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, 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 Section 12, 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. 7,501,981 shares of common
stock
PART I --- FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
KMG CHEMICALS, INC.
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
April 30, July 31,
2001 2000
----------- -----------
ASSETS
CURRENT ASSETS $14,407,001 $14,826,501
PROPERTY, PLANT AND EQUIPMENT -
Net of accumulated depreciation 4,396,764 2,189,958
NOTES RECEIVABLE, Less current portion 91,147 116,781
DEFERRED TAX ASSET 300,869 289,684
OTHER ASSETS 8,574,422 7,889,455
----------- -----------
TOTAL $27,770,203 $25,312,379
=========== ===========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES $ 6,905,623 $ 5,169,002
LONG TERM DEBT 2,670,790 2,554,414
----------- -----------
Total liabilities 9,576,413 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,
7,681,981 shares issued and
7,501,981 shares outstanding at
April 30, 2001 and 7,000,169 shares
issued and outstanding at July 31, 2000 76,820 70,002
Additional paid-in capital 3,363,953 1,129,507
Treasury stock (900,000)
Retained earnings 15,653,017 16,389,454
----------- -----------
Total stockholders' equity 18,193,790 17,588,963
----------- -----------
TOTAL $27,770,203 $25,312,379
=========== ===========
See notes to consolidated financial statements.
1
KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
Three Months Ended Nine Months Ended
April 30 April 30
------------------------ --------------------------
2001 2000 2001 2000
---------- ---------- ----------- -----------
NET SALES $8,098,371 $8,176,294 $24,593,307 $24,770,718
COST OF SALES 5,596,524 4,889,407 16,006,574 15,026,977
---------- ---------- ----------- -----------
Gross Profit 2,501,847 3,286,887 8,586,733 9,743,741
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 2,125,980 1,731,880 5,774,462 5,323,696
---------- ---------- ----------- -----------
Operating Income 375,867 1,555,007 2,812,271 4,420,045
OTHER INCOME (EXPENSE):
Interest & Dividend Income 32,966 67,878 239,079 208,626
Interest Expense (61,232) (69,015) (182,826) (221,385)
Other (6,528) (5,041) (14,500) (10,416)
---------- ---------- ----------- -----------
Total Other Income (Expense) (34,794) (6,178) 41,753 (23,175)
INCOME BEFORE INCOME TAX 341,073 1,548,829 2,854,024 4,396,870
Provision For Income Tax (129,608) (600,555) (1,084,529) (1,651,360)
---------- ---------- ----------- -----------
NET INCOME $ 211,465 $ 948,274 $ 1,769,495 $ 2,745,510
=========== ========== =========== ===========
EARNINGS PER SHARE:
Basic $ 0.03 $ 0.12 $ 0.23 $ 0.36
=========== ========== =========== ===========
Diluted $ 0.03 $ 0.12 $ 0.23 $ 0.35
=========== ========== =========== ===========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 7,501,981 7,681,981 7,551,432 7,681,981
=========== ========== =========== ===========
Diluted 7,543,089 7,733,400 7,593,961 7,734,118
=========== ========== =========== ===========
See notes to consolidated financial statements.
2
KMG CHEMICALS, INC.
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 $ $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 16,389,454 17,588,963
========= ======= ========== ========= =========== ===========
Warrants issued for services 25,375 25,375
Stock dividends 681,812 $ 6,818 2,209,071 (2,215,889)
Purchase of 180,000 shares
of treasury stock (900,000) (900,000)
Cash dividends (290,043) (290,043)
Net income 1,769,495 1,769,495
--------- ------- ---------- --------- ----------- -----------
BALANCE AT APRIL 30, 2001 7,681,981 $76,820 $3,363,953 $(900,000) $15,653,017 $18,193,790
========= ======= ========== ========= =========== ===========
See notes to consolidated financial statements.
