UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended April 30,October 31, 2015
¨ | 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 |
| 75-2640529 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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| |
9555 West Sam Houston Parkway South, Suite 600 Houston, Texas |
| 77099 |
(Address of principal executive offices) |
| (Zip Code) |
(713) 600-3800
(Registrant’s telephone number, including area code)
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer |
| ¨ |
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| Accelerated filer |
| x |
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Non-accelerated filer |
| ¨ |
| (Do not check if a smaller reporting company) |
| Smaller reporting company |
| ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
As of JuneDecember 8, 2015, there were 11,685,63811,715,586 shares of the registrant’s common stock outstanding.
PART I — FINANCIAL INFORMATION |
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CONDENSED CONSOLIDATED BALANCE SHEETS AS OF | 3 |
| 4 |
| 5 |
| 6 |
| 7 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK |
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2
PART I — FINANCIAL INFORMATION
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share amounts)
|
| April 30, |
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| July 31, |
|
| October 31, |
|
| July 31, |
| ||||
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| 2015 |
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| 2014 |
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| 2015 |
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| 2015 |
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| (Unaudited) |
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| (Unaudited) |
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Assets |
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Current assets |
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Cash and cash equivalents |
| $ | 6,840 |
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| $ | 19,252 |
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| $ | 10,398 |
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| $ | 7,517 |
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Accounts receivable |
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Trade, net of allowances of $143 at April 30, 2015 and $272 at July 31, 2014 |
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| 38,428 |
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| 40,176 |
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Trade, net of allowances of $156 at October 31, 2015 and $144 at July 31, 2015 |
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| 35,573 |
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| 36,887 |
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Other |
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| 3,572 |
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| 1,904 |
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| 3,515 |
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| 3,668 |
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Inventories, net |
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| 38,995 |
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| 45,268 |
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| 39,592 |
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| 42,082 |
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Current deferred tax assets |
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| 1,351 |
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| 1,577 |
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| 2,953 |
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| 2,953 |
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Prepaid expenses and other |
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| 3,873 |
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| 3,476 |
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| 2,739 |
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| 3,738 |
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Total current assets |
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| 93,059 |
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| 111,653 |
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| 94,770 |
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| 96,845 |
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Property, plant and equipment, net |
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| 80,702 |
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| 92,450 |
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| 80,289 |
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| 80,589 |
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Deferred tax assets |
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| 442 |
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| 442 |
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|
| 131 |
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| 131 |
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Goodwill |
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| 11,146 |
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| 12,595 |
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| 22,374 |
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| 22,408 |
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Intangible assets, net |
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| 20,911 |
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| 28,353 |
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| 35,959 |
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| 36,560 |
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Restricted cash |
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| 1,000 |
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| 1,000 |
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| 1,000 |
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| 1,000 |
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Other assets, net |
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| 4,860 |
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| 4,365 |
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| 4,850 |
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| 4,826 |
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Total assets |
| $ | 212,120 |
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| $ | 250,858 |
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| $ | 239,373 |
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| $ | 242,359 |
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Liabilities and stockholders’ equity |
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Current liabilities |
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Accounts payable |
| $ | 30,057 |
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| $ | 36,690 |
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| $ | 27,279 |
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| $ | 35,980 |
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Accrued liabilities |
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| 14,605 |
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| 16,986 |
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| 10,120 |
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| 9,602 |
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Employee incentive accrual |
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| 4,238 |
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| 4,575 |
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| 6,780 |
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| 4,852 |
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Total current liabilities |
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| 48,900 |
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| 58,251 |
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| 44,179 |
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| 50,434 |
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Long-term debt, net of current maturities |
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| 35,000 |
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| 60,000 |
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| 51,500 |
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| 53,000 |
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Deferred tax liabilities |
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| 5,146 |
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| 9,881 |
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| 13,145 |
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| 13,075 |
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Other long-term liabilities |
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| 1,881 |
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| 2,520 |
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| 2,422 |
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| 2,429 |
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Total liabilities |
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| 90,927 |
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| 130,652 |
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| 111,246 |
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| 118,938 |
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Commitments and contingencies |
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Stockholders’ equity |
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Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued |
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| — |
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| — |
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| — |
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| — |
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Common stock, $0.01 par value, 40,000,000 shares authorized, 11,680,940 shares issued and outstanding at April 30, 2015 and 11,649,001 shares issued and outstanding at July 31, 2014 |
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| 117 |
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| 116 |
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Common stock, $0.01 par value, 40,000,000 shares authorized, 11,710,439 shares issued and outstanding at October 31, 2015 and 11,690,439 shares issued and outstanding at July 31, 2015 |
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| 117 |
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| 117 |
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Additional paid-in capital |
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| 30,866 |
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| 28,886 |
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| 32,625 |
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| 31,676 |
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Accumulated other comprehensive income (loss) |
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| (8,107 | ) |
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| 645 |
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| (10,151 | ) |
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| (9,667 | ) |
Retained earnings |
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| 98,317 |
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| 90,559 |
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| 105,536 |
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| 101,295 |
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Total stockholders’ equity |
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| 121,193 |
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| 120,206 |
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| 128,127 |
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| 123,421 |
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Total liabilities and stockholders’ equity |
| $ | 212,120 |
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| $ | 250,858 |
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| $ | 239,373 |
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| $ | 242,359 |
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See accompanying notes to condensed consolidated financial statements.
3
KMG CHEMICALS,CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (LOSS)
(UNAUDITED)
(In thousands, except for per share amounts)
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| Three Months Ended |
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| Nine Months Ended |
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| Three Months Ended |
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| April 30, |
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| April 30, |
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| October 31, |
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| 2015 |
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| 2014 |
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| 2015 |
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| 2014 |
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| 2015 |
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| 2014 |
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Net sales |
| $ | 73,964 |
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| $ | 84,437 |
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| $ | 244,505 |
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| $ | 262,250 |
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| $ | 76,650 |
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| $ | 90,779 |
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Cost of sales |
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| 47,149 |
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| 59,672 |
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| 161,544 |
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| 186,728 |
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| 47,390 |
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| 63,188 |
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Gross profit |
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| 26,815 |
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| 24,765 |
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| 82,961 |
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| 75,522 |
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| 29,260 |
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| 27,591 |
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Distribution expenses |
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| 11,700 |
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| 11,975 |
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| 37,721 |
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| 36,979 |
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| 10,129 |
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| 12,999 |
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Selling, general and administrative expenses |
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| 9,257 |
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| 8,815 |
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| 28,164 |
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| 29,085 |
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| 11,215 |
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| 9,200 |
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Restructuring charges |
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| 27 |
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| 1,061 |
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| 900 |
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| 5,092 |
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| 466 |
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| 577 |
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Realignment charges |
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| 1,070 |
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| — |
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| 5,429 |
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| — |
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| 130 |
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| 1,996 |
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Operating income |
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| 4,761 |
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| 2,914 |
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| 10,747 |
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| 4,366 |
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| 7,320 |
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| 2,819 |
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Other income (expense) |
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Interest expense, net |
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| (111 | ) |
|
| (926 | ) |
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| (1,098 | ) |
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| (2,250 | ) |
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| (152 | ) |
|
| (803 | ) |
Gain (loss) on sale of creosote distribution business, net |
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| (234 | ) |
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| — |
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| 5,448 |
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| — |
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Other non-operating expense |
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| (1,250 | ) |
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| — |
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| (1,250 | ) |
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| — |
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Other, net |
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| (339 | ) |
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| (105 | ) |
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| (498 | ) |
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| (540 | ) |
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| (17 | ) |
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| (28 | ) |
Total other income (expense), net |
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| (1,934 | ) |
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| (1,031 | ) |
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| 2,602 |
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| (2,790 | ) | ||||||||
Total other expense, net |
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| (169 | ) |
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| (831 | ) | ||||||||||||||||
Income before income taxes |
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| 2,827 |
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| 1,883 |
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| 13,349 |
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| 1,576 |
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| 7,151 |
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| 1,988 |
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Provision for income taxes |
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| (692 | ) |
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| (657 | ) |
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| (4,539 | ) |
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| (1,742 | ) |
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| (2,560 | ) |
|
| (803 | ) |
Net income (loss) |
| $ | 2,135 |
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| $ | 1,226 |
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| $ | 8,810 |
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| $ | (166 | ) | ||||||||
Net income |
| $ | 4,591 |
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| $ | 1,185 |
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Earnings per share |
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Net income (loss) per common share basic |
| $ | 0.18 |
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| $ | 0.11 |
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| $ | 0.75 |
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| $ | (0.01 | ) | ||||||||
Net income (loss) per common share diluted |
| $ | 0.18 |
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| $ | 0.11 |
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| $ | 0.75 |
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| $ | (0.01 | ) | ||||||||
Net income per common share basic |
| $ | 0.39 |
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| $ | 0.10 |
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Net income per common share diluted |
| $ | 0.39 |
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| $ | 0.10 |
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Weighted average shares outstanding |
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Basic |
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| 11,680 |
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| 11,634 |
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| 11,669 |
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| 11,606 |
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| 11,697 |
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|
| 11,658 |
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Diluted |
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| 11,819 |
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| 11,673 |
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| 11,758 |
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| 11,606 |
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| 11,865 |
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| 11,696 |
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See accompanying notes to condensed consolidated financial statements.
4
KMG CHEMICALS,CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(UNAUDITED)
(In thousands)
|
| Three Months Ended |
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| Nine Months Ended |
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| Three Months Ended |
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|
| April 30, |
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| April 30, |
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| October 31, |
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| 2015 |
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| 2014 |
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| 2015 |
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| 2014 |
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| 2015 |
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| 2014 |
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Net income (loss) |
| $ | 2,135 |
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| $ | 1,226 |
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| $ | 8,810 |
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| $ | (166 | ) | ||||||||
Net income |
| $ | 4,591 |
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| $ | 1,185 |
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Other comprehensive income |
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Foreign currency translation income (loss) |
|
| 650 |
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| 1,776 |
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|
| (8,752 | ) |
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| 4,280 |
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|
| (484 | ) |
|
| (3,974 | ) |
Total other comprehensive income (loss) |
|
| 650 |
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|
| 1,776 |
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|
| (8,752 | ) |
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| 4,280 |
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|
| (484 | ) |
|
| (3,974 | ) |
Total comprehensive income |
| $ | 2,785 |
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| $ | 3,002 |
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| $ | 58 |
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| $ | 4,114 |
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Total comprehensive income (loss) |
| $ | 4,107 |
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| $ | (2,789 | ) |
See accompanying notes to condensed consolidated financial statements.
