   787    920  

Accrued liabilities

   1,545    166  

Employee benefits

   1,879    606  

Other

   102    159  

Less valuation allowance

   (636   
  

 

 

  

 

 

 

Total current deferred tax assets

  $4,003   $2,110  
  

 

 

  

 

 

 

Non-current deferred tax assets

   

Net operating loss

  $839   $803  

Deferred compensation

   616    793  

Less valuation allowance

   (1,090   
  

 

 

  

 

 

 

Total non-current deferred tax assets

  $365   $1,596  
  

 

 

  

 

 

 

Deferred tax liabilities:

   

Current deferred tax liabilities:

   

Other

  $(128) $(152

Prepaid assets

   (398  (562
  

 

 

  

 

 

 

Total current deferred tax liabilities:

  $(526 $(714
  

 

 

  

 

 

 

Non-current deferred tax liabilities:

   

Difference in amortization basis of intangibles

  $(7,129 $(6,020

Difference in depreciable basis of property

   (4,575  (5,965
  

 

 

  

 

 

 

Total non-current deferred tax liabilities

   (11,704  (11,985
  

 

 

  

 

 

 

Net non-current deferred tax liability

  $(7,862 $(8,993
  

 

 

  

 

 

 

As of July 31, 2014, the Company has $2.7 million foreign net operating losses carry forwards which start to expire in 2024.

The Company records provisions for uncertain tax provisions in accordance with GAAP, which prescribes the minimum recognition threshold that a tax position is required to meet before being recognized in the financial statements. The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. The statute of limitations remain open for fiscal year ended July 31, 2011 and forward for United States federal income taxes and fiscal year ended July 31, 2009 and forward for state tax jurisdictions. On August 28, 2014, the Company was notified by the Internal Revenue Service that the federal income tax return for the July 31, 2013 fiscal year-end had been selected for examination. The audit is ongoing at this time.

The Company’s subsidiary in Italy is contesting income tax assessments for the three years period ended July 31, 2011 and a registration tax assessment for the December 2007 purchase of the electronic chemicals business in Italy. Adjustments were proposed by the taxing authorities that would result in approximately $3.5 million (including interest and penalties) of additional liability, if all the adjustments are sustained. However, the Company does not expect all of this amount to result in cash payments in the event of an unfavorable resolution, as the Company would be able to utilize available net operating losses. The Company intends to vigorously defend its tax position, and on October 13, 2014 the Provincial Tax Court in Milan, Italy agreed with the Company’s position. The ruling is subject to appeal by the taxing authority. The ultimate outcome of this examination is subject to uncertainty, and the Company had a liability for its uncertain tax position in Italy as of July 31, 2014 and 2013 of $326,000 and $437,000, respectively, which includes penalties and interest offset by net operations losses. These uncertain tax positions primarily relate to transfer pricing. See Note 8 to the consolidated financial statements.

On January 2, 2013 the American Taxpayer Relief Act was adopted. The law included a retroactive two year extension of the research and development credit from January 1, 2012 through December 31, 2013. A retroactive income tax benefit of approximately $200,000 was recorded by the Company during the second quarter of fiscal year 2013. In July 2013, The Finance Bill 2013 included reductions in the United Kingdom corporation tax rate to 21%, effective April 2014.

The Company has reviewed its Mexican operations and concluded that they do not have the same level of immediate capital needs as previously expected. Therefore, the Company no longer intends for previously unremitted foreign earnings associated with its Mexico operations to be permanently reinvested outside the United States.

The following table accounts for the differences between the actual tax provision, and the amounts obtained by applying the applicable statutory United States federal income tax rate of 35% to income from continuing operations before income taxes for each of the years ended July 31, 2014, 2013, and 2012, respectively (in thousands):

   2014  2013  2012 

Income taxes at the federal statutory rate

  $93   $5,320   $8,074  

Effect of foreign operations

   329    (65  160  

Change in valuation allowance

   1,725    —      —    

Adjustments to foreign operations

   (916  —      —    

State income taxes, net of federal income tax effect

   269    232    717  

Acquisition related cost

   —      714    —    

Other

   (246  (486  (197
  

 

 

  

 

 

  

 

 

 

Total

  $1,254   $5,715   $8,754  
  

 

 

  

 

 

  

 

 

 

6. INTANGIBLE ASSETS

Intangible assets are summarized as follows (in thousands):

   Number of Years                
   Weighted       July 31, 2014 
   Average
Amortization
Period
   Original
Cost
   Accumulated
Amortization
  Foreign
Currency
Translation
   Carrying
Amount
 

Intangible assets subject to amortization

(range of useful life):

         

Electronic chemicals-related contracts (5-8 years)

   6.6    $2,204    $(559 $79    $1,724  

Electronic chemicals-related trademarks and patents (10-15 years)

   12.0     117     (67  —       50  

Electronic chemicals-value of product qualifications (5-15 years)

   14.1     14,100     (2,426  801     12,475  
    

 

 

   

 

 

  

 

 

   

 

 

 

Total intangible assets subject to amortization

   13.1    $16,421    $(3,052 $880     14,249  
    

 

 

   

 

 

  

 

 

   

 

 

 

Intangible assets not subject to amortization:

         

Creosote product registrations

          5,339  

Penta product registrations

          8,765  
         

 

 

 

Total intangible assets not subject to amortization

          14,104  
         

 

 

 

Total intangible assets, net

         $28,353  
         

 

 

 

   Number of Years            
   Weighted
Average
   July 31, 2013 
   Amortization
Period
   Original
Cost
   Accumulated
Amortization
  Carrying
Amount
 

Intangible assets subject to amortization

(range of useful life):

       

Electronic chemicals-related contracts (5-8 years)

   6.5    $2,297    $(253 $2,044  

Electronic chemicals-related trademarks and patents (10-15 years)

   12.0     117     (57  60  

Electronic chemicals-value of product qualifications (5-15 years)

   14.1     14,100     (1,047  13,053  
    

 

 

   

 

 

  

 

 

 

Total intangible assets subject to amortization

   13.0    $16,514    $(1,357  15,157  
    

 

 

   

 

 

  

 

 

 

Intangible assets not subject to amortization:

       

Creosote product registrations

        5,339  

Penta product registrations

        8,765  
       

 

 

 

Total intangible assets not subject to amortization

        14,104  
       

 

 

 

Total intangible assets, net

       $29,261  
       

 

 

 

Assets acquired in the acquisition of the UPC subsidiaries in May 2013 included $12.8 million of product qualifications and $1.9 million of non-compete agreements, which are being amortized over 15 and seven years, respectively. Intangible assets subject to amortization are amortized over their estimated useful lives which are between five and 15 years. Total amortization expense related to intangible assets was approximately $1.8 million, $573,000 and $548,000 for the fiscal years ended July 31, 2014, 2013 and 2012, respectively. The estimated amortization expense is projected to be approximately $1.6 million, $1.4 million, $1.3 million, $1.3 million and $1.2 million for fiscal years 2015 through 2019, respectively.

