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 January 31, 2001
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from ________ to ______
Commission file number 000-29278
KMG CHEMICALS, INC.
(Exact name of registrant as specified in its charter)
TEXAS 75-2640529
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10611 HARWIN DRIVE, SUITE 402
HOUSTON, TEXAS 77036
(Address of principal executive offices)
(713) 988-9252
(Registrant's telephone number including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act 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 / /
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Check whether the registrant filed all documents and reports required to be
filed by Section12, 13 or 15(d) of the Exchange Act after the distribution of
securities under a plan confirmed by a court.
Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. 6,820,169 shares of
common stock
PART I --- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
KMG CHEMICALS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
JANUARY 31 JULY 31,
2001 2000
---- ----
ASSETS
- ------
CURRENT ASSETS $13,409,529 $14,826,501
PROPERTY, PLANT AND EQUIPMENT -
Net of accumulated depreciation 3,569,774 2,189,958
NOTES RECEIVABLE, Less current portion 99,692 116,781
DEFERRED TAX ASSET 300,869 289,684
OTHER ASSETS 8,688,351 7,889,455
----------- -----------
TOTAL $26,068,215 $25,312,379
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
CURRENT LIABILITIES $ 5,845,618 $ 5,169,002
LONG TERM DEBT 2,093,859 2,554,414
----------- -----------
Total liabilities 7,939,477 7,723,416
----------- -----------
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value,
10,000,000 shares authorized,
none issued
Common stock, $.01 par value,
40,000,000 shares authorized,
7,000,169 shares issued and
6,820,169 shares outstanding 70,002 70,002
Additional paid-in capital 1,151,256 1,129,507
Treasury stock (900,000)
Retained earnings 17,807,480 16,389,454
----------- -----------
Total stockholders' equity 18,128,738 17,588,963
----------- -----------
TOTAL $26,068,215 $25,312,379
=========== ===========
See notes to condensed consolidated financial statements.
1
KMG CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Six Months Ended
January 31 January 31
---------- ----------
2001 2000 2001 2000
---- ---- ---- ----
NET SALES $8,192,896 $7,761,334 $16,494,936 $16,594,424
COST OF SALES 5,255,040 4,686,637 10,410,050 10,137,570
---------- ---------- ----------- -----------
Gross Profit 2,937,856 3,074,697 6,084,886 6,456,854
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 1,969,126 1,789,642 3,648,482 3,591,816
---------- ---------- ----------- -----------
Operating Income 968,730 1,285,055 2,436,404 2,865,038
OTHER INCOME (EXPENSE):
Interest & Dividend Income 82,439 74,070 206,113 140,748
Interest Expense (58,795) (74,327) (121,594) (152,370)
Other (10,320) (7,415) (7,972) (5,375)
---------- ---------- ----------- -----------
Total Other Income (Expense) 13,324 (7,672) 76,547 (16,997)
INCOME BEFORE INCOME TAX 982,054 1,277,383 2,512,951 2,848,041
Provision For Income Tax (373,181) (485,352) (954,922) (1,050,805)
---------- ---------- ----------- -----------
NET INCOME $ 608,873 $ 792,031 $ 1,558,029 $ 1,797,236
========== ========== =========== ===========
EARNINGS PER SHARE:
Basic $ 0.09 $ 0.11 $ 0.23 $ 0.26
========== ========== =========== ===========
Diluted $ 0.09 $ 0.11 $ 0.22 $ 0.25
========== ========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 6,820,169 7,000,169 6,896,474 7,000,169
========== ========== =========== ===========
Diluted 6,862,520 7,051,588 6,940,813 7,052,306
========== ========== =========== ===========
See notes to condensed consolidated financial statements.
2
KMG CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(UNAUDITED)
COMMON STOCK ADDITIONAL TOTAL
SHARES PAR PAID-IN TREASURY RETAINED STOCKHOLDERS'
ISSUED VALUE CAPITAL STOCK EARNINGS EQUITY
------ ----- ------- ----- -------- ------
BALANCE AT AUGUST 1, 1999 7,000,169 $70,002 $1,063,385 $ 0 $12,824,656 $13,958,043
Warrants issued for services 66,122 66,122
Dividends (280,007) (280,007)
Net income 3,844,805 3,844,805
--------- ------- ---------- --------- ----------- -----------
BALANCE AT JULY 31, 2000 7,000,169 70,002 1,129,507 0 16,389,454 17,588,963
========= ======= ========== ========= =========== ===========
Warrants issued for services 21,749 21,749
Purchase of 180,000 shares
of treasury stock (900,000) (900,000)
Dividends (140,003) (140,003)
Net income 1,558,029 1,558,029
--------- ------- ---------- --------- ----------- -----------
BALANCE AT JANUARY 31, 2001 7,000,169 $70,002 $1,151,256 $(900,000) $17,807,480 $18,128,738
========= ======= ========== ========= =========== ===========
See notes to condensed consolidated financial statements.