5
KMG CHEMICALS,CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
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| Nine Months Ended |
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| Three Months Ended |
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| April 30, |
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| October 31, |
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| 2015 |
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| 2014 |
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| 2015 |
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| 2014 |
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Cash flows from operating activities |
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Net income (loss) |
| $ | 8,810 |
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| $ | (166 | ) | ||||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities |
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Net income |
| $ | 4,591 |
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| $ | 1,185 |
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Adjustments to reconcile net income to net cash provided by operating activities |
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Depreciation and amortization |
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| 9,951 |
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| 10,422 |
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| 3,545 |
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| 3,430 |
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Non-cash restructuring and realignment charges |
|
| 5,640 |
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|
| 1,720 |
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|
| 105 |
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|
| 2,589 |
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Amortization of loan costs |
|
| 111 |
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|
| 45 |
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|
| 42 |
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|
| 27 |
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Stock-based compensation expense |
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| 1,970 |
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|
| 1,777 |
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|
| 939 |
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|
| 436 |
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Bad debt expense |
|
| — |
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|
| 89 |
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|
| 12 |
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|
| — |
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Allowance for excess and obsolete inventory |
|
| 760 |
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|
| 33 |
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|
| 57 |
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|
| 221 |
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Gain on disposal of property |
|
| — |
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| (14 | ) | ||||||||
Gain on sale of creosote distribution business |
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| (5,448 | ) |
|
| — |
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Loss (gain) on disposal of property |
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| 9 |
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|
| (2 | ) | ||||||||
Deferred income taxes |
|
| (4,374 | ) |
|
| 751 |
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|
| 86 |
|
|
| (1,141 | ) |
Tax benefit from stock-based awards |
|
| (10 | ) |
|
| (328 | ) |
|
| (10 | ) |
|
| (9 | ) |
Changes in operating assets and liabilities |
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Accounts receivable — trade |
|
| 95 |
|
|
| 1,906 |
|
|
| 1,099 |
|
|
| (2,398 | ) |
Accounts receivable — other |
|
| (1,756 | ) |
|
| 538 |
|
|
| 160 |
|
|
| (373 | ) |
Inventories |
|
| 965 |
|
|
| 7,277 |
|
|
| 2,310 |
|
|
| (826 | ) |
Other current and noncurrent assets |
|
| (1,386 | ) |
|
| 389 |
|
|
| 420 |
|
|
| (139 | ) |
Accounts payable |
|
| (4,897 | ) |
|
| (3,916 | ) |
|
| (7,850 | ) |
|
| 4,486 |
|
Accrued liabilities and other |
|
| (2,219 | ) |
|
| 5,383 |
|
|
| 2,450 |
|
|
| 2,099 |
|
Net cash provided by operating activities |
|
| 8,212 |
|
|
| 25,906 |
|
|
| 7,965 |
|
|
| 9,585 |
|
Cash flows from investing activities |
|
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|
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Additions to property, plant and equipment |
|
| (10,751 | ) |
|
| (7,133 | ) |
|
| (3,616 | ) |
|
| (4,184 | ) |
Disposals of property, plant and equipment |
|
| 2,561 |
|
|
| 39 |
|
|
| — |
|
|
| 10 |
|
Proceeds from sale of creosote distribution business |
|
| 14,899 |
|
|
| — |
| ||||||||
Net cash provided by (used in) investing activities |
|
| 6,709 |
|
|
| (7,094 | ) | ||||||||
Net cash used in investing activities |
|
| (3,616 | ) |
|
| (4,174 | ) | ||||||||
Cash flows from financing activities |
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Net payments under revolving credit agreement |
|
| (41,100 | ) |
|
| (13,000 | ) |
|
| — |
|
|
| (40,000 | ) |
Principal payments on term loan |
|
| (20,000 | ) |
|
| — |
|
|
| — |
|
|
| (20,000 | ) |
Borrowings under New Credit Facility |
|
| 59,100 |
|
|
| — |
|
|
| — |
|
|
| 59,100 |
|
Payments under New Credit Facility |
|
| (23,000 | ) |
|
| — |
|
|
| (1,500 | ) |
|
| (3,100 | ) |
Tax benefit from stock-based awards |
|
| 10 |
|
|
| 328 |
|
|
| 10 |
|
|
| 9 |
|
Payment of dividends |
|
| (1,050 | ) |
|
| (1,043 | ) |
|
| (351 | ) |
|
| (349 | ) |
Net cash used in financing activities |
|
| (26,040 | ) |
|
| (13,715 | ) |
|
| (1,841 | ) |
|
| (4,340 | ) |
Effect of exchange rate changes on cash |
|
| (1,293 | ) |
|
| 356 |
|
|
| 373 |
|
|
| (592 | ) |
Net (decrease) increase in cash and cash equivalents |
|
| (12,412 | ) |
|
| 5,453 |
| ||||||||
Net increase in cash and cash equivalents |
|
| 2,881 |
|
|
| 479 |
| ||||||||
Cash and cash equivalents at beginning of period |
|
| 19,252 |
|
|
| 13,949 |
|
|
| 7,517 |
|
|
| 19,252 |
|
Cash and cash equivalents at end of period |
| $ | 6,840 |
|
| $ | 19,402 |
|
| $ | 10,398 |
|
| $ | 19,731 |
|
Supplemental disclosures of cash flow information |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest |
| $ | 1,097 |
|
| $ | 1,909 |
|
| $ | 151 |
|
| $ | 757 |
|
Cash paid for income taxes |
| $ | 7,289 |
|
| $ | 527 |
|
| $ | 1,371 |
|
| $ | 1,149 |
|
Supplemental disclosure of non-cash investing activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property, plant and equipment through accounts payable |
| $ | 868 |
|
| $ | 637 |
|
| $ | 137 |
|
| $ | 960 |
|
See accompanying notes to condensed consolidated financial statements.
6
NOTES TO CONDENSED CONSOLIDATEDCONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The consolidated balance sheet as of July 31, 2014,2015, which has been derived from audited consolidated financial statements, and the unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting. As permitted under those requirements, certain footnotes or other financial information that are normally required by generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted. The Company believes that the disclosures made are adequate to make the information not misleading and in the opinion of management reflect all adjustments, including those of a normal recurring nature, that are necessary for a fair presentation of financial position and results of operations for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of results of operations to be expected for the full year. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2014.2015.
These condensed consolidated financial statements are prepared using certain estimates by management and include the accounts of KMG Chemicals, Inc. and its subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.
In April 2014, the FASB issued ASU No. 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU No. 2014-08”). ASU No. 2014-08 limits discontinued operations reporting to disposals of components of an entity that represent a strategic shift that has (or will have) a major effect on an entity’s operations and financial results when any of the following occurs: a) the component of an entity or group of components of an entity meets the criteria to be classified as held for sale; b) the component of an entity or group of components of an entity is disposed of by sale; or c) the component of an entity or group of components of an entity is disposed of other than by sale. ASU No. 2014-08 also requires additional disclosures about discontinued operations. ASU No. 2014-08 is effective for reporting periods beginning after December 15, 2014. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. The Company early adopted ASU No. 2014-08 for the reporting period beginning November 1, 2014. As a result of the adoption of ASU No. 2014-08, results of operations for disposals in the ordinary course of business on or subsequent to November 1, 2014 would generally be included in continuing operations on the Company’s consolidated statements of operations, to the extent such disposals did not meet the criteria for classification as a discontinued operation. Additionally, any gain or loss on disposals that do not meet the criteria for classification as a discontinued operation would be included in income from continuing operations on the consolidated statements of operations.
2. Disposition of BusinessAcquisitions
On January 16,May 1, 2015, the Company sold its creosotecompleted the acquisition of Valves Incorporated of Texas, a privately held Texas corporation, pursuant to the terms of a previously announced Agreement and Plan of Merger. The acquired company manufactures and distributes industrial sealants and lubricants, primarily to the oil and gas, storage, pipeline and gas distribution business, partmarkets, as well as related products, such as lubrication equipment and fittings. As of October 31, 2015, the valuation of the wood treating chemicals segment, to Koppers Inc. pursuant to an asset purchase agreement.assets acquired and the liabilities assumed is not final. The transaction closed concurrently with the signing of the asset purchase agreement. Assets that were sold in the transaction included the Company’s United States Environmental Protection Agency (“EPA”) registrations for creosote, creosote inventory, railcar and tank terminal leases and various customer agreements. The adjusted sale price for the assets was approximately $14.9 million.
The following table summarizes the cost of assets sold in conjunction with the sale of the creosote distribution business (in thousands):
Creosote product registrations |
| $ | 5,339 |
|
Inventory |
|
| 3,009 |
|
Other assets |
|
| 168 |
|
|
| $ | 8,516 |
|
The Company allocated goodwill of approximately $662,000 within the wood treating segment to the sale of the creosote distribution business. The Company recognized a gain of $5.4 millionpro forma impact on the sale of the creosote distribution business, net of closing and other transaction expenses.consolidated results is immaterial.
3. Earnings Per Share
Basic earnings per share have been computed by dividing net income by the weighted average shares outstanding. Diluted earnings per share have been computed by dividing net income by the weighted average shares outstanding plus potentially dilutive common shares. There were approximately 139,000168,000 and approximately 89,00038,000 dilutive shares related to stock-based awards for the
7
three and nine months ended April 30, 2015. There were approximately 39,000 dilutive shares related to stock-based award for the three months ended April 30, 2014. Potentially dilutive shares are not included in the computation of diluted weighted average shares outstanding due to a loss from continuing operations for the nine months ended April 30, 2014.October 31, 2015 and 2014, respectively.
Outstanding stock-based awards are not included in the computation of diluted earnings per share under the treasury stock method if including them would be anti-dilutive. There were no such14,783 potentially dilutive securities that were not included for the three and nine months ended April 30,October 31, 2015. There were no shares of potentially dilutive securities not included in the computation of diluted earnings per share for the three months ended April 30, 2014. There were an average of approximately 21,000 shares of potentially dilutive securities not included in the computation of diluted earnings per share for the nine months ended April 30,October 31, 2014.
4. Inventories
Inventories are summarized in the following table (in thousands):
|
| April 30, |
|
| July 31, |
|
| October 31, |
|
| July 31, |
| ||||
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2015 |
| ||||
Raw materials |
| $ | 5,390 |
|
| $ | 7,914 |
|
| $ | 7,646 |
|
| $ | 8,723 |
|
Work in process |
|
| 1,237 |
|
|
| 1,508 |
|
|
| 1,053 |
|
|
| 780 |
|
Supplies |
|
| 1,483 |
|
|
| 1,793 |
|
|
| 1,016 |
|
|
| 525 |
|
Finished products |
|
| 31,497 |
|
|
| 34,343 |
|
|
| 30,395 |
|
|
| 32,535 |
|
Less: reserve for inventory obsolescence |
|
| (612 | ) |
|
| (290 | ) |
|
| (518 | ) |
|
| (481 | ) |
Inventories, net |
| $ | 38,995 |
|
| $ | 45,268 |
|
| $ | 39,592 |
|
| $ | 42,082 |
|
7
5. Property, Plant and Equipment
Property, plant and equipment and related accumulated depreciation and amortization are summarized as follows (in thousands):
|
| April 30, |
|
| July 31, |
|
| October 31, |
|
| July 31, |
| ||||
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2015 |
| ||||
Land |
| $ | 13,502 |
|
| $ | 15,763 |
|
| $ | 13,306 |
|
| $ | 13,257 |
|
Buildings and improvements |
|
| 38,062 |
|
|
| 42,664 |
|
|
| 37,903 |
|
|
| 38,036 |
|
Equipment |
|
| 81,107 |
|
|
| 77,557 |
|
|
| 84,387 |
|
|
| 84,273 |
|
Leasehold improvements |
|
| 177 |
|
|
| 143 |
|
|
| 193 |
|
|
| 193 |
|
|
|
| 132,848 |
|
|
| 136,127 |
|
|
| 135,789 |
|
|
| 135,759 |
|
Less: accumulated depreciation and amortization |
|
| (63,583 | ) |
|
| (52,972 | ) |
|
| (64,328 | ) |
|
| (61,936 | ) |
|
|
| 69,265 |
|
|
| 83,155 |
|
|
| 71,461 |
|
|
| 73,823 |
|
Construction-in-progress |
|
| 11,437 |
|
|
| 9,295 |
|
|
| 8,828 |
|
|
| 6,766 |
|
Property, plant and equipment, net |
| $ | 80,702 |
|
| $ | 92,450 |
|
| $ | 80,289 |
|
| $ | 80,589 |
|
The Company sold its facility in Elwood, Kansas in February 2015 for $2.5 million, payable in cash on the closing date, which approximated the Company’s carrying value of the property. The Company recognized a loss on the sale of approximately $29,000.