3
KMG CHEMICALS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Nine Months Ended
April 30
------------------------------
2001 2000
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,769,495 $ 2,745,510
Adjustments to reconcile net income to net cash
(used in) provided by operating activities:
Depreciation and amortization 840,205 799,269
(Gain) on sale of securities (829)
Options and warrants issued for services 25,375 47,997
Deferred income tax asset (24,416) (29,899)
Changes in operating assets and liabilities:
Accounts receivable - trade (713,718) (283,105)
Accounts receivable - other (64,992) (2,257)
Inventories (4,733,953) (540,984)
Prepaid expenses and other assets (70,276) (35,271)
Accounts payable 598,628 (661,293)
Accrued liabilities 1,088,333 (45,674)
----------- -----------
Net cash (used in) provided by
operating activities (1,285,319) 1,993,465
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (1,257,977) (127,998)
Proceeds from sale of securities 7,752
Loans to third parties - short term 57,454
Collection of notes receivable 714,463 6,592
Product line purchase from Zeneca affiliate (2,300,000)
Additions to other assets (160,769) (224,984)
----------- -----------
Net cash used in investing activities (3,004,283) (281,184)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on borrowings (648,965) (602,093)
Borrowings on working capital line 815,000
Purchase of treasury stock (900,000)
Payment of dividends (290,043) (280,007)
----------- -----------
Net cash used in financing activities (1,024,008) (882,100)
----------- -----------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (5,313,610) 830,181
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 7,830,843 4,840,963
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,517,233 $ 5,671,144
=========== ===========
SUPPLEMENTAL DISCLOSURES FOR CASH FLOW INFORMATION:
Cash paid during the period for interest $ 182,826 $ 221,385
Cash paid during the period for income taxes $ 1,239,599 $ 1,825,293
NON-CASH FINANCING ACTIVITY:
Stock Dividends $ 2,215,889
See notes to 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 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 Nine Months Ended
April 30 April 30
2001 2000 2001 2000
-------------------------------------------------------------
BASIC EARNINGS PER SHARE
Net Income $ 211,465 $ 948,274 $1,769,495 $2,745,510
-------------------------------------------------------------
Weighted Average Shares Outstanding 7,501,981 7,681,981 7,551,432 7,681,981
-------------------------------------------------------------
Basic Earnings Per Share $ 0.03 $ 0.12 $ 0.23 $ 0.36
=============================================================
DILUTED EARNINGS PER SHARE
Net Income $ 211,465 $ 948,274 $1,769,495 $2,745,510
-------------------------------------------------------------
Weighted Average Shares Outstanding 7,501,981 7,681,981 7,551,432 7,681,981
Shares Issuable from Assumed Conversion of
Common Share Options 41,108 51,419 42,529 52,137
-------------------------------------------------------------
Weighted Average Shares Outstanding, as
Adjusted 7,543,089 7,733,400 7,593,961 7,734,118
-------------------------------------------------------------
Diluted Earnings Per Share $ 0.03 $ 0.12 $ 0.23 $ 0.35
=============================================================
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
nine month periods ended April 30, 2001 and 2000:
Three Months Ended Nine Months Ended
April 30 Increase/ April 30 Increase/
---------------------------- (Decrease) ---------------------------- (Decrease)
2001 2000 2001 2000
-------------------------------------------------------------------------------------------------
Net sales ............... $ 8,098,371 $ 8,176,294 $ (77,923) $24,593,307 $24,770,718 $ (177,411)
Gross profit ............ $ 2,501,847 $ 3,286,887 $ (785,040) $ 8,586,733 $ 9,743,741 $(1,157,008)
Gross profit as a
percent of net sales .... 30.9% 40.2% (23.9)% 34.9% 39.3% (11.9)%
Net income .............. $ 211,465 $ 948,274 $ (736,809) $ 1,769,495 $ 2,745,510 $ (976,015)
Earnings per share ...... $ 0.03 $ 0.12 $ (0.09) $ 0.23 $ 0.36 $ (0.13)
Weighted average shares
outstanding ............. 7,501,981 7,681,981 (180,000) 7,551,432 7,681,981 (130,549)
SALES REVENUE
Net sales revenue for the third quarter and the first nine months of
fiscal 2001 was essentially unchanged when compared with the same periods in the
prior fiscal year. However, net sales revenue from the Company's wood treating
chemicals were down significantly in both periods. That decline was largely
offset by the Company's first sales of MSMA herbicide products, which began
during the second quarter of the current fiscal year.
In the third quarter of this fiscal year, the Company experienced a
substantial decline in sales volume for its pentachlorophenol wood treating
chemical. Management believes the decline in volume was attributable primarily
to a lesser overall demand this fiscal year for replacement utility poles and to
a shift by some utilities to purchases of poles treated with a competing
product, CCA. The Company's product is dissolved in oil to create a treating
solution while CCA is dissolved in water. Higher oil prices have meant that
treating solutions made using CCA enjoy a widened price differential over the
Company's product compared to historical levels. Although the Company
experienced improved creosote sales volume in the third quarter, creosote sales
continue to be down for the first nine months of this fiscal year 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 calendar 2001.
6
GROSS PROFIT
Gross profit for the third quarter and first nine months of fiscal 2001
was approximately $785 thousand and $1.2 million less than in the same periods
of the prior fiscal year. The Company's gross profit margin was down 23.9% for
the third quarter and down 11.9% for the first nine months of this fiscal year
as compared to the last fiscal year. The decrease in gross profit margin was
attributable to the decline in higher margin pentachlorophenol sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the third quarter and
for the first nine months of fiscal 2001 were $394 thousand and $451 thousand
higher than in that same periods of the prior fiscal year. Most of the increase
was for expenses related to the MSMA products line purchased in October 2000.
The Company also incurred severance costs in the third quarter of this fiscal
year for a force reduction at the Company's manufacturing facility in Mexico.
OTHER INCOME (EXPENSE)
The improvement in other income and expense for the fist nine months of
the fiscal year was attributable to the combination of higher cash balances held
by the Company during the period, 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 nine months of fiscal 2001, the Company invested
approximately $1.3 million 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 in the fourth quarter when
delivery of the MSMA products production equipment is complete. In addition, the
Company invested $3.8 million in MSMA products inventory by the end of the third
quarter. As of April 30, 2001 the principal balance of the Company's term
loan with SouthTrust Bank of Alabama, National Association ("SouthTrust") was
approximately $2.8 million and the Company had borrowings of $815 thousand
under its revolving loan with SouthTrust. As of May 31, 2001 the borrowing
base availability under the revolving loan was $3.5 million.
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
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
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: June 13, 2001
-----------------------------------
David L. Hatcher, President
By: /s/ Jack Vernie Date: June 13, 2001
-----------------------------------
Jack Vernie, Controller