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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

(One)

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

For the quarterly period ended October 31, 2012

 

¨ 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.)

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   ¨    Accelerated filer   x
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 December 7, 2012, there were 11,498,872 shares of the registrant’s common stock outstanding.

 

 

 


Table of Contents

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION

  

ITEM 1. FINANCIAL STATEMENTS

     3   

CONDENSED CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 2012 AND JULY 31, 2012

     3   

CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED OCTOBER 31, 2012 AND 2011

     4   

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED OCTOBER 31, 2012 AND 2011

     5   

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED OCTOBER 31, 2012 AND 2011

     6   

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     7   

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     15   

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

     19   

ITEM 4. CONTROLS AND PROCEDURES

     19   

PART II — OTHER INFORMATION

     19   

ITEM 1. LEGAL PROCEEDINGS

     19   

ITEM 1A. RISK FACTORS

     19   

ITEM 5. OTHER INFORMATION

     19   

ITEM 6. EXHIBITS

     19   

SIGNATURES

     20   

 

2


Table of Contents

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

KMG CHEMICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

     October 31,
2012
    July 31,
2012
 
     (Unaudited)        

Assets

    

Current assets

    

Cash and cash equivalents

   $ 4,180      $ 1,633   

Accounts receivable

    

Trade, net of allowances of $89 at October 31, 2012 and $16 at July 31, 2012

     26,344        28,933   

Other

     1,280        960   

Inventories, net

     46,129        40,661   

Current deferred tax assets

     1,424        1,417   

Prepaid expenses and other

     1,595        2,057   
  

 

 

   

 

 

 

Total current assets

     80,952        75,661   
  

 

 

   

 

 

 

Property, plant and equipment, net

     68,629        68,026   

Deferred tax assets

     1,154        1,129   

Goodwill

     3,778        3,778   

Intangible assets, net

     14,903        14,980   

Restricted cash

     1,000        1,000   

Other assets, net

     3,268        3,116   
  

 

 

   

 

 

 

Total assets

   $ 173,684      $ 167,690   
  

 

 

   

 

 

 

Liabilities and stockholders’ equity

    

Current liabilities

    

Accounts payable

   $ 23,953      $ 21,855   

Accrued liabilities

     4,374        4,303   

Employee incentive accrual

     839        2,227   

Income taxes payable

     2,647        292   
  

 

 

   

 

 

 

Total current liabilities

     31,813        28,677   
  

 

 

   

 

 

 

Long-term debt, net of current maturities

     22,000        24,000   

Deferred tax liabilities

     6,825        7,046   

Other long-term liabilities

     1,227        1,200   
  

 

 

   

 

 

 

Total liabilities

     61,865        60,923   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity

    

Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued

     —          —     

Common stock, $0.01 par value, 40,000,000 shares authorized, 11,412,400 shares issued and outstanding at October 31, 2012 and 11,405,808 shares issued and outstanding at July 31, 2012

     114        114   

Additional paid-in capital

     26,203        26,022   

Accumulated other comprehensive loss

     (3,267     (4,339

Retained earnings

     88,769        84,970   
  

 

 

   

 

 

 

Total stockholders’ equity

     111,819        106,767   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 173,684      $ 167,690   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

KMG CHEMICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except for per share amounts)

 

     Three Months Ended
October 31,
 
     2012     2011  

Net sales

   $ 65,336      $ 71,539   

Cost of sales

     45,248        52,864   
  

 

 

   

 

 

 

Gross profit

     20,088        18,675   
  

 

 

   

 

 

 

Distribution expenses

     7,053        6,070   

Selling, general and administrative expenses

     5,931        5,614   
  

 

 

   

 

 

 

Operating income

     7,104        6,991   
  

 

 

   

 

 

 

Other income/(expense)

    

Interest expense, net

     (411     (550

Other, net

     (50     (75
  

 

 

   

 

 

 

Total other expense, net

     (461     (625
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     6,643        6,366   

Provision for income taxes

     (2,435     (2,505
  

 

 

   

 

 

 

Income from continuing operations

     4,208        3,861   
  

 

 

   

 

 

 

Discontinued operations:

    

Loss from discontinued operations, before income taxes

     (102     (526

Income tax benefit

     36        200   
  

 

 

   

 