6. Stock-Based Compensation
The Company has stock-based incentive plans which are described in more detail in Note 11 to the consolidated financial statements in the Company’s Annual Report on Form 10-K for fiscal year 2014.2015. The Company recognized stock-based compensation costs of approximately $832,000$939,000 and $343,000$436,000 for the three months and $2.0 million and $1.8 million for the nine months ended April 30,October 31, 2015 and 2014, respectively. The amount recognized in the first nine months of fiscal year 2014 includes $1.1 million for shares granted to Christopher T. Fraser upon becoming President and CEO. The Company also recognized the related tax benefits of $310,000$333,000 and $120,000$161,000 for the three months and $743,000 and $663,000 for the nine months ended April 30,October 31, 2015 and 2014, respectively. Stock-based compensation costs are recorded under selling, general and administrative expenses in the condensed consolidated statements of income (loss).income.
As of April 30,October 31, 2015, the unrecognized compensation costs related to stock-based awards was approximately $5.3$5.4 million, which is expected to be recognized over a weighted-average period of 2.02.2 years.
8
On August 1, 2014,2015, there were 250,944244,790 non-vested performance shares outstanding which reflected the maximum number of shares under the awards. No performance share awards vested during the ninethree months ended April 30,October 31, 2015. As of April 30,October 31, 2015, the non-vested performance-based stock awards consisted of Series 1 awards granted to certain executives and employees in fiscal years 2015 and 2014 as summarized below reflecting the target number of shares under the awards. The Series 1 awards granted in fiscal year 2013 are not expected to vest at this time.
8
|
|
|
| Target |
|
|
|
|
|
|
|
| Expected |
|
|
|
|
|
|
|
| Target |
|
|
|
|
|
|
|
| Expected |
|
|
|
|
| ||||
|
| Series |
| Award |
|
| Grant Date |
|
| Measurement |
| Percentage of |
|
| Shares Expected |
|
| Series |
| Award |
|
| Grant Date |
|
| Measurement |
| Percentage of |
|
| Shares Expected |
| ||||||||
Date of Grant |
| Award |
| Shares |
|
| Fair Value |
|
| Period Ending |
| Vesting(1) |
|
| to Vest |
|
| Award |
| Shares |
|
| Fair Value |
|
| Period Ending |
| Vesting(1) |
|
| to Vest |
| ||||||||
Fiscal Year 2015 Awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/26/2015 |
| Series 1 |
|
| 21,173 |
|
| $ | 25.85 |
|
| 7/31/2017 |
|
|
|
|
|
|
|
|
| Series 1 |
|
| 21,173 |
|
| $ | 25.85 |
|
| 7/31/2017 |
|
|
|
|
|
|
|
|
12/9/2014 |
| Series 1 |
|
| 103,499 |
|
| $ | 17.81 |
|
| 7/31/2017 |
|
|
|
|
|
|
|
|
| Series 1 |
|
| 103,499 |
|
| $ | 17.81 |
|
| 7/31/2017 |
|
|
|
|
|
|
|
|
|
| Forfeitures(2) |
|
| (1,124 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Total |
|
|
|
| 124,672 |
|
|
|
|
|
|
|
|
| 154 | % |
|
| 192,441 |
|
|
|
|
| 123,548 |
|
|
|
|
|
|
|
|
| 134 | % |
|
| 165,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Fiscal Year 2014 Awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/25/2014 |
| Series 1 |
|
| 127,315 |
|
| $ | 14.88 |
|
| 7/31/2016 |
|
|
|
|
|
|
|
|
| Series 1 |
|
| 127,315 |
|
| $ | 14.88 |
|
| 7/31/2016 |
|
|
|
|
|
|
|
|
|
| Forfeitures(2) |
|
| (5,529 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Forfeitures(2) |
|
| (7,372 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
| 121,786 |
|
|
|
|
|
|
|
|
| 100 | % |
|
| 121,786 |
|
|
|
|
| 119,943 |
|
|
|
|
|
|
|
|
| 100 | % |
|
| 119,943 |
|
Fiscal Year 2013 Awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
12/04/2012 |
| Series 1 |
|
| 141,059 |
|
| $ | 18.75 |
|
| 7/31/2015 |
|
|
|
|
|
|
|
| ||||||||||||||||||||
|
| Forfeitures(2) |
|
| (87,409 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
Total |
|
|
|
| 53,650 |
|
|
|
|
|
|
|
|
| 0 | % |
|
| — |
|
|
(1) | The percentage vesting for performance share awards is currently estimated at |
(2) | Forfeitures include Series 1 awards that were granted in fiscal years |
Series 1: For the fiscal year 2015 2014 and 20132014 awards, vesting is subject to performance requirements composed of certain objectives including average annual return on invested capital and annual compound growth rate in the Company’s diluted earnings per share. These objectives are measuredassessed quarterly using the Company’s budget, actual results and long-term projections. For each of the Series 1 awards, the expected percentage of vesting is evaluated through April 30,October 31, 2015, and reflects the percentage of shares projected to vest for the respective awards at the end of their measurement periods. For the fiscal year 2015 and 2014 awards, shares vested may increase to a maximum of 167% and 150%, respectively, of the target award on achievement of maximum performance objectives. For the fiscal year 2013 awards, the target award is equal to the maximum award.
Series 2: None outstanding.
Series 3: The table does not include certain performance-based awards to bethat are granted to Christopher T. Fraser according to his employment agreement as of September 24, 2013.agreement. Awards to Mr. Fraser for fiscal year 2015 included (i) a performance-based Series 3 award for 10,000 shares of common stock (at maximum) having a performance requirement related to debt payments during the fiscal year, 2015, and (ii) a performance-based Series 3 award for 4,000 shares of common stock having certain organizational objectives as a performance requirement, and in each case such awards vest and are measured over a one year period beginning August 1 2014 and ending July 31,31. The award for fiscal year 2015 was fully vested and 14,000 shares were issued on October 1, 2015. As of April 30,October 31, 2015, the 2016 Series 3 awards to Mr. Fraser have not been granted, but when granted they are expected to vest at 100%.
The weighted-average per share grant-date fair value of the target award shares for performanceperformance-based awards outstanding was $17.47$17.51 and $14.88$17.36 at April 30,October 31, 2015 and August 1, 2014,2015, respectively.
The weighted-average per share grant-date fair value of the target award shares for performance-based awards granted during the ninethree months ended April 30,October 31, 2015 and 2014 was $18.92$21.04 and $16.65, respectively.
The weighted-average per share grant-date fair value of awards forfeited during the three months ended October 31, 2015 and 2014 was $19.63 and $14.88, respectively.
9
A summary of activity for time-based stock awards for the ninethree months ended April 30,October 31, 2015 is presented below:
|
| Shares |
|
| Weighted-Average Grant-Date Fair Value |
|
| Shares |
|
| Weighted-Average Grant-Date Fair Value |
| ||||
Non-vested on August 1, 2014 |
|
| 50,100 |
|
| $ | 19.19 |
| ||||||||
Non-vested on August 1, 2015 |
|
| 82,688 |
|
| $ | 19.66 |
| ||||||||
Granted (1) |
|
| 59,498 |
|
|
| 19.60 |
|
|
| 85,147 |
|
|
| 21.83 |
|
Vested(2) |
|
| (29,222 | ) |
|
| 19.69 |
|
|
| (11,147 | ) |
|
| 21.59 |
|
Non-vested on April 30, 2015 |
|
| 80,376 |
|
|
| 19.31 |
| ||||||||
Forfeited(3) |
|
| (188 | ) |
|
| 25.85 |
| ||||||||
Non-vested on October 31, 2015 |
|
| 156,500 |
|
|
| 20.70 |
|
|
(1) | Includes |
(2) | Includes |
(3) | Forfeitures include Series 1 awards that were granted in fiscal year 2015 to certain |
The total fair value of shares vested during the ninethree months ended April 30,October 31, 2015 and 2014 was approximately $575,000$474,000 and $1.6 million, respectively. The amount in the first nine months of fiscal year 2014 includes $1.1 million for shares granted to Mr. Fraser upon becoming President and CEO.
The weighted-average per share grant-date fair value of awards forfeited during the nine months ended April 30, 2015 and 2014 was $14.88 and $17.10,$237,000, respectively.