The following table presents carrying value of goodwill by segment as of July 31, 2014, 2013 and 2012 (in thousands):

   Wood
Treating
   Electronic
Chemicals
   Total 

Balance as of July 31, 2012

  $3,779    $—      $3,779  

Goodwill resulting from the UPC acquisition

   —       7,150     7,150  
  

 

 

   

 

 

   

 

 

 

Balance as of July 31, 2013

   3,779     7,150     10,929  
  

 

 

   

 

 

   

 

 

 

Working capital adjustment from the UPC acquisition

   —       535     535  

Finalization of purchase price allocation

   —       880     880  

Foreign currency translation adjustment

   —       251     251  
  

 

 

   

 

 

   

 

 

 

Balance as of July 31, 2014

  $3,779    $8,816    $12,595  
  

 

 

   

 

 

   

 

 

 

7. LONG-TERM OBLIGATIONS

Working Capital

The Company refinanced and amended the loan facility it had in place at July 31, 2014 with a new credit facility as reported on Form8-K filed on October 10, 2014 (“New Credit Facility”), but at July 31, 2014 the Company had $40.0 million outstanding under the then existing revolving facility of $110.0 million. The maximum borrowing capacity under that revolving loan facility was $46.6 million, after giving effect to a reduction of $3.4 million for unused letters of credit. The actual amount available under the revolving facility at July 31, 2014 was limited, however, to approximately $35.0 million, because of a loan covenant restriction respecting funded debt to pro-forma earnings before interest, taxes and depreciation.

Long Term Obligations

The Company’s long-term debt and current maturities as of July 31, 2014 and July 31, 2013 consisted of the following (in thousands):

   July 31,
2014
   July 31,
2013
 

Senior Secured Debt:

    

Note Purchase Agreement, maturing on December 31, 2014, interest rate of 7.43%

  $20,000    $20,000  

Revolving Loan Facility, maturing on April 30, 2018, variable interest rates based on LIBOR plus 2.0% and 1.50% at July 31, 2014 and 2013, respectively

   40,000     65,000  
  

 

 

   

 

 

 

Total debt

   60,000     85,000  

Current maturities of long-term debt

   —      —   
  

 

 

   

 

 

 

Long-term debt, net of current maturities

  $60,000    $85,000  
  

 

 

   

 

 

 

The Company entered into an amended and restated credit agreement and a note purchase agreement in December 2007, which were 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. 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.

On October 9, 2014, the Company refinanced its existing revolving loan facility and entered into the New Credit Facility. The New Credit Facility is now 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 New Credit Facility was used to repay in full the $20.0 million outstanding indebtedness under the Company’s note purchase agreement with The Prudential Insurance Company of America and Pruco Life Insurance Company, and the Company refinanced $38.0 million then outstanding under its existing revolving loan facility. As a result, the note purchase agreement has been classified as a long-term obligation as of July 31, 2014.

The New Credit Facility provides for a revolving loan up to $150.0 million, including an accordion feature that allows for an additional revolving loan increase of up to an additional $100.0 million with approval from the lenders. The amount available under the New Credit Facility at October 9, 2014 was limited, however, to approximately $44.2 million, because of a loan covenant restriction respecting funded debt to EBITDA. The maturity date for the New Credit Facility is October 9, 2019.

The revolving loan under the New 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.

Ratio of Funded Debt to EBITDA

Margin

Equal to or greater than 3.0 to 1.0

1.875

Equal to or greater than 2.75 to 1.0, but less than 3.0 to 1.0

1.625

Equal to or greater than 2.50 to 1.0, but less than 2.75 to 1.0

1.500

Equal to or greater than 2.25 to 1.0, but less than 2.50 to 1.0

1.375

Equal to or greater than 2.00 to 1.0, but less than 2.25 to 1.0

1.250

Equal to or greater than 1.50 to 1.0, but less than 2.00 to 1.0

1.125

Less than 1.50 to 1.0

1.000

The Company will also incur an unused commitment fee on the unused amount of commitments under the New Credit Facility from 0.30% to 0.15%, based on the ratio of funded debt to EBITDA.

Loans under the New Credit Facility are secured by the Company’s assets, including stock in subsidiaries, inventory, accounts receivable, equipment, intangible assets, and real property. The New Credit Facility has restrictive covenants, including requirements that the Company 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.

After considering the New Credit Facility, principal payments due under long-term debt agreements as of July 31, 2014 for the fiscal years ended July 31 are as follows (in thousands):

   Total   2015   2016   2017   2018   2019   Thereafter 

Long-term debt

  $60,000    $—      $—      $—      $—      $—      $60,000  

8. COMMITMENTS AND CONTINGENCIES

Contractual ObligationsThe Company has non-cancelable operating leases for its office and warehouse facilities and certain transportation equipment and purchase obligations. Our obligations to make future payments under certain contractual obligations as of July 31, 2014 are summarized in the following table (in thousands):

   Total   2015   2016   2017   2018   2019   Thereafter 

Operating leases

  $17,512    $5,333    $4,396    $2,442    $1,388    $1,027    $2,926  

Purchase obligations(1)

  ��129,146     56,087     43,102     27,870     2,087     —       —   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $146,658    $61,420    $47,498    $30,312    $3,475    $1,027    $2,926  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(1)Consists primarily of raw materials purchase contracts. These are typically not fixed price arrangements. The prices are based on the prevailing market prices.

Rent expense relating to the operating leases was approximately $3.8 million, $2.7 million and $2.3 million in fiscal years 2014, 2013 and 2012, respectively.

Environmental— The Company’s operations are subject to extensive federal, state and local laws, regulations and ordinances in the United States and abroad relating to the generation, storage, handling, emission, transportation and discharge of certain materials, substances and waste into the environment, and various other health and safety matters. Governmental authorities have the power to enforce compliance with their regulations, and violators may be subject to fines, injunctions or both. The Company must devote substantial financial resources to ensure compliance, and it believes that it is in substantial compliance with all of the applicable laws and regulations.

Certain licenses, permits and product registrations are required for the Company’s products and operations in the United States, Mexico and other countries in which it does 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 comparable state law) in order to sell those products in the United States. Compliance with these requirements has had, and in the future will continue to have, a material effect on our business, financial condition and results of operations.

The Company incurred expenses in connection with FIFRA research and testing programs of approximately $667,000, $522,000 and $802,000, in fiscal year 2014, 2013 and 2012, respectively. These costs are included in selling, general, and administrative expenses.

Litigation and Other Contingencies— The Company is subject to contingencies, including litigation relating to environmental laws and regulations, commercial disputes and other matters. Certain of these contingencies are discussed below. The ultimate resolution of these contingencies is subject to significant uncertainty, and should the Company fail to prevail in any of them or should several of them be resolved against the Company in the same reporting period, these matters could, individually or in the aggregate, be material to the consolidated financial statements. The ultimate outcome of these matters, however, cannot be determined at this time, nor can the amount of any potential loss be reasonably estimated, and as a result except where indicated no amounts have been recorded in the Company’s consolidated financial statements.

The Company records legal costs associated with loss contingencies as expenses in the period in which they are incurred.