 

 

Loss from discontinued operations

     (66     (326
  

 

 

   

 

 

 

Net income

   $ 4,142      $ 3,535   
  

 

 

   

 

 

 

Earnings per share:

    

Basic

    

Income from continuing operations

   $ 0.36      $ 0.34   

Loss from discontinued operations

     —          (0.03
  

 

 

   

 

 

 

Net income

   $ 0.36      $ 0.31   
  

 

 

   

 

 

 

Diluted

    

Income from continuing operations

   $ 0.36      $ 0.34   

Loss from discontinued operations

     —          (0.03
  

 

 

   

 

 

 

Net income

   $ 0.36      $ 0.31   
  

 

 

   

 

 

 

Weighted average shares outstanding:

    

Basic

     11,436        11,348   

Diluted

     11,564        11,511   

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

KMG CHEMICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(In thousands)

 

     Three Months Ended
October 31,
 
     2012      2011  

Net income

   $ 4,142       $ 3,535   

Other comprehensive income/ (loss)

     

Foreign currency translation gain/ (loss)

     1,072         (425
  

 

 

    

 

 

 

Total other comprehensive income/ (loss)

     1,072         (425
  

 

 

    

 

 

 

Total comprehensive income

   $ 5,214       $ 3,110   
  

 

 

    

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

KMG CHEMICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

     Three Months Ended
October 31,
 
     2012     2011  

Cash flows from operating activities

    

Net income

   $ 4,142      $ 3,535   

Adjustments to reconcile net income to net cash provided by operating activities

    

Depreciation and amortization

     1,757        1,765   

Amortization of loan costs included in interest expense

     17        27   

Stock-based compensation expense

     181        211   

Bad debt expense

     73        —     

Inventory valuation adjustment

     (209     45   

Loss on disposal of property

     9        4   

Loss on sale of animal health business

     57        —     

Deferred income tax expense/(benefit)

     (221     576   

Tax deficiency from stock-based awards

     —          30   

Changes in operating assets and liabilities

    

Accounts receivable — trade

     2,723        4,505   

Accounts receivable — other

     (315     (385

Inventories

     (5,038     524   

Other current and noncurrent assets

     310        459   

Accounts payable

     1,901        719   

Accrued liabilities and other

     (1,400     (162

Income taxes payable

     2,345        1,729   
  

 

 

   

 

 

 

Net cash provided by operating activities

     6,332        13,582   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Additions to property, plant and equipment

     (1,523     (1,800
  

 

 

   

 

 

 

Net cash used in investing activities

     (1,523     (1,800
  

 

 

   

 

 

 

Cash flows from financing activities

    

Net borrowings/(payments) under revolver credit agreement

     (2,000     6,054   

Principal payments on borrowings on term loan

     —          (11,333

Tax deficiency from stock-based awards

     —          (30

Book overdraft

     —          (2,852

Payment of dividends

     (342     (283
  

 

 

   

 

 

 

Net cash used in financing activities

     (2,342     (8,444
  

 

 

   

 

 

 

Effect of exchange rate changes of cash

     80        (15

Net increase in cash and cash equivalents

     2,547        3,323   

Cash and cash equivalents at beginning of period

     1,633        1,826   
  

 

 

   

 

 

 

Cash and cash equivalents at end of period

   $ 4,180      $ 5,149   
  

 

 

   

 

 

 

Supplemental disclosures of cash flow information

    

Cash paid for interest

   $ 394      $ 527   

Cash paid for income taxes

   $ 295      $ 253   

See accompanying notes to condensed consolidated financial statements.

 

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Table of Contents

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The consolidated balance sheet as of July 31, 2012, 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, 2012.

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.

Certain reclassifications have been made to the prior period consolidated financial statements to conform to the current period presentation.

During the third quarter of fiscal year 2012 the Company sold its animal health business and reported the related results of operations as discontinued operations in its condensed consolidated statements of income. Previously reported amounts for the prior year have been adjusted for the effects of discontinued operations (See Note 3).