7. Intangible Assets
Intangible assets are summarized as follows (in thousands):
|
| Number of Years |
|
| April 30, 2015 |
|
| Number of Years |
|
| October 31, 2015 |
| ||||||||||||||||||||||||||||
|
| Weighted |
|
|
|
|
|
|
|
|
|
| Foreign |
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
| Foreign |
|
|
|
|
| ||||
|
| Average |
|
|
|
|
|
|
|
|
|
| Currency |
|
|
|
|
|
| Average |
|
|
|
|
|
|
|
|
|
| Currency |
|
|
|
|
| ||||
|
| Amortization |
|
| Original |
|
| Accumulated |
|
| Translation |
|
| Carrying |
|
| Amortization |
|
| Original |
|
| Accumulated |
|
| Translation |
|
| Carrying |
| ||||||||||
|
| Period |
|
| Cost |
|
| Amortization |
|
| Adjustment |
|
| Amount |
|
| Period |
|
| Cost |
|
| Amortization |
|
| Adjustment |
|
| Amount |
| ||||||||||
Intangible assets subject to amortization: (range of useful life): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic chemicals-related contracts (5-8 years) |
|
| 6.6 |
|
| $ | 2,204 |
|
| $ | (770 | ) |
| $ | (64 | ) |
| $ | 1,370 |
|
|
| 6.6 |
|
| $ | 2,204 |
|
| $ | (905 | ) |
| $ | (99 | ) |
| $ | 1,200 |
|
Electronic chemicals-related trademarks and patents (10-15 years) |
|
| 12.0 |
|
|
| 117 |
|
|
| (75 | ) |
|
| (1 | ) |
|
| 41 |
|
|
| 12.0 |
|
|
| 117 |
|
|
| (81 | ) |
|
| — |
|
|
| 36 |
|
Electronic chemicals-value of product qualifications (5-15 years) |
|
| 14.1 |
|
|
| 14,100 |
|
|
| (3,394 | ) |
|
| 29 |
|
|
| 10,735 |
|
|
| 14.1 |
|
|
| 14,100 |
|
|
| (3,900 | ) |
|
| (20 | ) |
|
| 10,180 |
|
Other chemicals-customer relationships (15 years) |
|
| 15.0 |
|
|
| 10,291 |
|
|
| (343 | ) |
|
| — |
|
|
| 9,948 |
| ||||||||||||||||||||
Other chemicals-Other related contracts (5 years) |
|
| 5.0 |
|
|
| 152 |
|
|
| (15 | ) |
|
| — |
|
|
| 137 |
| ||||||||||||||||||||
Total intangible assets subject to amortization |
|
| 13.1 |
|
| $ | 16,421 |
|
| $ | (4,239 | ) |
| $ | (36 | ) |
| $ | 12,146 |
|
|
| 13.8 |
|
| $ | 26,864 |
|
| $ | (5,244 | ) |
| $ | (119 | ) |
| $ | 21,501 |
|
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Penta product registrations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8,765 |
| ||||||||||||||||||||
Other chemicals-penta product registrations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8,765 |
| ||||||||||||||||||||
Other chemicals-related trade name and trademark |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,885 |
| ||||||||||||||||||||
Other chemicals-proprietary manufacturing process |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,808 |
| ||||||||||||||||||||
Total intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 14,458 |
|
Total intangible assets, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 20,911 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 35,959 |
|
10
| Number of Years |
|
| July 31, 2014 |
|
| Number of Years |
|
| July 31, 2015 |
| |||||||||||||||||||||||||||||
|
| Weighted |
|
|
|
|
|
|
|
|
|
| Foreign |
|
|
|
|
|
| Weighted |
|
|
|
|
|
|
|
|
|
| Foreign |
|
|
|
|
| ||||
|
| Average |
|
|
|
|
|
|
|
|
|
| Currency |
|
|
|
|
|
| Average |
|
|
|
|
|
|
|
|
|
| Currency |
|
|
|
|
| ||||
|
| Amortization |
|
| Original |
|
| Accumulated |
|
| Translation |
|
| Carrying |
|
| Amortization |
|
| Original |
|
| Accumulated |
|
| Translation |
|
| Carrying |
| ||||||||||
|
| Period |
|
| Cost |
|
| Amortization |
|
| Adjustment |
|
| Amount |
|
| Period |
|
| Cost |
|
| Amortization |
|
| Adjustment |
|
| Amount |
| ||||||||||
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic chemicals-related contracts (5-8 years) |
|
| 6.6 |
|
| $ | 2,204 |
|
| $ | (559 | ) |
| $ | 79 |
|
| $ | 1,724 |
|
|
| 6.6 |
|
| $ | 2,204 |
|
| $ | (839 | ) |
| $ | (87 | ) |
| $ | 1,278 |
|
Electronic chemicals-related trademarks and patents (10-15 years) |
|
| 12.0 |
|
|
| 117 |
|
|
| (67 | ) |
|
| — |
|
|
| 50 |
|
|
| 12.0 |
|
|
| 117 |
|
|
| (77 | ) |
|
| — |
|
|
| 40 |
|
Electronic chemicals-value of product qualifications (5-15 years) |
|
| 14.1 |
|
|
| 14,100 |
|
|
| (2,426 | ) |
|
| 801 |
|
|
| 12,475 |
|
|
| 14.1 |
|
|
| 14,100 |
|
|
| (3,649 | ) |
|
| 70 |
|
|
| 10,521 |
|
Other chemicals-customer relationships (15 years) |
|
| 15.0 |
|
|
| 10,291 |
|
|
| (172 | ) |
|
| — |
|
|
| 10,119 |
| ||||||||||||||||||||
Other chemicals-Other related contracts (5 years) |
|
| 5.0 |
|
|
| 152 |
|
|
| (8 | ) |
|
| — |
|
|
| 144 |
| ||||||||||||||||||||
Total intangible assets subject to amortization |
|
| 13.1 |
|
| $ | 16,421 |
|
| $ | (3,052 | ) |
| $ | 880 |
|
|
| 14,249 |
|
|
| 13.8 |
|
| $ | 26,864 |
|
| $ | (4,745 | ) |
| $ | (17 | ) |
|
| 22,102 |
|
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creosote product registrations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 5,339 |
| ||||||||||||||||||||
Penta product registrations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8,765 |
| ||||||||||||||||||||
Other chemicals-penta product registrations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 8,765 |
| ||||||||||||||||||||
Other chemicals-related trade name and trademark |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,885 |
| ||||||||||||||||||||
Other chemicals-proprietary manufacturing process |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2,808 |
| ||||||||||||||||||||
Total intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 14,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 14,458 |
|
Total intangible assets, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 28,353 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 36,560 |
|
Intangible assets subject to amortization are amortized over their estimated useful lives. Amortization expense was approximately $372,000$499,000 and $403,000$414,000 for the three month periods ended April 30, 2015 and 2014, respectively, and $1.2 million and $1.4 million for the nine month periods ended April 30,October 31, 2015 and 2014, respectively.
8. Dividends
Dividends of approximately $350,000$351,000 ($0.03 per share) and $349,000 ($0.03 per share) were declared and paid in the thirdfirst quarter of fiscal years 2016 and 2015, and 2014, respectively. Dividends of approximately $1.1 million ($0.09 per share) and $1.0 million ($0.09 per share) were declared and paid in the first nine months of fiscal years 2015 and 2014, respectively. A dividend of $0.03 per share was approved by the Company’s board of directors on June 2, 2015 to be paid on June 26, 2015 to shareholders of record on June 15, 2015.
9. Segment Information
The Company has two reportable segments — electronic chemicals and wood treatingother chemicals.
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
| |||||||||||||||
|
| April 30, |
|
| April 30, |
|
| October 31, |
| |||||||||||||||
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| ||||||
|
| (Amounts in thousands) |
|
| (Amounts in thousands) |
| ||||||||||||||||||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic chemicals |
| $ | 66,388 |
|
| $ | 61,542 |
|
| $ | 199,306 |
|
| $ | 187,422 |
|
| $ | 66,082 |
|
| $ | 66,323 |
|
Wood treating chemicals |
|
| 7,566 |
|
|
| 22,851 |
|
|
| 45,129 |
|
|
| 74,710 |
| ||||||||
Other chemicals |
|
| 10,568 |
|
|
| 24,427 |
| ||||||||||||||||
Total sales for reportable segments |
| $ | 73,954 |
|
| $ | 84,393 |
|
| $ | 244,435 |
|
| $ | 262,132 |
|
| $ | 76,650 |
|
| $ | 90,750 |
|
Depreciation and amortization (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic chemicals |
| $ | 2,983 |
|
| $ | 3,202 |
|
| $ | 9,311 |
|
| $ | 9,794 |
|
| $ | 2,915 |
|
| $ | 3,202 |
|
Wood treating chemicals |
|
| 93 |
|
|
| 104 |
|
|
| 286 |
|
|
| 300 |
| ||||||||
Other chemicals |
|
| 297 |
|
|
| 96 |
| ||||||||||||||||
Other |
|
| 108 |
|
|
| 104 |
|
|
| 354 |
|
|
| 328 |
|
|
| 333 |
|
|
| 132 |
|
Total consolidated depreciation and amortization |
| $ | 3,184 |
|
| $ | 3,410 |
|
| $ | 9,951 |
|
| $ | 10,422 |
|
| $ | 3,545 |
|
| $ | 3,430 |
|
Segment income from operations (2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic chemicals |
| $ | 6,644 |
|
| $ | 3,175 |
|
| $ | 16,335 |
|
| $ | 9,508 |
|
| $ | 7,274 |
|
| $ | 4,121 |
|
Wood treating chemicals |
|
| 2,276 |
|
|
| 2,092 |
|
|
| 6,456 |
|
|
| 5,708 |
| ||||||||
Other chemicals |
|
| 3,764 |
|
|
| 2,585 |
| ||||||||||||||||
Total segment income from operations |
| $ | 8,920 |
|
| $ | 5,267 |
|
| $ | 22,791 |
|
| $ | 15,216 |
|
| $ | 11,038 |
|
| $ | 6,706 |
|
|
(1) | Depreciation and amortization excludes restructuring related depreciation. |
(2) | Segment income from operations includes allocated corporate overhead expenses. |
11
Corporate overhead expenses allocated to segment income from operations for the three and nine months ended April 30,October 31, 2015 and 2014 were as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
| |||||||||||||||
|
| April 30, |
|
| April 30, |
|
| October 31, |
| |||||||||||||||
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| ||||||
|
| (Amounts in thousands) |
|
| (Amounts in thousands) |
| ||||||||||||||||||
Electronic chemicals |
| $ | 1,802 |
|
| $ | 2,054 |
|
| $ | 7,192 |
|
| $ | 6,492 |
|
| $ | 2,481 |
|
| $ | 2,391 |
|
Wood treating chemicals |
|
| 597 |
|
|
| 1,110 |
|
|
| 2,704 |
|
|
| 3,240 |
| ||||||||
Other chemicals |
|
| 790 |
|
|
| 934 |
| ||||||||||||||||
Total corporate overhead expense allocation |
| $ | 2,399 |
|
| $ | 3,164 |
|
| $ | 9,896 |
|
| $ | 9,732 |
|
| $ | 3,271 |
|
| $ | 3,325 |
|
A reconciliation of total segment information to consolidated amounts is as follows:
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
| |||||||||||||||
|
| April 30, |
|
| April 30, |
|
| October 31, |
| |||||||||||||||
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| ||||||
|
| (Amounts in thousands) |
|
| (Amounts in thousands) |
| ||||||||||||||||||
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales for reportable segments |
| $ | 73,954 |
|
| $ | 84,393 |
|
| $ | 244,435 |
|
| $ | 262,132 |
|
| $ | 76,650 |
|
| $ | 90,750 |
|
Other |
|
| 10 |
|
|
| 44 |
|
|
| 70 |
|
|
| 118 |
|
|
| — |
|
|
| 29 |
|
Net sales |
| $ | 73,964 |
|
| $ | 84,437 |
|
| $ | 244,505 |
|
| $ | 262,250 |
|
| $ | 76,650 |
|
| $ | 90,779 |
|
Segment income from operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income from operations |
| $ | 8,920 |
|
| $ | 5,267 |
|
| $ | 22,791 |
|
| $ | 15,216 |
|
| $ | 11,038 |
|
| $ | 6,706 |
|
Other corporate expense (1) |
|
| (3,062 | ) |
|
| (1,292 | ) |
|
| (5,715 | ) |
|
| (5,758 | ) |
|
| (3,122 | ) |
|
| (1,314 | ) |
Restructuring and realignment charges |
|
| (1,097 | ) |
|
| (1,061 | ) |
|
| (6,329 | ) |
|
| (5,092 | ) |
|
| (596 | ) |
|
| (2,573 | ) |
Operating income |
|
| 4,761 |
|
|
| 2,914 |
|
|
| 10,747 |
|
|
| 4,366 |
|
|
| 7,320 |
|
|
| 2,819 |
|
Interest expense, net |
|
| (111 | ) |
|
| (926 | ) |
|
| (1,098 | ) |
|
| (2,250 | ) |
|
| (152 | ) |
|
| (803 | ) |
Other income (expense), net (Including gain on sale of creosote distribution business) |
|
| (1,823 | ) |
|
| (105 | ) |
|
| 3,700 |
|
|
| (540 | ) |
|
| (17 | ) |
|
| (28 | ) |