The Company’s subsidiary in Italy is contesting two cases in the Provincial Tax Court in Milan, Italy. In the first case the Company disputes income tax assessments by the taxing authority for the three year period ended July 31, 2011. In the aggregate, the amount of the assessments, including interest and penalties, is €1.8 million. If all the adjustments are sustained, the additional liability for the years 2009 through 2011 would total approximately $2.4 million, including interest and penalties through July 31, 2014 (at an exchange rate of 1.339 $/€). The Company had a liability for an uncertain tax position for items in the amount of $326,000 and $437,000 as of July 31, 2014 and 2013, respectively. In the second case, the Company’s subsidiary is contesting the assessment of additional registration tax. The taxing authority is asserting an increased valuation of assets purchased from Air Products and Chemicals, Inc. in December 2007 on which registration tax is payable. The amount of this assessment, including interest and penalties through July 31, 2014, is €788,000 (or approximately $1.1 million, at an exchange rate of 1.339 $/€). The Provincial Tax Court issued a ruling on October 13, 2014 agreeing with the Company’s position in the income tax assessment case. That ruling is subject to appeal by the taxing authority. The Company intends to vigorously pursue its position before the court in both cases, but the ultimate outcome of this litigation is subject to uncertainty.

The EPA has listed the Star Lake Canal Superfund Site in Port Neches and Groves, Texas on the National Priorities List. In December 2002, the Company received a letter from the EPA addressed to Idacon, Inc. (f/k/a Sonford Chemical Company) notifying Idacon of potential liability under CERCLA in connection with this site. The letter requested reimbursement from Idacon for costs incurred by the EPA in responding to releases at the sites, equal to approximately $500,000 as of July 31, 2002. Idacon sold substantially all of its assets to one of our subsidiaries in 1988. The Company responded to a request for information from the EPA on the corporate history and relationship between the Company and its subsidiaries and Sonford Chemical Company in April 2003. On December 22, 2005, the EPA and certain potentially responsible parties entered an administrative order on consent which required the implementation of a remedial investigation and feasibility study. We understand that these studies were completed by mid-2012. EPA prepared a Record of Decision, selecting a remedy of excavation and disposal or soil and/or sediment, containment with soil, clay and/or armor caps and monitored natural recovery. In October 2014, the Company’s subsidiary, KMG-Bernuth, received a letter from EPA notifying it of potential liability under CERCLA, and inviting it to enter into negotiations to pay for or perform the selected remedy. No assurance can be given that the EPA will not designate the Company’s subsidiary as a potentially responsible party.

The Company is subject to federal, state, local and foreign laws and regulations and potential liabilities relating to the protection of the environment and human health and safety including, among other things, the cleanup of contaminated sites, the treatment, storage and disposal of wastes, the emission of substances into the air or waterways, and various health and safety matters. The Company expects to incur substantial costs for ongoing compliance with such laws and regulations. The Company may also face governmental or third-party claims, or otherwise incur costs, relating to cleanup of, or for injuries resulting from, contamination at sites associated with past and present operations. The Company accrues for environmental liabilities when a determination can be made that they are probable and reasonably estimable.

9. EMPLOYEE BENEFIT PLANS

The Company has a defined contribution 401(k) plan in which all regular U.S. employees are eligible to participate. The Company makes matching contributions under this plan of up to 4% of a participant’s compensation up to the annual regulated maximum amounts. The first 3% of the employee contribution is matched at 100%. The next 2% of the employee contribution is matched at 50%. Company contributions to the plan totaled approximately $608,000, $457,000 and $420,000 in fiscal years 2014, 2013 and 2012, respectively.

The locations in the United Kingdom and Singapore, acquired as part of the UPC acquisition from OM Group, make contributions to retirement plans that function as defined contribution retirement plans. The Company’s contributions to those plans were approximately $1.5 million in fiscal year 2014.

As of July 31, 2014, the Company’s other long-term liabilities included approximately $1.1 million related to benefit obligations in connection with one of its foreign subsidiaries included in the acquisition of the UPC business. This payable is an unfunded benefit obligation of the Company.

The Company has an employee benefit arrangement for one of its former U.S. employees. As of July 31, 2014 and 2013, the associated liability was approximately $553,000 and $617,000, respectively. The amount payable is a general obligation of the Company. Benefit payments under this arrangement, which were started in April 2013, will be paid for 10 years.

10. EARNINGS PER SHARE

Basic earnings per share have been computed by dividing net income by the weighted average shares outstanding. Diluted earnings per share have been computed by dividing net income by the weighted average shares outstanding plus potentially dilutive common shares. The following table presents information necessary to calculate basic and diluted earnings per share for periods indicated:

   Year Ended 
   2014  2013  2012 
   (Amounts in thousands, except per share data) 

Income/(loss) from continuing operations

  $(988 $9,486   $14,315  

Income/(loss) from discontinued operations

   —      (138  (490
  

 

 

  

 

 

  

 

 

 

Net income (loss)

  $(988 $9,348   $13,825  
  

 

 

  

 

 

  

 

 

 

Weighted average shares outstanding — basic

   11,615    11,487    11,363  

Dilutive effect of options/warrants and stock awards

   —      91    165  
  

 

 

  

 

 

  

 

 

 

Weighted average shares outstanding — diluted

   11,615    11,578    11,528  
  

 

 

  

 

 

  

 

 

 

Basic earnings per share

    

Basic earnings per share from continuing operations

  $(0.09 $0.82   $1.26  

Basic earnings per share on income/(loss) from discontinued operations

   —      (0.01  (0.04
  

 

 

  

 

 

  

 

 

 

Basic earnings per share

  $(0.09 $0.81   $1.22  
  

 

 

  

 

 

  

 

 

 

Diluted earnings per share

    

Diluted earnings per share from continuing operations

  $(0.09 $0.82   $1.24  

Diluted earnings per share on income/(loss) from discontinued operations

   —      (0.01  (0.04
  

 

 

  

 

 

  

 

 

 

Diluted earnings per share

  $(0.09 $0.81   $1.20  
  

 

 

  

 

 

  

 

 

 

Outstanding stock-based awards are not included in the computation of diluted earnings per share under the treasury stock method, if including them would be anti-dilutive. There was an average of 21,033 shares, 6,222 shares and 4,972 shares for the fiscal years ended 2014, 2013 and 2012, respectively, not included in the computation of diluted earnings per share. Potentially dilutive shares are not included in the computation of diluted weighted average shares outstanding for the fiscal year ended July 31, 2014 due to a loss from continuing operations for the year.

11. STOCK-BASED COMPENSATION

Stock-Based Incentive Plans

The Company adopted a 2009 Long-Term Incentive Plan (“2009 LTI Plan”) in October 2009, and it was approved by the shareholders at the annual meeting in December 2009. The Company adopted a 2004 Long-Term Incentive Plan (“2004 LTI Plan”) in October 2004, and it was approved by the shareholders at the annual meeting in November 2005 (the 2009 LTI Plan and the 2004 LTI Plan are referred to collectively as the “LTI Plans”). The Company adopted the 1996 Stock Option Plan (the “1996 Stock Plan”) in October, 1996, which expired and terminated on July 31, 2007. There are no options outstanding under the 1996 Stock Plan as of July 31, 2014.