3
KMG CHEMICALS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
January 31
----------
2001 2000
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,558,029 $ 1,797,236
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 549,148 533,097
Gain on sale of securities (829)
Options and warrants issued for services 21,749 47,997
Deferred income tax asset (21,005) (19,367)
Changes in operating assets and liabilities:
Accounts receivable - trade (587,048) 648,335
Accounts receivable - other (120,993) 3,751
Inventories (3,140,084) (515,109)
Prepaid expenses and other assets 1,212 (143,443)
Accounts payable (147,796) (1,379,637)
Accrued liabilities 791,248 (195,114)
----------- -----------
Net cash (used in) provided by operating activities $(1,095,539) $ 776,917
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (342,946) (73,369)
Proceeds from sale of securities 7,752
Loans to third parties - short term 6,104
Collection of notes receivable 705,918 4,359
Product line purchase from Zeneca affiliate (2,300,000)
Additions to other assets (75,094) (215,137)
----------- -----------
Net cash used in investing activities $(2,012,121) $ (270,291)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings (427,391) (396,615)
Purchase of treasury stock (900,000)
Payment of dividends (140,003) (140,003)
----------- -----------
Net cash used in financing activities $(1,467,395) $ (536,618)
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (4,575,055) (29,992)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,830,843 4,840,963
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3,255,788 $ 4,810,971
=========== ===========
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Cash paid during the period for interest $ 121,594 $ 152,370
Cash paid during the period for income taxes $ 1,099,545 $ 1,267,230
See notes to condensed consolidated financial statements.
4
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(1) BASIS OF PRESENTATION - The unaudited condensed consolidated
financial statements included herein have been prepared pursuant to the rules
and regulations of the Securities and Exchange Commission and reflect in the
opinion of management all adjustments, consisting only of normal recurring
accruals, that are necessary for a fair presentation of financial position
and results of operations for the interim periods presented. These financial
statements include the accounts of KMG Chemicals, Inc. and its subsidiaries
(the Company). All significant intercompany balances and transactions have
been eliminated in consolidation. Certain information and footnote
disclosures required by accounting principles generally accepted in the
United States of America have been condensed or omitted pursuant to such
rules and regulations. The financial statements included herein should be
read in conjunction with the financial statements and notes thereto included
in the Company's annual report on Form 10-KSB for the year ended July 31, 2000.
(2) EARNINGS PER SHARE - Basic earnings per share has been computed
by dividing net income by the weighted average shares outstanding. Diluted
earnings per share has been computed by dividing net income by the weighted
average shares outstanding plus dilutive potential common shares.
The following table presents information necessary to calculate basic
and diluted earnings per share for periods indicated:
Three Months Ended Six Months Ended
January 31 January 31
2001 2000 2001 2000
-----------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Net Income $ 608,873 $ 792,031 $ 1,558,029 $ 1,797,236
-----------------------------------------------------------------------
Weighted Average Shares Outstanding 6,820,169 7,000,169 6,896,474 7,000,169
-----------------------------------------------------------------------
Basic Earnings Per Share $ 0.09 $ 0.11 $ 0.23 $ 0.26
=======================================================================
DILUTED EARNINGS PER SHARE
Net Income $ 608,873 $ 792,031 $ 1,558,029 $ 1,797,236
-----------------------------------------------------------------------
Weighted Average Shares Outstanding 6,820,169 7,000,169 6,896,474 7,000,169
Shares Issuable from Assumed Conversion
of Common Share Options 42,351 51,419 44,340 52,137
-----------------------------------------------------------------------
Weighted Average Shares Outstanding,
as Adjusted 6,862,520 7,051,588 6,940,813 7,052,306
-----------------------------------------------------------------------
Diluted Earnings Per Share $ 0.09 $ 0.11 $ 0.22 $ 0.25
=======================================================================
5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS.