2. Recent Accounting Standards

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

In July 2012, the Financial Accounting Standards Board issued updated accounting guidance amending the method an entity uses to test indefinite-lived assets for impairment. Under previous guidance, an entity was required to test indefinite-lived assets for impairment on at least an annual basis, in two steps. First, an entity had to compare the fair value of the asset with its carrying amount. If the fair value of the asset was less than its carrying amount, then the second step of the test had to be performed to measure the amount of the impairment loss, if any. Under the updated guidance, an entity is not required to calculate the fair value of the asset, unless it determines that it is more likely than not that its fair value is less than its carrying amount. An entity has the option to first assess qualitative factors to determine whether it is more likely than not that the asset’s fair value is less than its carrying amount. Performing the two-step impairment test is unnecessary, when the asset’s fair value is determined to more likely than not be greater than its carrying amount. The updated guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. Early adoption is permitted, including for annual or interim indefinite-lived assets impairment tests performed prior to July 27, 2012, if an entity’s financial statements for the most recent annual period have not yet been issued. The Company early adopted the updated guidance for its annual impairment test for indefinite-lived assets performed as of July 31, 2012, which did not have a material impact on the consolidated financial statements. Based on the Company’s assessment, it was determined that it was not more likely than not that the fair value of its indefinite-lived intangible assets was greater than the carrying amount, and that there would be no impairment of the assets.

3. Discontinued Operations

In fiscal year 2008 the Company discontinued operations of its herbicide product line that had comprised the agricultural chemical segment. In connection with the dismantling of related equipment the Company incurred costs of $35,000 and $43,000 for the three months ended October 31, 2012 and 2011, respectively, reported as loss from discontinued operations, before income taxes.

On March 1, 2012, the Company sold its animal health business that had comprised the animal health segment to Bayer Healthcare LLC. During the first quarter of fiscal year 2013 the Company recorded costs of $67,000 for certain post-closing adjustments and costs which were reported as a loss from discontinued operations, before income taxes. This amount included $57,000 that was recognized as loss on sale of the business.

 

7


Table of Contents

The results of operations on the animal health business reported in discontinued operations were as follows, in thousands:

 

     Three Months Ended
October 31,
 
     2012     2011  

Net sales

   $ —        $ 1,768   

Loss before income tax

     (10     (483

4. Earnings Per Share

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

 

     Three Months Ended
October 31,
 
     2012     2011  
     (Amounts in thousands, except
per share data)
 

Income from continuing operations

   $ 4,208      $ 3,861   

Loss from discontinued operations

     (66     (326
  

 

 

   

 

 

 

Net income

   $ 4,142      $ 3,535   
  

 

 

   

 

 

 

Weighted average shares outstanding-basic

     11,436        11,348   

Dilutive effect of options and stock awards

     128        163   
  

 

 

   

 

 

 

Weighted average shares outstanding-diluted

     11,564        11,511   
  

 

 

   

 

 

 

Basic earnings per share

    

Basic earnings per share from continuing operations

   $ 0.36      $ 0.34   

Basic earnings per share on loss from discontinued operations

     —          (0.03
  

 

 

   

 

 

 

Basic earnings per share

   $ 0.36      $ 0.31   
  

 

 

   

 

 

 

Diluted earnings per share

    

Diluted earnings per share from continuing operations

   $ 0.36      $ 0.34   

Diluted earnings per share on loss from discontinued operations

     —          (0.03
  

 

 

   

 

 

 

Diluted earnings per share

   $ 0.36      $ 0.31   
  

 

 

   

 

 

 

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 shares of potentially dilutive securities not included in the computation of diluted earnings per share for the three months ended October 31, 2012 and there were approximately 7,300 shares of potentially dilutive securities not included in the computation of diluted earnings per share for the three months ended October 31, 2011.

5. Inventories

Inventories are summarized in the following table (in thousands):

 

     October 31,
2012
        July 31,    
2012
 

Raw materials

   $ 6,427      $ 5,846   

Work in process

     1,247        896   

Supplies

     1,436        1,405   

Finished products

     37,350        33,007   

Less reserve for inventory obsolescence

     (331     (493
  

 

 

   

 

 

 

Inventories, net

   $ 46,129      $ 40,661   
  

 

 

   

 

 

 

 

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Table of Contents

6. Property, Plant and Equipment

Property, plant and equipment and related accumulated depreciation and amortization are summarized as follows (in thousands):

 

     October 31,
2012
    July 31,
2012
 

Land

   $ 9,410      $ 9,034   

Buildings and improvements

     35,920        35,578   

Equipment

     46,608        45,924   

Leasehold improvements

     143        143   
  

 