The LTI Plans permit the granting of incentive stock options, non-qualified stock options, stock appreciation rights, restricted stock, restricted stock units, performance awards, dividend equivalent rights, and other awards. They are administered by the Board of Directors or a committee appointed by the Board of Directors. The Board has designated the Compensation and Development Committee as the administrator of the LTI Plans. Subject to the terms of the LTI Plans, the committee has the sole discretion to select the persons eligible to receive awards, the type and amount of incentives to be awarded, and the terms and conditions of awards. The committee also has the authority to interpret the LTI Plans, and establish and amend regulations necessary or appropriate for their administration. Any employee of the Company or a subsidiary of the Company or a director of the Company whose judgment, initiative, and efforts contributed or may be expected to contribute to the successful performance of the Company is eligible to participate. The maximum number of shares of the Company’s common stock that may be delivered pursuant to awards granted is 750,000 shares under the 2009 Long-Term Incentive Plan and 375,000 shares under the 2004 Long-Term Incentive Plan. Under the 2009 Long-Term Plan, no executive officer may receive in any calendar year stock options or stock appreciation rights, or awards that are subject to the attainment of performance goals relating to more than 200,000 shares of common stock. Under the 2004 Long-Term Plan, no executive officer may receive in any calendar year stock options or stock appreciation rights relating to more than 250,000 shares of common stock, or awards that are subject to the attainment of performance goals relating to more than 100,000 shares of common stock. At July 31, 2014 there were approximately 338,273 shares and 36,174 shares available for future grants under the 2009 Long-Term Plan and 2004 Long-Term Plan, respectively.

The 1996 Stock Plan terminated by expiration of its original term on July 31, 2007. There are no option outstanding under the plan as of July 31, 2014. The 1996 Stock Plan was administered either by the Company’s Board of Directors or by a committee of two or more non-employee directors. The Board designated the Compensation and Development Committee as the administrator of the plan. Options are exercisable during the period specified in each option agreement and in accordance with a vesting schedule designated by the Board of Directors or the committee. Any option agreement may provide that options become immediately exercisable in the event of a change or threatened change in control of the Company and in the event of certain mergers and reorganizations of the Company. Options may be subject to early termination within a designated period following the option holder’s cessation of service with the Company.

Accounting for Stock-Based Compensation

The Company recognized stock-based compensation costs of approximately $2,231,000, $446,000 and $714,000, respectively, for the fiscal years ended July 31, 2014, 2013 and 2012, and the related tax benefits of $825,000, $168,000 and $266,000, respectively, for the fiscal years ended July 31, 2014, 2013 and 2012. Stock-based compensation costs are recorded as selling, general and administrative expenses in the consolidated statements of income. The Company accounts for stock-based compensation costs at fair value measured on the date of grant of the award using a Black-Scholes option valuation model for stock option awards. Grant date fair value for stock awards is measured using the Company’s closing stock price on the date of grant of the stock awards where the award is based on a specific number of shares. Stock-based compensation costs are recognized as an expense over the requisite service period, generally the vesting period of the award, using the straight-line method.

As of July 31, 2014, there was approximately $1,902,000 of unrecognized compensation costs that are related to outstanding stock awards expected to be recognized over a weighted-average period of 2.1 years.

In connection with the election of Christopher T. Fraser as the Company’s President and Chief Executive Officer on September 24, 2013, the Company granted Mr. Fraser (i) 50,000 shares of common stock and (ii) time-based restricted stock awards for 30,000 shares of common stock (vesting over five years). The Company also agreed to grant performance-based restricted stock awards for an aggregate of 70,000 shares of common stock in five equal installments beginning in fiscal year 2013. The Company recorded an expense of approximately $1.1 million in the first quarter of fiscal year 2014 for the grant date fair value of the 50,000 shares of common stock.

A summary of activity for stock option and stock-awards is presented below.

Stock Options

A summary of option activity associated with employee compensation for the fiscal year ended July 31, 2014 is presented below.

   Shares  Weighted-
Average
Exercise Price
 

Outstanding on August 1, 2013

   58,000   $4.03  

Granted

   —      —    

Exercised

   (58,000  4.03  

Forfeited/Expired

   —     
  

 

 

  

Outstanding on July 31, 2014

   —     $—    
  

 

 

  

No stock options were outstanding at July 31, 2014.

No options were granted in fiscal years 2014, 2013 and 2012.

The total intrinsic value of options exercised in fiscal years 2014, 2013 and 2012 was approximately $952,000, $1.6 million, and $629,000, respectively. The total fair value of shares vested was $0, $39,000 and $39,000 for the fiscal years ended 2014, 2013, and 2012, respectively.

Performance Shares

The Company grants performance based shares to certain executives and employees consisting of Series 1 and Series 2 awards. Stock-based compensation for the awards is recognized on a straight-line basis over the requisite service period beginning on the date of grant through the end of the measurement period based on the number of shares expected to vest at the end of the measurement period. The expected percent of vesting is determined using certain performance measures described below and is re-evaluated at the end of each reporting period through the end of the measurement period.

At August 1, 2013 there were 154,758 non-vested performance shares outstanding. During fiscal year 2014 there were 192,344 Series 1 shares granted and there were 23,242 shares forfeited. These shares represented the maximum award subject to certain performance measures. There were 3,076 performance shares vested during fiscal year 2014. At July 31, 2014, there were 250,944 non-vested performance shares outstanding reflecting the maximum number of shares issuable under outstanding awards.

The fair value of the fiscal year 2014 award was measured on the grant dates on February 25, 2014 using the Company’s closing stock price of $14.88. Stock-based compensation on the award is recognized on a straight-line basis over the requisite service period beginning on the date of grant through the end of the measurement period ending on July 31, 2016, based on the number of shares expected to vest at the end of the measurement period.

A summary of the performance based stock awards granted to certain executives as Series 1 awards in fiscal years 2013 and 2014 and Series 1 and Series 2 awards in fiscal years 2012 and 2011 is detailed below.