Income before income taxes |
| $ | 2,827 |
|
| $ | 1,883 |
|
| $ | 13,349 |
|
| $ | 1,576 |
|
| $ | 7,151 |
|
| $ | 1,988 |
|
|
(1) | Other corporate expense primarily represents employee stock-based compensation expenses and those expenses associated with the Company’s operation as a public company, such as board compensation, audit expense, fees related to the listing of our stock, and expenses incurred to pursue acquisition opportunities. |
10. Long-Term Debt
The Company’s debt as of April 30,October 31, 2015 and July 31, 20142015 consisted of the following:
|
| April 30, |
|
| July 31, |
|
| October 31, |
|
| July 31, |
| ||||
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2015 |
| ||||
|
| (Amounts in thousands) |
|
| (Amounts in thousands) |
| ||||||||||
Senior secured debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note purchase agreement, maturing on December 31, 2014, interest rate of 7.43% |
| $ | — |
|
| $ | 20,000 |
| ||||||||
Revolving loan facility, maturing on April 30, 2018, variable interest rates based on LIBOR plus 2.0% at July 31, 2014 |
|
| — |
|
|
| 40,000 |
| ||||||||
Revolving loan facility, maturing on October 9, 2019, variable interest rates based on LIBOR plus 1.000% at April 30, 2015 |
|
| 35,000 |
|
|
| — |
| ||||||||
Revolving loan facility, maturing on October 9, 2019, variable interest rates based on LIBOR plus 1.0% at October 31, 2015 |
| $ | 51,500 |
|
| $ | 53,000 |
| ||||||||
Total debt |
|
| 35,000 |
|
|
| 60,000 |
|
|
| 51,500 |
|
|
| 53,000 |
|
Current maturities of long-term debt |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Long-term debt, net of current maturities |
| $ | 35,000 |
|
| $ | 60,000 |
|
| $ | 51,500 |
|
| $ | 53,000 |
|
12
On October 9, 2014, the Company refinanced its existing revolving loan facility and entered into a new credit facility (the “New“Second Restated Credit Facility”). The NewSecond Restated 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. Prior to that refinancing, the Company’s indebtedness included a revolving loan facility and a note purchase agreement. The amount outstanding on the prior revolving loan facility was $40.0 million at July 31, 2014. Advances under the prior revolving loan bore interest at 2.155% as of 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.
The initial advance under the NewSecond Restated 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. The Company incurred approximately $693,000$666,000 in fees and expenses related to enter into the NewSecond Restated Credit Facility. Additionally, the Company paid $288,000 for a make-whole charge for the early repayment of the note purchase agreement.
The NewSecond Restated 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. At October 31, 2015, the Company had $51.5 million outstanding under the revolving facility, and an additional $2.8 million was reserved for outstanding letters of credit, with up to an additional $95.7 million of additional borrowing capacity. The amount available under the NewSecond Restated Credit Facility at April 30,October 31, 2015 was limited, however, by a loan covenant restriction related to the ratio of funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”). Taking that restriction into account, at April 30,October 31, 2015 the Company could draw approximately an additional $89.1$84.9 million on its revolving loan. The Company borrowed $23.5 million on its revolving loan on May 1, 2015 to complete its acquisition of Valves Incorporated of Texas. The maturity date for the NewSecond Restated Credit Facility is October 9, 2019.
The revolving loan bears interest at a varying rate of the 30-day LIBOR rate plus a margin based on our funded debt to EBITDA.
Ratio of Funded Debt to EBITDA |
| Margin |
| |
Equal to or greater than 3.00 to 1.0 |
|
| 1.875 | % |
Equal to or greater than 2.75 to 1.0, but less than 3.00 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 | % |
Advances under the revolving loan bear interest at 1.184%1.188% as of April 30,October 31, 2015. The Company will also incur an unused commitment fee on the unused amount of commitments under the NewSecond Restated Credit Facility from 0.30% to 0.15%, based on the ratio of funded debt to EBITDA.
13
Loans under the NewSecond Restated Credit Facility are secured by the Company’s assets, including inventory, accounts receivable, equipment, intangible assets, and real property. The NewSecond Restated Credit Facility has restrictive covenants, including that the Company must maintain a fixed charge coverage ratio of 1.5 to 1.0 or greater, a ratio of funded debt to EBITDA (as adjusted for non-cash and unusual, non-recurring, and certain acquisition and integration costs) of 3.25 to 1.0 (with a step-up to 3.5 to 1.0 during an acquisition period with lender consent) and a current ratio of at least 1.5 to 1.0. As of October 31, 2015, the Company was in compliance with all covenants of the Second Restated Credit Facility.
11. Income Taxes
Income tax expense for the interim periods was computed using the effective tax rate based on the application of an estimated annual effective income tax rate applied to year-to-date income before income tax expense. In determining the estimated annual effective income tax rate, we analyze various factors, including forecasts of projected annual earnings and the ability to use tax credits and net operating loss carry forwards. The overall effective income tax rate for the three and nine month periodsperiod ended April 30,October 31, 2015 is 24.5% and 34.0%35.8%, respectively, including the valuation allowances recorded against the Company’s current operating losses for its Italian subsidiary. For the three and nine month periodsperiod ended April 30,October 31, 2014, the overall effective income tax rate was 34.9% and 110.5%40.4%.
Excluding the Italian results and discrete benefits, the estimated annual effective tax rate on ordinary income is 35.6% and 35.2%34.2% for the three and nine month periodsperiod ended April 30, 2015, respectively.October 31, 2015. Excluding the Italian results and discrete benefits, for the three and nine month periodsperiod ended April 30,October 31, 2014 the overall effective rate was 31.3% and 32.0%, respectively. In addition, the Company recognized $593,000 of discrete items net benefits in the nine months ended April 30, 2015.33.7%.
12. 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
13
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 $2.0 million, including interest and penalties through April 30,October 31, 2015 (at an exchange rate of 1.091.103 $/€). The Company had a liability for an uncertain tax position for items in the amount of $98,000$99,000 and $437,000$57,000 as of April 30,October 31, 2015 and July 31, 2014,2015, 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 April 30,October 31, 2015, is €798,000€805,000 (or approximately $870,000$890,000 at an exchange rate of 1.091.103 $/€). The Provincial Tax Court issued a ruling in October 2014 agreeing with the Company’s position in the income tax assessment case. In April 2015, the Company received notice that the Italian taxing authority appealed that ruling. The hearing date has not been set. 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 near Beaumont, Texas on the National Priorities List. In December 2002, the Company received a letter from the EPA addressed to Idacon (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 site, equal to $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. The Company understandsWe understand that these studies were completed by mid‑2012.mid-2012. EPA prepared a Record of Decision, selecting a remedy of excavation and disposal of soil and/or sediment, containment with soil, clay and/or armor caps and monitored natural recovery. The EPA has estimated that the remediation will cost approximately $22.0 million. 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. The Company is engaged in discussions with EPA and approximately seven other parties to assess their respective potential liability. No assurance can be given that the EPA will not designate the Company’s subsidiary as a potentially responsible party and no assurance can be given that the Company will not incur substantial expense to resolve this matter.party. The Company established a liability of $1.3 million in the third quarter of fiscal year 2015 in connection with this matter.
On October 24, 2014, the Company was notified by Stella-Jones Corporation that effective immediately it was terminating the supply agreement that the Company had with Stella-Jones for creosote. Earlier in the year, the agreement had been extended to June 30, 2017. Stella-Jones claimed it was entitled to repudiate the contract because it believed that the Company would be unable to
14
supply the contract volume in the future. The Company had repeatedly informed Stella-Jones that the Company would be able to supply the required quantity, and told Stella-Jones that it had no right to terminate the agreement. After the termination of the agreement, Stella-Jones continued to purchase creosote from the Company on a spot basis prior to the Company’s sale of its creosote business to Koppers, Inc. Stella-Jones claims that the Company owes approximately $2.4 million for rebates on purchases of creosote in the third and fourth calendar quarters of 2014 prior to the termination. The Company has accrued $1.9 million in rebates for the third calendar quarter of 2014, but payment was withheld when Stella-Jones terminated the agreement. The Company asserts that there was no basis for early termination of the agreement, and further asserts that, because of the early termination of the agreement, Stella‑Jones did not achieve the minimum purchase amount for calendar year 2014, and that no rebates are owed by it for the year. The Company is seeking repayment of rebates already paid to Stella-Jones for the first and second quarters of calendar 2014 of approximately $2.7 million. The Company will pursue any and all remedies available to it for the termination of the agreement, but the ultimate outcome of this matter is subject to uncertainty.
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.
13. Restructuring and Realignment Events
As part of the Company’s global restructuring of its electronic chemicals operations, the Fremont, California manufacturing site acquired in the acquisition from OM Group has been closed, and production has been shifted primarily to the Company’s Hollister, California and Pueblo, Colorado facilities. The Company has also announced that it will close a facilityone of its facilities in Milan, Italy, and shift some production to facilities in France and the United Kingdom. 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, 2015 and 2016. Accelerated depreciation with respect to the closed facilities has been completed and totaled $3.2 million cumulatively for fiscal year 2014 and year-to-date fiscal year 2015.completed.