RESULTS OF OPERATIONS
The following table sets forth the Company's net sales and certain other
financial data, including the amount of the change between the three and six
month periods ended January 31, 2001 and 2000:
Three Months Ended Six Months Ended
January 31 Increase/ January 31 Increase/
------------------------- (Decrease) ------------------------- (Decrease)
2001 2000 2001 2000
---------------------------------------------------------------------------------
Net sales............................ $ 8,192,896 $ 7,761,334 $ 431,562 $ 16,494,936 $ 16,594,424 $ (99,488)
Gross profit......................... $ 2,937,856 $ 3,074,697 $ (136,841) $ 6,084,886 $ 6,456,854 $ (371,968)
Gross profit as a percent of
net sales............................ 35.9% 39.6% (3.7)% 36.9% 38.9% (2.0)%
Net income........................... $ 608,873 $ 792,031 $ (183,158) $ 1,558,029 $ 1,797,236 $ (239,206)
Earnings per share................... $ 0.09 $ 0.11 $ (0.02) $ 0.23 $ 0.26 $ (0.03)
Weighted average shares
outstanding.......................... 6,820,169 7,000,169 (180,000) 6,896,474 7,000,169 (103,695)
SALES REVENUE
Net sales revenue for the second quarter in fiscal 2001 was 5.6% higher
than in the second quarter of fiscal 2000 but was essentially unchanged when
the first six months of fiscal 2001 are compared with the same period of the
prior fiscal year. The improvement in the quarterly comparison was because
the Company began to make sales of its herbicide product line, MSMA, in the
second quarter of this fiscal year. The Company acquired the MSMA product
line in October 2000. The selling season for MSMA products is largely in the
last half of the Company's fiscal year. Net sales revenue from the Company's
wood treating products, however, was lower in both the second quarter and the
first six months of this fiscal year than in the comparable periods in
fiscal 2000. In particular, the Company has continued to experience lesser
creosote sales revenue due to deferral of railroad crosstie replacement by
major railroads. Management believes that demand for its wood treating
chemicals will remain soft during the remainder of fiscal 2001.
GROSS PROFIT
Gross profit for the second quarter and first six months of fiscal 2001
was approximately $137 thousand and $372 thousand less than in the same
periods of the prior fiscal year. The Company's gross profit margin was down
3.7% for the second quarter and down 2.0% for the first six months of this
fiscal year as compared to the
6
last fiscal year. The decrease in gross profit margin is largely attributable
to the fact that in fiscal 2000 the Company benefitted from a combination of
lower raw material costs and higher penta production rates.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the second quarter and
for the first six months of fiscal 2001 were $179 thousand higher and
$57 thousand less than in that same periods of the prior fiscal year. However,
selling, general and administrative expenses were approximately 22% of net
sales revenue in both the first six months of this fiscal year and the first
six months of the last fiscal year.
OTHER INCOME (EXPENSE)
The improvement in other income and expense is attributable to the
combination of higher cash balances held by the Company during the second
quarter and the first six months of the current fiscal year, higher interest
rates realized on those cash balances during the early months of the current
fiscal year and a decline in interest paid on the Company's term loan.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of fiscal 2001, the Company invested
approximately $343 thousand in capital improvements. The Company also paid an
initial installment of $1.3 million to purchase the MSMA products line and
has accrued the second installment of $1 million, payable when the MSMA
products production equipment is delivered. These payments are being financed
out of the Company's working capital. The principal balance of the Company's
term loan with SouthTrust Bank of Alabama, National Association (SouthTrust)
was approximately $3.0 million as of January 31, 2000. As of that same date,
the Company had no borrowings under its revolving loan with SouthTrust but
its borrowing base availability under that loan was $3.5 million. In the
coming quarter, the Company will draw substantial amounts under the revolving
loan for working capital for the MSMA product line.
7
DISCLOSURE REGARDING FORWARD LOOKING STATEMENTS
Certain information included or incorporated by reference in this report
is forward-looking, including statements contained in Management's
Discussion and Analysis of Operations. It includes statements regarding the
intent, belief and current expectations of the Company and its directors and
officers. Forward-looking information involves important risks and
uncertainties that could materially alter results in the future from those
expressed in these the statements. These risks and uncertainties include, but
are not limited to, the ability of the Company to maintain existing
relationships with long-standing customers, the ability of the Company to
successfully implement productivity improvements, cost reduction initiatives,
facilities expansion and the ability of the Company to develop, market and
sell new products and to continue to comply with environmental laws, rules
and regulations. Other risks and uncertainties include uncertainties relating
to economic conditions, acquisitions and divestitures, government and
regulatory policies, technological developments and changes in the
competitive environment in which the Company operates. Persons reading this
report are cautioned that such statements are only predictions and that
actual events or results may differ materially. In evaluating such
statements, readers should specifically consider the various factors that
could cause actual events or results to differ materially from those
indicated by the forward-looking statements.
PART II --- OTHER INFORMATION
None.
8
SIGNATURES
In accordance with the requirements of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
KMG Chemicals, Inc.
By: /s/ David L. Hatcher Date: March 14, 2001
------------------------------
David L. Hatcher, President
By: /s/ Jack Vernie Date: March 14, 2001
------------------------------
Jack Vernie, Controller