Date of Grant

  Series
Award
   Maximum
Award

(Shares)
   Grant Date
Fair Value
   Measurement
Period Ending
   Actual or
Expected
Percentage of
Vesting (2)
  Shares Projected
to Vest or Vested (2)
 

Fiscal Year 2014 Award

           

2/25/2014 (1)

   Series 1     192,344    $14.88     07/31/2016     53  102,737  

Fiscal Year 2013 Award

           

12/4/2012 (1)

   Series 1     58,600    $18.75     07/31/2015     0  —   
    

 

 

        
     250,944         
    

 

 

        

Fiscal Year 2012 Award

           

2/27/2012

   Series 1     300    $18.08     07/31/2014     10  30  

2/27/2012

   Series 2     200    $18.08     07/31/2014     0  —    
    

 

 

        

 

 

 
     500          30  
    

 

 

        

 

 

 

10/28/2011

   Series 1     15,300    $15.30     07/31/2014     10  1,380  

10/28/2011

   Series 2     10,200    $15.30     07/31/2014     0  —    
    

 

 

        

 

 

 
     25,500          1,380  
    

 

 

        

 

 

 

10/11/2011 (1)

   Series 1     28,150    $14.16     07/31/2014     10  1,666  

10/11/2011 (1)

   Series 2     18,766    $14.16     07/31/2014     0  —    
    

 

 

        

 

 

 
     46,916          1,666  
    

 

 

        

 

 

 

Total

     72,916          3,076  
    

 

 

        

 

 

 

(1)Series 1 and Series 2 awards to J. Neal Butler were forfeited upon his termination of employment on July 10, 2013 and the table reflects that forfeiture. Shares forfeited included 59,217 shares granted in fiscal year 2013, 30,837 Series 1 and 20,558 Series 2 awards granted in fiscal year 2012, and 24,201 Series 1 and 16,134 Series 2 awards granted in fiscal year 2011.
(2)For performance shares granted before 2013, the above table represents the actual percentage vesting and shares vested as of the end of the measurement period ended July 31, 2014. For the other performance share grants identified in the above table, the information set forth is the expected vesting percentage and the shares projected to vest.

Series 1: Vesting for the Series 1 awards is subject to a performance requirement composed of certain revenue growth objectives and average annual return on invested capital or equity objectives measured across a three-year period. For the fiscal year 2013 and 2012 awards, the expected percentage of vesting is based on performance through July 31, 2013 and reflects the percentage of shares projected to vest for the respective awards at the end of their measurement periods. For the Series 1 award for fiscal year 2011, the actual vesting was determined to be 20% at the end of the measurement period. Performance shares that have vested are normally issued within 75 days of the end of the fiscal year.

Series 2: Vesting for the Series 2 awards is subject to performance requirements pertaining to the growth rate in the Company’s basic earnings per share over a three-year period. For the fiscal year 2012 awards the expected percentage of vesting is based on performance through July 31, 2013 and reflects the percentage of shares projected to vest for the respective awards at the end of their measurement periods. For the Series 2 award for fiscal year 2011, the actual vesting was determined to be zero at the end of the measurement period. Performance shares that have vested are normally issued within 75 days of the end of the fiscal year.

The weighted-average grant-date fair value of performance share awards forfeited during the fiscal year 2014 was $17.54. The weighted-average grant-date fair value of performance share awards outstanding at August 1, 2013 and July 31, 2014 was $17.66 and $14.88, respectively.

The total fair value of performance shares vested during fiscal years 2014, 2013 and 2012 was approximately $45,000, $118,000, and $297,000, respectively.

Time-Based Shares

A summary of activity for time-based stock awards for the fiscal year ended July 31, 2014 is presented below:

   Shares  Weighted-Average
Grant-Date
Fair Value
 

Non-vested on August 1, 2013

   —     $—   

Granted(1)

   79,126    18.67  

Vested (2)

   (29,026  17.79  

Forfeited

   —      —   
  

 

 

  

Non-vested on July 31, 2014

   50,100    19.19  
  

 

 

  

(1)Includes number of shares granted to non-employee directors and to certain employees during fiscal year 2014. The director awards were granted for either a two or three month service period. The director awards were granted on August 27, 2013, December 17, 2013, February 25, 2014 and May 20, 2014 and vested once the service period was complete. Generally the employee awards vest on the respective employee’s work anniversary dates. The Company recognizes compensation expense related to the awards over the respective service period in accordance with GAAP.
(2)Includes 27,526 shares granted to non-employee directors indicated above and 1,500 shares granted to employees.

The total fair value of shares vested during the fiscal year ended 2014, 2013 and 2012 was approximately $1,822,000, $542,000, and $545,000, respectively.

12. DISCONTINUED OPERATIONS

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

In fiscal year 2008, the Company discontinued operations of its herbicide product line that had comprised the agricultural chemical segment. The Company incurred costs of $121,000 and $599,000 in the fiscal years ended July 31, 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, the Company sold the business that had comprised the animal health segment to Bayer Healthcare LLC. For the fiscal year ended July 31, 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.

In the sale of the animal health business, $1.0 million of the price is restricted cash held in escrow. The escrowed amount is to be held pending final acceptance by the EPA of certain studies being performed at the request of the EPA on tetrachlorvinphos, the active ingredient used in Rabon products. The escrowed funds are to be released to the Company once the EPA has finally accepted the studies, the buyer has voluntarily canceled the products, or after five years. The escrowed funds are to be released to the buyer if the EPA cancels the products to which the studies pertain before the funds are distributed to the Company.

Animal health net sales and income before income tax reported in discontinued operations were as follows for the fiscal year ended July 31. There were no such amounts for fiscal 2014:

   2013  2012 
   (Amounts in thousands) 

Revenue

  $57   $5,643  

Income (loss) before income taxes

   (25  (202

13. SEGMENT INFORMATION

The Company has two reportable segments—electronic chemicals and wood treating chemicals. The electronic chemicals segment includes the ultra pure chemicals business acquired from OM Group on May 31, 2013.

   2014   2013   2012 
   (Amounts in thousands) 

Sales

      

Electronic chemicals

  $253,754    $165,755    $159,451  

Wood treating

   99,514     97,185     113,034  
  

 

 

   

 

 

   

 

 

 

Total sales for reportable segments

  $353,268    $262,940    $272,485  
  

 

 

   

 

 

   

 

 

 

Depreciation and amortization(1)

      

Electronic chemicals

  $13,240    $7,416    $5,933  

Wood treating

   400     418     504  

Other — general corporate

   477     461     239  
  

 

 

   

 

 

   

 

 

 

Total consolidated depreciation and amortization

  $14,117    $8,295    $7,018  
  

 

 

   

 

 

   

 

 

 

Segment income from operations(2)

      

Electronic chemicals

  $14,089    $13,992    $13,392  

Wood treating

   8,390     10,522     15,622  
  

 

 

   

 

 

   

 

 

 

Total segment income from operations

  $22,479    $24,514    $29,014  
  

 

 

   

 

 

   

 

 

 

(1)Segment depreciation excludes depreciation for restructuring and realignment.
(2)Segment income from operations includes allocated corporate overhead expenses, but excludes restructuring and realignment charges.

Corporate overhead expenses allocated to segment income for the fiscal years ended July 31, 2014, 2013 and 2012 were as follows:

 

   2014   2013   2012 
   (Amounts in thousands) 

Electronic chemicals

  $8,751    $5,218    $5,354  

Wood treating

   4,458     4,461     4,406  
  

 

 

   

 

 

   

 

 

 

Total corporate overhead expense allocation

  $13,209    $9,679    $9,760  
  

 

 

   

 

 

   

 

 

 

 

 

2015

 

 

2014

 

Audit Fees (1)

 

$

1,460,935

 

 

$

1,368,000

 

Tax Fees (2)

 

 

34,600

 

 

 

23,000

 

All Other Fees (3)

 

 

50,000

 

 

 

58,655

 

Total

 

$

1,545,535

 

 

$

1,449,655

 

For fiscal years 2014, 2013 and 2012 sales to one customer represented approximately 15%, 20%, and 19%, respectively

(1)

Includes fees and reimbursable expenses for professional services rendered for the audits of our consolidated financial statements, quarterly reviews of the consolidated financial statements included in quarterly reports on Form 10-Q, and audit of internal control over financial reporting and issuance of consents related to registration statements.