14
At April 30,October 31, 2015, the accrued liability associated with restructuring and other related charges consisted of the following:
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| ||
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| Employee |
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| Decommissioning |
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| Employee |
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| Decommissioning |
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| Costs |
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| and Environmental |
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| Other |
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| Total |
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| Costs |
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| and Environmental |
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| Other |
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| Total |
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Accrued liability at August 1, 2014 |
| $ | 1,888 |
|
| $ | 810 |
|
| $ | 27 |
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| $ | 2,725 |
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Accrued liability at August 1, 2015 |
| $ | 716 |
|
| $ | 169 |
|
| $ | 17 |
|
| $ | 902 |
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Charges |
|
| — |
|
|
| 90 |
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|
| 11 |
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|
| 101 |
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|
| — |
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|
| — |
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|
| — |
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| — |
| ||
Payments |
|
| (882 | ) |
|
| (654 | ) |
|
| (12 | ) |
|
| (1,548 | ) |
|
| — |
|
|
| (51 | ) |
|
| — |
|
|
| (51 | ) | ||
Adjustment |
|
| (274 | ) |
|
| (107 | ) |
|
| (8 | ) |
|
| (389 | ) |
|
| 3 |
|
|
| 1 |
|
|
| — |
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|
| 4 |
| ||
Accrued liability at April 30, 2015 |
| $ | 732 |
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| $ | 139 |
|
| $ | 18 |
|
| $ | 889 |
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Accrued liability at October 31, 2015 |
| $ | 719 |
|
| $ | 119 |
|
| $ | 17 |
|
| $ | 855 |
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Total accelerated depreciation related to the closure of the Fremont and Milan facilities for the three and nine months ended April 30,October 31, 2015 and 2014 was approximately $30,000$105,000 and $888,000, respectively, and was $949,000 and $1.7 million for the three and nine months ended April 30, 2014,$631,000, respectively.
In October 2014, the Company announced a realignment of its hydrofluoric acid business. The Company did not renewbusiness and subsequently exited the toll manufacturing agreement under which hydrofluoric acid products are producedfacility operated for the Company by Chemtrade Logistics (“Chemtrade”) at itsin Bay Point, California facility (the agreement had formerly been with General Chemical). 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.California. 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 total chargesasset retirement obligation was initially established in the amount of between $3.5 million and $4.3$3.7 million for decontamination, decommissioning decontamination and dismantling. Additionally, the Company is obligated to pay certain employee costs that the Company estimatesdismantling at $0.8 million. In addition, duringBay Point. Operations ceased in the third quarter and first nine months of fiscal year 2015. The changes to the asset retirement obligation associated with realignment during the three months ended October 31, 2015 are as follows:
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Asset retirement obligation at August 1, 2015 |
| $ | 811 |
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Charges |
|
| 130 |
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Payments |
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| (132 | ) |
Asset retirement obligation at October 31, 2015 |
| $ | 809 |
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The Company incurred no charges for accelerated depreciation during the three month period ended October 31, 2015. For the three month period ended October 31, 2014, the Company recorded $0.7 million and $4.8$1.9 million of accelerated depreciation, respectively.depreciation. All assets have been fully depreciated as of April 30,July 31, 2015.
14. Subsequent Events
On May 1, 2015, Additionally, the Company completedincurred certain employee costs of $130,000 during the acquisition of Valves Incorporated of Texas (“Val-Tex”), a privately held Texas corporation, pursuant tothree months ended October 31, 2015, and $38,000 in employee costs during the terms of a previously announced Agreement and Plan of Merger (the “Merger Agreement”) that is intended to qualify as a reorganization under the Internal Revenue Code. Val-Tex manufactures and distributes industrial sealants and
15
lubricants, primarily to the oil and gas storage, pipeline and gas distribution markets, as well as related products, such as lubrication equipment and fittings. In addition to the lubricants business, Val-Tex also owned 606,875 shares of the Company’s common stock. Fred C. Leonard III was the majority shareholder, president and chief executive officer of Val-Tex. He is also a director of the Company.
The merger consideration paid to the former shareholders of Val-Tex was 606,875 shares of common stock of the Company plus $23.7 million in cash. The 606,875 shares of the Company previously owned by Val‑Tex were cancelled as of the time of the merger, and no additional net shares of the Company are outstanding as a result of the merger. The cash portion of the purchase price included payment of approximately $236,000 for the value of inventory at closing that exceeded $1.5 million. The merger consideration was determined based on arms-length negotiation among the parties to the Merger Agreement and was based on the estimated fair value of the assets, liabilities and business involved. The Company also assumed liabilities of approximately $0.5 million. The Company completed the acquisition by borrowing $23.5 million on its revolving loan under its existing credit facility with Wells Fargo Bank, National Association, Bank of America, N.A., HSBC Bank USA, National Association and JPMorgan Chase Bank, N.A.three months ended October 31, 2014.
1615
We manufacture, formulate and distribute specialty chemicals globally. We operate businesses engaged in selling electronic chemicals, industrial wood treating chemicals and industrial valve lubricants and sealants. Our electronic chemicals are sold to the semiconductor industry, where they are used primarily to clean and etch silicon wafers in the production of semiconductors. Our wood treating chemicals, based on pentachlorophenol (“penta”) and creosote,, are used by our industrial customers primarily to extend the useful life of utility poles and railroad crossties.cross-arms. Our valve lubricants and sealants enable optimal valve operation and help prevent costly downtime at oil and gas storage facilities and pipelines. In addition, our lubricants and sealants provide important safety benefits along with preventing fugitive valve emissions.
Acquisition of Valves Incorporated of Texas
On May 1, 2015, we completed the acquisition of Valves Incorporated of Texas, (“Val-Tex”), a privately held Texas corporation, pursuant to the terms of a previously announced Agreementagreement and Planplan of Merger (the “Merger Agreement”). Val-Texmerger. The acquired company manufactures and distributes industrial sealants and lubricants, primarily to the oil and gas storage, pipeline and gas distribution markets, as well as related products, such as lubrication equipment and fittings. In addition toAt the lubricants business, Val-Tex also owned 606,875 shares of our common stock. The merger consideration paid to the former shareholders of Val-Tex was 606,875 shares of our common stock plus $23.7 million in cash. The 606,875 shares of the Company previously owned by Val‑Tex were cancelled as of the timeclosing of the merger, and no additional net sharesValves Incorporated of the Company are outstanding as a result of the merger. The financial condition and results of operation of the valve lubricants and sealants business will first be included inTexas merged into KMG Val-Tex, LLC, our Annual Report on Form 10‑K for the year ended July 31, 2015.wholly owned subsidiary.
Sale of Creosote Distribution Business
On January 16, 2015, we sold our creosote distribution business, part of our previous wood treating chemicals segment, to Koppers Inc. pursuant to an asset purchase agreement. Creosote is a wood preservative used to treat utility poles and railroad crossties. The transaction closed concurrently with the signing of the asset purchase agreement. Assets that were sold in the transaction included our EPA registrations for creosote, creosote inventory, railcar and tank terminal leases and various customer agreements. The sale price for the assets was approximately $14.9 million. The gain on the sale was $5.4 million.
Sale of Elwood Facility
The Company had retained the real estate and building of its facility in Elwood, Kansas when its animal health business was sold in 2012 and had been leasing the facility to a third party since that time. The tenant, Ritepack, Inc., exercised its option to purchase the facility. The sale price was $2.5 million, payable in cash on the closing date. The sale of the facility closed on February 26, 2015. The Company recognized a loss on the sale of approximately $29,000.
Restructuring and Realignment
As part of the global restructuring of our electronic chemicals operations, we have closed our Fremont, California manufacturing site acquired in our acquisition of the ultra pure chemicals (“UPC”) business subsidiaries of OM Group, Inc. and production has been shifted primarily to our Hollister, California and Pueblo, Colorado facilities. We have also announced that we will close a facilityone of our facilities in Milan, Italy, and shift some production to our facilities in France and the United Kingdom. We have begunare decommissioning certain manufacturing equipment in Milan, and have started to transition products from there to other sitesMilan. That effort will be completed in Europe. Overall, the consolidation of our global operations remains on schedule. We estimate that restructuring charges, exclusive of accelerated depreciation, will range between $7.0 million and $9.0 million cumulatively over fiscal years 2014, 2015 and 2016. Accelerated depreciation with respect to the closed facilities was approximately $3.2 million cumulatively for fiscal year 2016. Decommissioning charges incurred during the three months ended October 31, 2015 were $0.5 million. There were no such decommissioning charges incurred during the three months ended October 31, 2014. However, during the three months ended October 31, 2014, and year-to-date fiscal year 2015. See Note 13we incurred $0.6 million in restructuring costs, primarily due to the financial statements included in this report.accelerated depreciation.
In October, 2014, we announced a realignment of our hydrofluoric acid business and that we would not renew oursubsequently exited the facility operated for us by Chemtrade Logistics in Bay Point, toll manufacturing agreement with Chemtrade. Under that agreement, we must 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.California. Operations ceased in the third quarter of fiscal year 2015. We estimate that we will incur realignment charges of between $3.5 million and $4.3 million for decommissioning, decontamination and dismantling. We are also obligated to payincurred certain employee costs that we estimate at $0.8 million. In addition, duringof $0.1 million in the thirdfirst quarter and first nine months of fiscal year 2015, we recorded $0.72016, and a total of $2.0 million and $4.8 million ofin accelerated depreciation on manufacturing equipment, respectively. All assets have been fully depreciated as of April 30, 2015. and employee costs during the three months ended October 31, 2014.
See Note 13 to the financial statements included in this report.
17
Three and Nine Month PeriodsPeriod Ended April 30,October 31, 2015 compared with the Three and Nine Month PeriodsPeriod Ended April 30,October 31, 2014
Segment Net Sales
Segment data is presented for our two reportable segments for the three and nine month periodsperiod ended April 30, 2015 and 2014.October 31, 2015. The segment data should be read in conjunction with our condensed consolidated financial statements and related notes thereto included elsewhere in this report.
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| Three Months Ended |
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| Nine Months Ended |
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| Three Months Ended |
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| April 30, |
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| April 30, |
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| October 31, |
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| 2015 |
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| 2014 |
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| 2015 |
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| 2014 |
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| 2015 |
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| 2014 |
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| (Amounts in thousands) |
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| (Amounts in thousands) |
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Sales |
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Electronic chemicals |
| $ | 66,388 |
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| $ | 61,542 |
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| $ | 199,306 |
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| $ | 187,422 |
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| $ | 66,082 |
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| $ | 66,323 |
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Wood treating chemicals |
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| 7,566 |
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|
| 22,851 |
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|
| 45,129 |
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|
| 74,710 |
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Other chemicals |
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| 10,568 |
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|
| 24,427 |
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Total sales for reportable segments |
| $ | 73,954 |
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| $ | 84,393 |
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| $ | 244,435 |
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| $ | 262,132 |
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| $ | 76,650 |
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| $ | 90,750 |
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16
Net Sales
Net sales for reportable segments decreased $10.4$14.1 million, or 12.3%15.5%, to $74.0$76.7 million in the thirdfirst quarter of fiscal year 20152016 from $84.4$90.8 million for the same period of the prior year. For the nine months ended April 30, 2015, net sales for reportable segments decreased $17.6 million, or 6.7%, to $244.5 million from $262.1 million. The decline in net sales was primarily due to the divestiture of the creosote business in January 2015. The decrease was partially offset by increased sales of our penta products and sales in our industrial valve lubricants and sealants business acquired in May 2015.
In the first quarter of fiscal year 2016, the electronic chemicals segment had net sales of $66.1 million, a decrease of $0.2 million, or 0.3%, as compared to $66.3 million for both the quarterlyprior year period. Net sales were essentially flat compared to the prior year period despite the impact from the strong U.S. dollar, which reduced sales by $3.0 million compared to the prior year. Product volume grew in North America and nine month periodsAsia, partially offset by softness in Europe.