 

   

 

 

 
     92,081        90,679   

Less accumulated depreciation and amortization

     (30,707     (28,824
  

 

 

   

 

 

 
     61,374        61,855   

Construction-in-progress

     7,255        6,171   
  

 

 

   

 

 

 

Property, plant and equipment, net

   $ 68,629      $ 68,026   
  

 

 

   

 

 

 

7. 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 2012. The Company recognized stock-based compensation costs of approximately $181,000 and $211,000 for the three months ended October 31, 2012 and 2011, and the related tax benefits of $66,000 and $83,000, respectively, for the three months ended October 31, 2012 and 2011. Stock-based compensation costs are recorded as selling, general and administrative expenses in the condensed consolidated statements of income.

As of October 31, 2012, the unrecognized compensation costs related to stock-based awards was approximately $249,000 which is expected to be recognized over a weighted-average period of 1.3 years.

A summary of stock option and stock activity is presented below.

Stock Options

A summary of activity for the three months ended October 31, 2012 is presented below. No options were granted in the first three months of fiscal years 2013 or 2012:

 

     Shares      Weighted-
Average
Exercise Price
 

Outstanding on August 1, 2012

     180,000       $ 4.13   

Granted

     —           —     

Exercised

     —           —     

Forfeited/expired

     —           —     
  

 

 

    

Outstanding on October 31, 2012

     180,000         4.13   
  

 

 

    

The following table summarizes information about stock options outstanding at October 31, 2012 based on fully vested (currently exercisable) stock option awards and stock options awards expected to vest:

 

     Options
Outstanding
     Weighted-
Average
Exercise Price
     Weighted-
Average
Remaining
Contractual
Term (years)
     Aggregate
Intrinsic Value
(in thousands) (1)
 

Fully vested and currently exercisable

     150,000       $ 4.09         5.41       $ 1,949   

Expected to vest

     30,000         4.37         10.86         381   
  

 

 

          

 

 

 

Total outstanding stock options

     180,000         4.13         6.32       $ 2,330   
  

 

 

          

 

 

 

 

(1) 

The aggregate intrinsic value is computed based on the closing price of the Company’s stock on October 31, 2012.

There were no options exercised in the three months ended October 31, 2012 or 2011.

 

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Performance Shares

On August 1, 2012, there were 227,609 non-vested performance shares outstanding which reflected the maximum number of shares under the awards. During the three months ended October 31, 2012, there were no awards vested or granted. As of October 31, 2012, the non-vested performance-based stock awards consisted of Series 1 and Series 2 awards granted to certain executives and employees in fiscal years 2012 and 2011, as summarized below.

 

Date of Grant

   Series
Award
     Maximum
Award
(Shares)
     Grant Date
Fair Value
     Measurement
Period Ending
   Expected
Percentage of
Vesting
    Shares Expected
to Vest
 

Fiscal Year 2012 Award

                

2/27/2012

     Series 1         300       $ 18.08       07/31/2014      20     60   

2/27/2012

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

 

 

            

 

 

 
        500                 60   
     

 

 

            

 

 

 

10/28/2011

     Series 1         15,300       $ 15.30       07/31/2014      20     3,060   

10/28/2011

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

 

 

            

 

 

 
        25,500                 3,060   
     

 

 

            

 

 

 

10/11/2011

     Series 1         58,987       $ 14.16       07/31/2014      20     11,797   

10/11/2011

     Series 2         39,324       $ 14.16       07/31/2014      0     —     
     

 

 

            

 

 

 
        98,311                 11,797   
     

 

 

            

 

 

 

Fiscal Year 2011 Award

                

12/7/2010

     Series 1         61,980       $ 15.65       07/31/2013      30     18,594   

12/7/2010

     Series 2         41,318       $ 15.65       07/31/2013      0     —     
     

 

 

            

 

 

 
        103,298                 18,594   
     

 

 

            

 

 

 

Total

        227,609                 33,511   
     

 

 

            

 

 

 

Series 1: Vesting for the Series 1 awards is subject to a performance requirement composed of certain revenue growth objectives and average annual return on invested capital or equity objectives measured across a three year period. These objectives are measured quarterly using the Company’s budget, actual results and long-term projections. For the fiscal year 2012 and 2011 awards, the expected percentage of vesting is based on performance through October 31, 2012 and reflects the percentage of shares projected to vest for the respective awards at the end of their measurement periods.