(2)

Includes fees and reimbursable expenses for international tax consulting services rendered during fiscal years 2015 and 2014.

(3)

Includes fees and reimbursable expenses for certain consulting services rendered during fiscal years 2015 and 2014.

The policy of the Company’s net sales,Audit Committee is to pre-approve all audit and sales to another customer represented approximately 13%, 16% and 12% of the Company’s net sales. No other customers accounted for 10% or more of the Company’s net sales.

A reconciliation of total segment to consolidated amounts as of July 31, 2014 and 2013, and for fiscal years 2014, 2013 and 2012 is set forth in the table below.

   2014  2013  2012 
   (Amounts in thousands) 

Assets:

    

Total assets for reportable segments

  $233,580   $244,015   

Total assets for discontinued operations(1)

   —      467   

Other current assets

   7,690    9,120   

Other assets

   9,588    8,413   
  

 

 

  

 

 

  

Total assets

  $250,858   $262,015   
  

 

 

  

 

 

  

Sales:

    

Total sales for reportable segments

  $353,268   $262,940   $272,485  

Other(2)

   138    371    215  
  

 

 

  

 

 

  

 

 

 

Net sales

  $353,406   $263,311   $272,700  
  

 

 

  

 

 

  

 

 

 

Segment income from operations:

    

Total segment income from operations(3)

  $22,479   $24,514   $29,014  

Other corporate expense(3)

   (7,652  (7,334  (3,577

Restructuring and realignment charges

   (10,876  —      —    
  

 

 

  

 

 

  

 

 

 

Operating income

   3,951    17,180    25,437  

Interest expense, net

   (2,854  (1,771  (2,099

Other expense, net

   (831  (208  (269
  

 

 

  

 

 

  

 

 

 

Income from continuing operations before income taxes

  $266   $15,201   $23,069  
  

 

 

  

 

 

  

 

 

 

Geographic Data

   2014   2013   2012 
   (Amounts in thousands) 

Net sales:

      

United States

  $212,903    $200,184    $229,140  

International

   140,503     63,127     43,560  
  

 

 

   

 

 

   

 

 

 

Net sales

  $353,406    $263,311    $272,700  
  

 

 

   

 

 

   

 

 

 

Property, plant and equipment, net:

      

United States

  $49,776    $51,720    

International

   42,674     44,968    
  

 

 

   

 

 

   

Property, plant and equipment, net

  $92,450    $96,688    
  

 

 

   

 

 

   

(1)Reflects deferred tax assets as of July 31, 2013.
(2)Primarily reflects income in connection with the sale of the animal health business. See Note 12.
(3)Other corporate expense primarily represents employee stock-based compensation expenses and those expenses associated with the Company’s operation as a public entity such as board compensation, audit expense, fees related to the listing ofnon-audit services conducted by our stock and expenses incurred to pursue acquisition opportunities. The amounts presented for fiscal year 2012 include corporate overhead previously allocated to the animal health business. These amounts were not reallocated to the remaining segments.

14. RESTRUCTURING EVENTS

In October 2013, the Company announced that as part of global restructuring of its electronic chemicals operations, the Fremont, California manufacturing site acquired in the acquisition from OM Group will be closed, and production shifted primarily to the Company’s Hollister, California and Pueblo, Colorado facilities. The Company ceased production at the Fremont facility and completed site decommissioning prior to the end of fiscal year 2014. In November 2013, the Company announced that it will close a facility in Milan, Italy, and shift production to facilities in France and the United Kingdom. The Company will continue to operate the warehouse facility in Milan. The Company estimates that restructuring charges, exclusive of accelerated depreciation, will range between $7.0 million and $9.0 million cumulatively over fiscal years 2014 and 2015, and that accelerated depreciation with respect to the closed facilities will be approximately $4.0 million over those two fiscal years.

At July 31, 2014, the accrued liability associated with restructuring and other related charges consisted of the following:

   Employee Costs  Decommissioning
and
Environmental
  Other  Total 

Charges

  $2,631   $1,260   $34   $3,925  

Payments

   (698  (438  —      (1,136

Adjustment

   (45  (12  (7  (64
  

 

 

  

 

 

  

 

 

  

 

 

 

Accrued liability at July 31, 2014

  $1,888   $810   $27   $2,725  
  

 

 

  

 

 

  

 

 

  

 

 

 

Total accelerated depreciation for the fiscal year ended July 31, 2014 was $2.4 million.

15. SUBSEQUENT EVENTS

Realignment

The Company has announced a realignment of its hydrofluoric acid business. The Company will not renew the toll manufacturing agreement under which hydrofluoric acid products are produced for the Company by Chemtrade Logistics (“Chemtrade”) at its Bay Point, California facility (the agreement had formerly been with General Chemical). The Company will instead obtain its requirements for those products under supply agreements with other producers. Certain manufacturing equipment at the Bay Point facility had been acquired by the Company in 2007, when the electronic chemicals business of General Chemical was purchased. That equipment has been used for hydrofluoric acid production by Chemtrade. Under the manufacturing agreement, the Company is obligated 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 the Company’s manufacturing equipment at the site. The Company estimates that it will incur charges of $2.5- $4.0 million for decontamination, decommissioning and dismantling, and $2.5- $2.8 million for accelerated depreciation. Additionally, the Company is obligated to pay certain employee costs that it is unable to estimate at this time. In fiscal year 2014, the Company established an asset retirement obligation of $3.7 million for decontamination, decommissioning and dismantling at Bay Point and recorded depreciation expense of $1.0 million against that obligation, and the Company recognized $0.8 million of accelerated depreciation. In addition, the Company recognized an impairment charge in fiscal year 2014 of $2.7 million with respect to certain manufacturing equipment at Bay Point that is unrelated to hydrofluoric acid production. That equipment is no longer in service and will be disposed of.

Credit Agreement

The Company announced in its current report on Form8-K filed on October 10, 2014 that it had entered into the New Credit Facility providing for a revolving loan facility of $150 million. The New Credit Facility replaced the Company’s prior credit agreement. The New Credit Facility was entered into 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 New Credit Facility was used to repay in full the $38.0 million then outstanding under its legacy revolving loan facility and the $20.0 million outstanding indebtedness under our note purchase agreement with The Prudential Insurance Company of America and Pruco Life Insurance Company, and accordingly these notes were reclassified as long-term obligations as of July 31, 2014. See Note 7 for further discussion regarding the New Credit Facility. The Company incurred approximately $693,000 in fees and expenses related to the New Credit Facility. Additionally, the Company paid approximately $325,000 for a make-whole penalty for the early repayment of the note purchase agreement.

16. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

Quarterly results for the fiscal years ended July 31, 2014 and 2013 exclude the effect of discontinued operations, except for net income amounts. See note 12 for further detail on discontinued operations.