Net sales of other chemicals decreased $13.9 million, or 56.7%, to $10.6 million in the first quarter of fiscal year 2016 as compared to $24.4 million for the prior year period. The decline in net sales was primarily due to the fact that creosote sales ceased upon the divestiture of the creosote business in January 2015.
In the third quarter of fiscal year 2015, the electronic chemicals segment had netpartially offset by increased sales of $66.4 million, an increase of $4.9 million, or 8.0%, as compared to $61.5 million for the prior year period. For the nine month periods, netour penta products and by sales in the electronic chemicals segment increased $11.9 million, or 6.4%, to $199.3 million from $187.4 million. In both periods, net sales increased over the prior year period because of increased sales volumeindustrial valve lubricants and pricingsealants business acquired in North America and Asia, offset to a degree by weaker sales in Europe.
Net sales of wood treating chemicals decreased $15.3 million, or 66.8%, to $7.6 million in the third quarter of fiscal year 2015 as compared to $22.9 million for the prior year period. For the nine month period, net sales in the wood treating segment decreased $29.6 million, or 39.6%, to $45.1 million from $74.7 million. The decline in net sales for both the quarterly and nine month periods was primarily due to the fact that creosote sales ceased upon the divestiture of the creosote business in JanuaryMay 2015.
Gross Profit
Gross profit increased by $2.0$1.7 million, or 8.1%6.0%, to $26.8$29.3 million in the thirdfirst quarter of fiscal year 20152016 from $24.8$27.6 million in the same quarter of the prior year. For the nine month period, gross profit increased $7.5 million, or 9.9%, to $83.0 million from $75.5 million in the prior year period. The increasesincrease in aggregate gross profit for the quarterly and nine month period comparisons werewas primarily due to increasedchanges in sales mix, cost improvements and sales in our electronic chemicals business.industrial valve lubricants and sealants business acquired in May 2015. Gross profit as a percentage of sales improved to 36.3%38.2% in the thirdfirst quarter of fiscal year 20152016 from 29.3%30.4% in the thirdfirst quarter of fiscal year 2014. For the nine month period ended April 30, 2015, gross profit as a percentage of sales improved to 33.9% from 28.8% for the nine month period ended April 30, 2014.2015. The improvementsimprovement in gross profit as a percentage of sales in the quarterly and nine month periods werewas due to higher sales volume in electronic chemicals, operating efficiencies realized from the consolidation of our electronic chemicals operations, improved penta sales and margins, and the sale of our creosote distribution business, which included products with lower profit margins.
Other companies may include certain costs that we record in cost of sales as distribution expenses or selling, general and administrative expenses, and may include certain of the costs that we record in distribution expenses or selling, general and administrative expenses as a component of cost of sales, resulting in a lack of comparability between our gross profit and that reported by other companies.
Distribution Expenses
Distribution expenses were down in the thirdfirst quarter of fiscal year 20152016 by $0.3$2.9 million, or 2.5%22.1%, to $11.7$10.1 million as compared to $12.0$13.0 million in the prior year period. Distribution expenses were approximately 15.8%13.2% and 14.2%14.3% of net sales for the thirdfirst quarter of fiscal years 2016 and 2015, and 2014, respectively. Distribution expenses for the nine month periods ending April 30, 2015 and 2014 were $37.7 and $37.0 million, respectively, an increase of $0.7 million or 1.9%, in fiscal year 2015 over the prior year period. Distribution expense as a percent of revenue for the nine month periods ended April 30, 2015 and 2014 were 15.4% and 14.1% of net sales,
18
respectively. Distribution expense is heavily concentrated in ourThe electronic chemicals business, and the change in the nine month comparisons for that expense in fiscal year 2015 is primarily driven by greater volume shipments in that segment.segment represents more than 90% of distribution expenses. Distribution expense decreased in the quarterly period over the same period in the priorfirst quarter of fiscal year 2016, despite greater volume shipments in North America, primarily because of lower volume shipmentsa decrease in Asia from improved cost controls. In addition, distribution expense decreased in the segment in Europe and improved cost control in Asia.first quarter of fiscal year 2016 due to the absence of creosote sales.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses increased $0.5$2.0 million, or 5.7%21.9%, to $9.3$11.2 million in the thirdfirst quarter of fiscal year 20152016 from $8.8$9.2 million in the same quarter of fiscal year 2014. Those expenses were 12.5% and 10.4% of net sales in the third quarter of fiscal years 2015 and 2014, respectively. For the nine month period, those expenses decreased $0.9 million or 3.1% to $28.2 million from $29.1 million.2015. The increase in the third quarter of fiscal year 2015 over the same period of the prior year is primarily the result of increases in short-term incentive expenses of $0.6 million and stock-based compensation expenses of $0.5 million, offset in part by a decrease of $0.3 million for professional services. The decrease for the comparable nine month period is primarily the result of $1.3 million of CEO transition costs we incurred in the first quarter of fiscal year 2014 and a decrease of $1.7 million for professional services for the nine month period ended April 30, 2015 as compared toover the prior year period partially offset by increasesof $0.5 million in short‑term incentiveprofessional service expenses of $1.0related to the year-end audit, $0.5 million andin stock-based compensation, $0.5 million in additional depreciation and amortization and $0.5 million of additional general and administrative expenses due to the acquisition of $1.3 million during the same period.our industrial lubricants and sealants business.
Segment Income from Operations
In the thirdfirst quarter of fiscal year 2015,2016, operating income in the electronic chemicals segment (excluding restructuring charges) was $6.6$7.3 million, an increase of $3.4$3.2 million, or 106.3%76.5%, as compared to $3.2$4.1 million for the prior year period. For the nine month period, operating income in the electronic chemicals segment increased $6.8 million, or 71.6%, to $16.3 million from $9.5 million. The improvement in the quarterly and nine month comparisons was primarily due to increased sales volume and favorable changes in North Americaregional product mix of sales, and Asia, partially offset by weaker sales in Europe.operating efficiencies realized from our manufacturing consolidation.
In our wood treatingother chemicals segment, operating income increased approximately $0.2$1.2 million, or 9.5%45.6%, to $2.3$3.8 million in the thirdfirst quarter of fiscal year 20152016 as compared to $2.1$2.6 million for the prior year period. For the nine month period, operating income in the wood treating segment increased $0.8 million, or 14.0%, to $6.5 million from $5.7 million. Operating income in wood treatingother chemicals increased in the third
17
first quarter of fiscal year 2016, because of sales in our industrial valve lubricants and sealants business acquired in May 2015 and nine month period ended April 30, 2015 due to lower supply chain costs as a result of the sale of our creosote distribution business in January 2015, improvedincreased sales of penta productsvolume and lower raw material costs.costs of our penta products.
Other corporate expenses are not allocated to segments in calculating a segment’s income from operations. Other corporate expense primarily represents employee stock-based compensation expenses and those public entity expenses such as board compensation, audit expense and fees related to the listing of our stock, and expenses incurred to pursue potential acquisition opportunities.stock. See Note 9 to the financial statements included in this report. For the three and ninth months ended April 30,October 31, 2015 and 2014, other corporate expenses were $3.1 million and $1.3 million, respectively. The increase in other corporate expense was $3.1 million and $5.7 million, respectively, including $2.3 million and $1.0due to increases in expenses over the prior year period of $0.5 million for professional services, in the same periods and $0.8 million and $2.0$0.5 million for stock-based compensation, in the same periods. For the three$0.3 million of depreciation for our new ERP system and nine months ended April 30, 2014, other corporate expense was $1.3$0.3 million and $5.8 million, respectively.for salaries.
Adjusted EBITDA, Adjusted Net Income and Adjusted Earnings Per Share
In the thirdfirst quarter of fiscal year 20152016 adjusted EBITDA, which excludes costs associated with the effectrestructuring of the gain on the sale of the creosote business, acquisition-related restructuring,our manufacturing operations in Europe and the realignment of the hydrofluoric acid business, integration and CEO transition expenses, was $9.1$11.4 million, an increase of $1.5$2.6 million, or 19.7%30.1%, as compared to $7.6$8.8 million in the thirdfirst quarter of fiscal year 2014. For2015. In the nine month period ended April 30, 2015, adjusted EBITDA was $27.0 million, an increase of $5.4 million, or 25%, as compared to $21.6 million for the prior year period. The improvement in adjusted EBIDTDA for the thirdfirst quarter of fiscal year 20152016 diluted adjusted earnings per share was $0.42, compared to $0.24 in the first quarter of fiscal year 2015. The increase in adjusted EBITDA and foradjusted earnings per share in the nine month period ended April 30, 2015first quarter of fiscal year 2016 came from increased sales volume and pricinggross profit margins in electronic chemicals due primarily to operating efficiencies realized from our manufacturing consolidation in North America, increased sales volume and lower raw material costs for our penta products and sales in our electronic chemicalsindustrial lubricants and sealants business acquired in North America.May 2015.
In the third quarter of fiscal year 2015 diluted adjusted earnings per share was $0.35, compared to $0.20 in the third quarter of fiscal year 2014. For the nine month period ended April 30, 2015, adjusted earnings per share was $0.89, compared to $0.54 for the nine month period ended April 30, 2014. The increase in adjusted earnings per share in the third quarter of fiscal year 2015 and in the nine month period ended April 30, 2015 primarily reflects improved results from our electronic chemicals business in North America.