   First
Quarter
   Second
Quarter
  Third
Quarter
   Fourth
Quarter
 
   (Amounts in thousands, except per share data) 

Year Ended July 31, 2014

       

Net sales

  $93,560    $84,253   $84,437    $91,156  

Gross profit

   25,567     25,190    24,765     27,977  

Operating income/(loss)

   3,055     (1,603  2,914     (415

Income/(loss) from continuing operations before income taxes

   2,077     (2,384  1,883     (1,310

Net income /(loss)

   1,352     (2,744  1,226     (822

Earnings/(loss) per share:

       

Income/(loss) per share from continuing operations

       

- basic

  $0.12    $(0.24 $0.11    $(0.07

- diluted

   0.12     (0.24  0.11     (0.07

Net income/(loss) per share

       

- basic

   0.12     (0.24  0.11     (0.07

- diluted

   0.12     (0.24  0.11     (0.07

Year Ended July 31, 2013

       

Net sales

  $65,336    $56,959   $59,929    $81,087  

Gross profit

   20,088     15,721    16,333     24,328  

Operating income

   7,104     3,196    4,355     2,525  

Income from continuing operations before income taxes

   6,643     2,725    3,918     1,915  

Net income

   4,142     1,618    2,865     723  

Earnings Per share:

       

Income per share from continuing operations

       

- basic

  $0.36    $0.14   $0.25    $0.06  

- diluted

   0.36     0.14    0.25     0.06  

Net income per share

       

- basic

   0.36     0.14    0.25     0.06  

- diluted

   0.36     0.14    0.25     0.06  

Earnings per share amounts are computed independently for each quarter presented. Therefore, the sum of the quarterly earnings per share may not equal annual earnings per share.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. This term refers to the controls and procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this annual report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this annual report.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Because of inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods is subject to the risk that controls may become inadequate in the future period because of changes in conditions, in the degree of compliance with the policies, or because procedures may deteriorate.

Under the supervision and with the participation of our management, including our principal executive and principal financial officers, we conducted an assessment as of July 31, 2014 of the effectiveness of our internal control over financial reporting based on the framework inInternal Control—Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (1992 Framework) (the “COSO Framework”). Based on this assessment, management concluded that its internal control over financial reporting was effective as of July 31, 2014.

Management’s assertion about the effectiveness of our internal control over financial reporting as of July 31, 2014, has been audited by KPMG LLP, an independent registered public accounting firm as stated in their report which appears herein.

Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting identified in conjunction with our management’s evaluation of such control that occurred during our fiscal quarter ended July 31, 2014 that materially affected, orand auditors. Under the policy, pre-approval is required before the independent accountants are reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

On October 24, 2014 we were notified by Stella-Jones that effective immediately it was terminatingengaged for the agreement we have to supply it with creosote. Stella-Jones claims it is entitled to repudiateparticular services. The Audit Committee has considered whether 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 terminationprovision of the agreement will not have a material adverse effect onservices included in other fees is compatible with maintaining the operations and financial performanceindependence of our wood treating chemicals business.independent registered accounting firm and auditors.

PART III

Pursuant to instruction G(3) to Form 10-K, the information required by Part III is incorporated by reference from our definitive proxy statement relating to our annual meeting of shareholders, which will be filed with the Securities and Exchange Commission within 120 days of the end of fiscal year 2014.


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PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K

 

The following documents are filed as exhibits:

(a)The financial statements and financial statement schedules filed as part of this report in Item 8 are listed in the Index to Financial Statements contained in that item.

 

(b)The following documents are filed as exhibits. Documents marked with an asterisk (*) are management contracts or compensatory plans, and portions of documents marked with a dagger (†) have been granted confidential treatment.

 

31.1

  3.1

Restated and Amended Articles of Incorporation filed as Exhibit 3(i) to the company’s filed as Exhibit 3(i) to the company’s Form 10-QSB12G filed December 6, 1996, incorporated in this report.
  3.2Amended and Restated Bylaws, amended and restated as of October 23, 2014.
  3.3Articles of Amendment to Restated and Amended Articles of Incorporation, filed December 11, 1997 filed as Exhibit 3 to the company’s second quarter 1998 report on Form 10-QSB filed December 12, 1997, incorporated in this report.
  4.1Form of Common Stock

Certificate filed as Exhibit 4.1 to the company’s Form 10-QSB12G filed December 6, 1996, incorporated in this report.

10.2*1996 Stock Option Plan filed as Exhibit 10.4 to the company’s Form 10-QSB12G filed December 6, 1996, incorporated in this report.
10.4*Employment Agreement with Roger C. Jackson dated August 1, 2002 filed as Exhibit 10.31 to the company’s 2003 report on Form 10-K filed October 23, 2003, incorporated in this report.
10.6*Supplemental Executive Retirement Plan dated effective August 1, 2001 filed as Exhibit 10.27 to the company’s 2001 report on Form 10-K filed October 24, 2001, incorporated in this report.
10.7*2004 Long-Term Incentive Compensation Plan filed as Exhibit 10.21 to the company’s report on Form 10-Q filed December 15, 2004, incorporated in this report.
10.8*Performance-Based Restricted Stock Agreement, Series 1 dated September 2, 2005 filed as Exhibit 10.28 to the company’s report on Form 8-K filed September 7, 2005.
10.9*Performance-Based Restricted Stock Agreement, Series 2 dated September 2, 2005 filed as Exhibit 10.29 to the company’s report on Form 8-K filed September 7, 2005.
10.10†Sales Agreement with Koppers, Inc. dated May 8, 2007, filed as Exhibit 10.34 to the company’s report on Form 10-Q filed June 5, 2007.
10.11Amended and Restated Credit Agreement with Wachovia Bank, National Association dated December 31, 2007 initially filed as Exhibit 10.39 to the company’s report on Form 8-K filed January 7, 2008, and re-filed on March 12, 2010 to the company’s report on Form 10-Q, and incorporated herein by this reference.
10.12Note Purchase Agreement with The Prudential Insurance Company of America dated December 31, 2007 filed as Exhibit 10.40 to the company’s report on Form 8-K filed January 7, 2008, and incorporated herein by this reference.
10.13†Agreement with Acme Chemical Marketing, LLC dated February 14, 2008 filed as Exhibit 10.41, to the company’s report on Form 10-Q filed March 17, 2008, and incorporated herein.
10.14*Executive Severance Plan dated October 10, 2008, by and between the Company and its Eligible Employees filed as Exhibit 10.42, to the company’s report on Form 8-K filed October 13, 2008, and incorporated herein by this reference.
10.15First Amendment to Amended and Restated Credit Agreement and Amended Pledge Agreement with Wachovia Bank, National Association dated effective January 30, 2009 filed as Exhibit 10.43, to the company’s report on Form 10-Q filed on March 12, 2009, and incorporated herein by this reference.
10.16Amendment No. 1 to Note Purchase Agreement with The Prudential Insurance Company of America dated effective January 30, 2009 filed as Exhibit 10.44, to the company’s report on Form 10-Q filed on March 12, 2009, and incorporated herein by this reference.