We provide non-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 these non-GAAP financial measures. We believe that these measures aid in evaluating the underlying operational performance of our business, and facilitate comparisons between periods. Non-GAAP financial information, such as adjusted
19
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. 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.
|
| Three Months Ended |
|
| Nine Months Ended |
|
| Three Months Ended |
| |||||||||||||||
|
| April 30, |
|
| April 30, |
|
| October 31, |
| |||||||||||||||
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| ||||||
|
| (Amounts in thousands) |
|
| (Amounts in thousands) |
| ||||||||||||||||||
Operating Income |
| $ | 4,761 |
|
| $ | 2,914 |
|
| $ | 10,747 |
|
| $ | 4,366 |
|
| $ | 7,320 |
|
| $ | 2,819 |
|
Other expense |
|
| (339 | ) |
|
| (105 | ) |
|
| (498 | ) |
|
| (540 | ) |
|
| (17 | ) |
|
| (28 | ) |
Depreciation and amortization |
|
| 3,894 |
|
|
| 4,359 |
|
|
| 15,591 |
|
|
| 12,142 |
|
|
| 3,651 |
|
|
| 6,019 |
|
EBITDA |
|
| 8,316 |
|
|
| 7,168 |
|
|
| 25,840 |
|
|
| 15,968 |
|
|
| 10,954 |
|
|
| 8,810 |
|
Acquisition and integration expenses |
|
| 441 |
|
|
| 358 |
|
|
| 441 |
|
|
| 1,018 |
| ||||||||
CEO transition costs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,280 |
| ||||||||
Restructuring and realignment charges, excluding accelerated depreciation and amortization |
|
| 388 |
|
|
| 112 |
|
|
| 689 |
|
|
| 3,372 |
| ||||||||
Restructuring and realignment charges, excluding accelerated depreciation |
|
| 490 |
|
|
| (16 | ) | ||||||||||||||||
Adjusted EBITDA |
| $ | 9,145 |
|
| $ | 7,638 |
|
| $ | 26,970 |
|
| $ | 21,638 |
|
| $ | 11,444 |
|
| $ | 8,794 |
|
The table below provides a reconciliation of net income/(loss)income to adjusted net income and diluted adjusted earnings per share.
|
| Three Months Ended |
|
| Nine Months Ended |
| ||||||||||
|
| April 30, |
|
| April 30, |
| ||||||||||
|
| 2015 |
|
| 2014 |
|
| 2015 |
|
| 2014 |
| ||||
|
| (Amounts in thousands) |
| |||||||||||||
Net income (loss) |
| $ | 2,135 |
|
| $ | 1,226 |
|
| $ | 8,810 |
|
| $ | (166 | ) |
Items impacting pre-tax income, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restructuring and realignment charges(1) |
|
| 713 |
|
|
| 929 |
|
|
| 4,114 |
|
|
| 4,965 |
|
Acquisition and integration expenses |
|
| 287 |
|
|
| 233 |
|
|
| 287 |
|
|
| 663 |
|
CEO transition costs |
|
| — |
|
|
| — |
|
|
| — |
|
|
| 833 |
|
Gain on sale of creosote business |
|
| 152 |
|
|
| — |
|
|
| (3,541 | ) |
|
| — |
|
Environmental site cleanup reserve |
|
| 812 |
|
|
| — |
|
|
| 812 |
|
|
| — |
|
Adjusted net income |
| $ | 4,099 |
|
| $ | 2,388 |
|
| $ | 10,482 |
|
| $ | 6,295 |
|
Diluted adjusted earnings per share |
| $ | 0.35 |
|
| $ | 0.20 |
|
| $ | 0.89 |
|
| $ | 0.54 |
|
Weighted average diluted shares outstanding |
|
| 11,819 |
|
|
| 11,673 |
|
|
| 11,758 |
|
|
| 11,606 |
|
18
|
(1)The restructuring and realignment charges include the income tax valuation allowance.
Interest Expense, net
Interest expense was $0.1$0.2 million and $0.9$0.8 million in the thirdfirst quarter of fiscal years 20152016 and 2014, respectively, and was $1.1 million and $2.3 million for the first nine months of fiscal year 2015, and 2014, respectively. Interest expense declined because of lower interest rates from the refinancing of our credit facility on October 9, 2014, and also because the amount outstanding onof our outstanding indebtedness was lower in the thirdfirst quarter of fiscal year 2015 and the nine months ended April 30, 20152016 compared to the prior year periods.period. Also, we incurred an early payment penalty of $0.3 million in connection with our refinancing in October 2014.
20
The overall effective income tax rate for the three and nine month period ended April 30,October 31, 2015 was 24.5% and 34.0%35.8%, respectively, including restructuring charges and operational results in Italy for which we do not expect to realize a tax benefit. With the consolidation of our European manufacturing facilities, we expect that our subsidiary in Italy will not generate a sufficient profit in the near future to recover the restructuring charges. Excluding the Italian results and other discrete items, the estimated annual effective tax rate on ordinary income was 35.6% and 35.2%34.2% for the three and nine months ended April 30, 2015, respectively.October 31, 2015. The overall effective rate for continuing operations was 34.9% and 110.5%40.4% for the three and nine months ended April 30,October 31, 2014.
Liquidity and Capital Resources
Cash Flows
For the ninethree months ended April 30,October 31, 2015, operating cash flows were favorably impacted by higher sales in our electronic chemicals business, resulting in adjusted EBITDA of $27.0 million. However, we made restructuringnet income and realignment payments of $3.4 million,lower overall accounts receivable and paid $8.4 million for interest and income taxesinventory during the nine months ended April 30, 2015. In addition,period. However, there was a net decrease inof accounts payable and accrued liabilities of $5.3$5.4 million primarily due to timing of payments to vendors, non-recurring payments related to the sale of the creosote distribution businessBay Point facility and inventory purchases to support growth.
During the three months ended April 30,October 31, 2015, we repaid $4.0$1.5 million on our revolving credit facility.
Working Capital
On October 9, 2014, we entered into a new amended and restated credit agreement (the “New“Second Restated Credit Facility”) under which we have a revolving line of credit of $150.0 million. At April 30,October 31, 2015, we had $35.0$51.5 million outstanding under the revolving facility, and an additional $2.8 million was reserved for outstanding letters of credit, with up to an additional $112.2$95.7 million of additional borrowing capacity. However, the amount that may be borrowed under the revolving facility is limited by a covenant for funded debt to pro-formapro‑forma earnings before interest, taxes and depreciation (“EBITDA”), and at April 30,October 31, 2015, that covenant limited our additional borrowing capacity to $89.1$84.9 million. On May 1, 2015, we borrowed $23.5 million against our revolving loan to complete our acquisition of Val-Tex.
The initial advance under the NewSecond Restated Credit Facility was used to repay in full the $20.0 million outstanding indebtedness under our note purchase agreement with The Prudential Insurance Company of America and Pruco Life Insurance Company, and to pay the $38.0 million then outstanding on our prior revolving loan facility. Management believes that the NewSecond Restated 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 DebtObligations
The NewSecond Restated 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 NewSecond Restated 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 $100.0 million with approval from our lenders. The maturity date for the NewSecond Restated Credit Facility is October 9, 2019.
19
The revolving loan under the NewSecond Restated Credit Facility bears interest at varying rate of the 30-day LIBOR rate 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 3.00 to 1.0 |
|
| 1.875 | % |
Equal to or greater than 2.75 to 1.0, but less than 3.00 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 | % |
Advances under the revolving loan bear interest at 1.184%1.188% and 1.189% as of April 30, 2015. AtOctober 31, 2015 and July 31, 2014, advances under the revolving loan under our old credit agreement bore interest at 2.155%.2015, respectively. At April 30,October 31, 2015, $35.0$51.5 million was outstanding on the revolving loan under the NewSecond Restated Credit Facility, and an additional $2.8 million was reserved for outstanding letters of credit. On May 1, 2015, we borrowed $23.5 million against our revolving loan to complete our acquisition of Val-Tex.
21
Loans under the NewSecond Restated Credit Facility are secured by our assets, including stock in subsidiaries, inventory, accounts receivable, equipment, intangible assets and real property. The credit facility has restrictive covenants, including that the Company must maintain a fixed charge coverage ratio of 1.5 to 1.0 or greater, and ratio of funded debt to EBITDA (as adjusted for non-cash and unusual, non-recurring, and certain acquisition and integration costs) of no more than 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. On April 30,October 31, 2015, we were in compliance with all of our debt covenants.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, such as financing or unconsolidated variable interest entities, other than operating leases.
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 or significant reduction in business from primary customers; |
● | the loss of key suppliers; |
● | the integration of our UPC acquisition taking longer or being more costly than currently believed, or the failure to achieve all the planned benefits of that integration; |
● | the impact of penta being banned or restricted as a persistent organic pollutant under the Stockholm Convention Treaty; |
● | the implementation of a new enterprise resource planning system taking longer or being more costly than currently believed; |
● | 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, affecting our primary raw materials and active ingredients; |
● | the timing of planned capital expenditures; |
20
● | 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; |
● | exposure to movements in foreign currency exchange rates as a result of geographic diversity of our operations; |
● | the political and economic climate in the foreign or domestic jurisdictions in which we conduct business; and |
22
The information contained in this report, including the information set forth under the heading “Risk Factors” contained herein and in our Annual Report on Form 10-K for the fiscal year ended July 31, 2014,2015, 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.
We are exposed to certain market risks in the ordinary course of our business, arising primarily from changes in interest rates and to a lesser extent foreign currency exchange rate fluctuations. Generally we do not utilize derivative financial instruments or hedging transactions to manage that risk. Our exposure to interest rate risk and foreign currency risk is discussed in our Annual Report on Form 10-K for the fiscal year ended July 31, 2014.2015. There has been no material change in that information.
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 provide reasonable assurance that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified by the Securities and Exchange Commission. Our management, including our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.
ThereAs reported in our Annual Report on Form 10-K for the year ended July 31, 2015, management identified material weaknesses in internal controls over financial reporting. The identified material weaknesses resulted from our personnel not having sufficient knowledge, experience and skills to handle both the demands of financial reporting in the fourth quarter of fiscal year 2015 and the added burden of the implementation and stabilization of our new ERP system in that quarter, and also resulted from failures in the control environment and monitoring activities over our operations in France. Our remediation of the material weaknesses in our internal control over financial reporting is ongoing.
Except for the items identified above, there were no changes to our internal control over financial reporting during the quarterly period covered by this Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
21
PARTPART II — OTHER INFORMATION
The information set forth in Note 12 to the condensed consolidated financial statements is incorporated herein by reference.
Except as set forth below, thereThere have been no material changes to the risk factors contained in our Annual Report on Form 10-K for the fiscal year ended July 31, 2014,2015, as filed with the SEC.
The classification of pentachlorophenol as a Persistent Organic Pollutant under the Stockholm Convention may adversely affect our ability to manufacture or sell our penta products.
The Conference of the Parties (“COP”), comprising representatives from countries that have ratified the treaty known as the Stockholm Convention, met in May 2015 and considered the classification of penta as a persistent organic pollutant (“POP”). The COP accepted the recommendation of the United Nations Persistent Organic Pollutant Review Committee that the use of penta should be banned except that its use for the treatment of utility poles and cross‑arms could continue for an extended period of six to eleven years. We supply penta to industrial customers who use it primarily to treat utility poles and cross-arms. The United States is not bound by the determination of the COP because it did not adopt the Stockholm Convention treaty. Canada and Mexico are governed by the treaty. No assurance can be given that the ultimate action of the COP will not have a material adverse effect on our financial condition and results of operation.
23
The financial statements are filed as part of this report in Part 1, Item 1. The following documents are filed as exhibits. Documents marked with an asterisk (*) are management contracts or compensatory plans, and portions of documents marked with a dagger (†) have been granted confidential treatment.
|
| |
31.1 |
| Certificates under Section 302 the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer. |
|
| |
31.2 |
| Certificates under Section 302 the Sarbanes-Oxley Act of 2002 of the Chief Financial Officer. |
|
| |
32.1 |
| Certificates under Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer. |
|
| |
32.2 |
| Certificates under Section 906 of the Sarbanes-Oxley Act of 2002 of 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 |
2422
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
KMG Chemicals, Inc.
By: | /s/ Christopher T. Fraser |
| Date: |
|
| Christopher T. Fraser |
|
| |
| President and Chief Executive Officer |
|
| |
|
|
|
| |
By: | /s/ Malinda G. Passmore |
| Date: |
|
| Malinda G. Passmore |
|
| |
| Chief Financial Officer |
|
|
2523