10.17†Purchase Agreement dated December 31, 2007 with Intel Corporation filed as Exhibit 10.45 to the company’s report on Form 8-K filed May 13, 2009, incorporated herein by this reference.
10.18*2009 Long Term Incentive Plan of the Company, filed as Exhibit 10.46 to the company’s report on Form 10-K filed October 14, 2009 and incorporated herein by this reference.
10.19Second Amendment to Amended and Restated Credit Agreement with Wachovia Bank, National Association dated March 18, 2010 filed as Exhibit 10.47, to the company’s report on Form 8-K filed on March 30, 2010, and incorporated herein by this reference.
10.20Amendment No. 2 to Note Purchase Agreement and Limited Consent with The Prudential Insurance Company of America dated March 18, 2010 filed as Exhibit 10.48, to the company’s report on Form 8-K filed on March 30, 2010, and incorporated herein by this reference.
10.21Third Amendment to Amended and Restated Credit Agreement with Wells Fargo Bank, National Association, Bank of America, N.A., The Prudential Insurance Company of America, and Pruco Life Insurance Company dated November 23, 2011 filed as Exhibit 10.49, to the company’s report on Form 8-K filed on November 23, 2011, and incorporated herein by this reference.
10.22Amendment No. 3 to Note Purchase Agreement and limited consent with The Prudential Insurance Company of America, and Pruco Life Insurance Company dated November 23, 2011 filed as Exhibit 10.50, to the company’s report on Form 8-K filed on November 23, 2011, and incorporated herein by this reference.
10.23Fourth Amendment to Amended and Restated Credit Agreement dated April 26, 2013 filed as Exhibit 10.23 to the company’s report on Form 8-K filed on April 29, 2013.
10.24Amendment No. 4 Note Purchase Agreement dated April 26, 2013 filed as Exhibit 10.24 to the company’s report on Form 8-K filed on April 29, 2013.
10.25Fifth Amendment to Amended and Restated Credit Agreement dated May 31, 2013 filed as Exhibit 10.25 to the company’s report on Form 8-K filed on June 3, 2013.
10.26Amendment No. 5 Note Purchase Agreement dated May 31, 2013 filed as Exhibit 10.26 to the company’s report on Form 8-K filed on June 3, 2013.
10.27Purchase Agreement between OM Group, Inc., OMG Kokkola Chemicals Holding (Two) BV, OMG Harjavalta Chemicals Holding BV, KMG Electronic Chemicals Ltd, KMG Electronic Chemicals, Ltd, KMG Electronic Chemicals Pte. LTD., KMG Electronic Chemicals, Inc. and KMG Chemicals. Inc. dated April 28, 2013 filed as Exhibit 10.27 to the Company’s report on Form 10-Q filed on June 10, 2013.
10.28Share Purchase Agreement between OM Group, Inc., OMG Harjavalta Chemicals Holding BV, KMG Electronic Chemicals SAS and KMG Chemicals, Inc. dated April 28, 2013 filed as Exhibit 10.28 to the Company’s report on Form 10-Q filed on June 10, 2013.
10.29*Interim CEO Agreement with Mr. Fraser filed as Exhibit 10.29 to the Company’s report on Form 8-K filed on July 2, 2013.
10.30Letter Agreement with Mr. Butler filed as Exhibit 10.30 to the Company’s report on Form 8-K filed on July 17, 2013.
10.31*Employment Agreement with Mr. Fraser dated September 24, 2013 filed as Exhibit 10.31 to the Company’s report on Form 8-K filed on September 26, 2013.
10.32Form of the Indemnification Agreement filed as Exhibit 10.32 to the Company’s report on Form 8-K filed on March 3, 2014, and incorporated herein by this reference.
10.33Second Amended and Restated Credit Agreement with Wells Fargo Bank, National Association Bank of America, N.A., HSBC Bank USA, National Association, and JPMorgan Chase Bank, N.A. dated October 9, 2014 initially filed as Exhibit 10.33 to the Company’s report on Form 8-K filed October 10, 2014, and incorporated herein by this reference.
21.1Subsidiaries of the company.
23.1Consent of KPMG LLP.
31Certificates under Section 302 the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer and the Chief Financial Officer.

32

31.2

Certificates

Certificate under Section 906 of302 the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer and the Chief Financial Officer.

101.INS^

XBRL Instance Document

101.SCH^

XBRL Schema Document
101.CAL^XBRL Calculation Linkbase Document
101.DEF^XBRL Definition Linkbase Document
101.LAB^XBRL Label Linkbase Document
101.PRE^XBRL Presentation Linkbase Document

29

(c)Schedule II-Valuation and Qualifying Accounts and Reserves. All other schedules are omitted because they are not applicable or the required information is contained in the applicable financial statements of notes thereto.


KMG Chemicals, Inc.

Schedule II — Valuation and Qualifying Accounts

Fiscal years ended July 31, 2014, 2013 and 2012

Description

  Balance at
beginning
of period
   Charged to costs
and expenses
   Additions/
Deductions
  Balance at
end
of period
 

Year ended July 31, 2014:

       

Allowance for doubtful accounts

  $224,000    $108,000    $(60,000 $272,000  

Inventory obsolescence

   180,000     221,000     (111,000  290,000  

Valuation allowance on deferred tax assets

   —       1,725,000     —      1,725,000  

Year ended July 31, 2013:

       

Allowance for doubtful accounts

  $16,000    $208,000    $—    $224,000  

Inventory obsolescence

   493,000     107,000     (420,000  180,000  

Valuation allowance on deferred tax assets

   —      —      —      

Year ended July 31, 2012:

       

Allowance for doubtful accounts

  $414,000    $—     $(398,000 $16,000  

Inventory obsolescence

   333,000     272,000     (112,000  493,000  

Valuation allowance on deferred tax assets

   —      —      —      

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

KMG CHEMICALS, INC.

By:

/s/ Christopher T. Fraser

Date: October 28, 2014December 15, 2015

Christopher T. Fraser

President, Chief Executive Officer and Director

Pursuant to the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

By:

/s/ Malinda G. Passmore

Date: October 28, 2014
Malinda G. Passmore, Vice President and Chief
Financial Officer
By:

/s/ Marcelino Rodriguez

Date: October 28, 2014

Marcelino Rodriguez, Controller and

Chief Accounting Officer

By:

/s/ James F. Gentilcore

Date: October 28, 2014
James F. Gentilcore, Director
By:

/s/ Gerald G. Ermentrout

Date: October 28, 2014
Gerald G. Ermentrout, Director
By:

/s/ George W. Gilman

Date: October 28, 2014
George W. Gilman, Director
By:

/s/ John C. Hunter, III

Date: October 28, 2014
John C. Hunter, III, Director
By:

/s/ Fred C. Leonard

Date: October 28 2014
Fred C. Leonard III, Director
By:

/s/ Stephen A. Thorington

Date: October 28, 2014
Stephen A. Thorington, Director
By:

/s/ Karen A. Twitchell

Date: October 28, 2014
Karen A. Twitchell, Director

 

60

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