Series 2: Vesting for the Series 2 awards is subject to performance requirements pertaining to the growth rate in the Company’s basic earnings per share over a three year period. The achievement of performance requirements is measured quarterly using the Company’s budget, actual results and long-term projections. For the fiscal year 2012 and 2011 awards, the expected percentage of vesting is based on performance through October 31, 2012 and reflects the percentage of shares projected to vest for the respective awards at the end of their measurement periods.

The weighted-average grant-date fair value of performance awards outstanding at October 31, 2012 and August 1, 2012 was $15.10.

 

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Table of Contents

Time Based Shares

A summary of activity for time-based stock awards for the three months ended October 31, 2012 is presented below:

 

     Shares     Weighted-
Average
Grant-Date
Fair Value
 

Non-vested on August 1, 2012

     5,769      $ 15.65   

Granted (1)

     6,592        18.42   

Vested (1)

     (6,592     18.42   

Forfeited

     —          —     
  

 

 

   

 

 

 

Non-vested on October 31, 2012

     5,769        15.65   
  

 

 

   

 

 

 

 

(1) 

Reflects shares granted to non-employee directors on August 28, 2012 for service for the three month period ended August 31, 2012. The shares vest on the date of grant and the Company recognizes compensation expense related to the awards over the three-month service period in accordance with GAAP.

8. Intangible Assets

Intangible assets are summarized as follows (in thousands):

 

    Number of Years     October 31, 2012  
    Weighted Average
Amortization Period
    Original
Cost
    Accumulated
Amortization
    Carrying
Amount
 

Intangible assets subject to amortization: (range of useful life):

       

Creosote supply contract (10 years)

    10.0      $ 4,000      $ (4,000   $ —     

Electronic chemicals-related contracts (3-8 years)

    3.8        1,164        (1,061     103   

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

    12.0        117        (49     68   

Electronic chemicals-value of product qualifications (5 years)

    5.0        1,300        (672     628   
   

 

 

   

 

 

   

 

 

 

Total intangible assets subject to amortization

    8.0      $ 6,581      $ (5,782     799   
   

 

 

   

 

 

   

 

 

 

Intangible assets not subject to amortization:

       

Creosote product registrations

          5,339   

Penta product registrations

          8,765   
       

 

 

 

Total intangible assets not subject to amortization

          14,104   
       

 

 

 

Total intangible assets, net

        $ 14,903   
       

 

 

 
    Number of Years     July 31, 2012  
    Weighted Average
Amortization Period
    Original
Cost
    Accumulated
Amortization
    Carrying
Amount
 

Intangible assets subject to amortization: (range of useful life):

       

Creosote supply contract (10 years)

    10.0      $ 4,000      $ (4,000   $ —     

Electronic chemicals-related contracts (3-8 years)

    3.8        1,164        (1,053     111   

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

    12.0        117        (46     71   

Electronic chemicals-value of product qualifications (5 years)

    5.0        1,300        (606     694   
   

 

 

   

 

 

   

 

 

 

Total intangible assets subject to amortization

    8.0      $ 6,581      $ (5,705     876   
   

 

 

   

 

 

   

 

 

 

Intangible assets not subject to amortization:

       

Creosote product registrations

          5,339   

Penta product registrations

          8,765   
       

 

 

 

Total intangible assets not subject to amortization

          14,104   
       

 

 

 

Total intangible assets, net

        $ 14,980   
       

 

 

 

Intangible assets subject to amortization are amortized over their estimated useful lives. Amortization expense was approximately $77,000 and $206,000 for the three month periods ended October 31, 2012 and 2011, respectively.

9. Dividends

Dividends of approximately $342,000 ($0.03 per share) and $283,000 ($0.025 per share) were declared and paid in the first quarter of fiscal years 2013 and 2012, respectively.

 

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10. Segment Information

The Company has two reportable segments — electronic chemicals and wood treating chemicals. The Company sold its animal health business on March 1, 2012, and that former segment is now reported as discontinued operations. Prior year information has been reclassified to conform to the current period presentation.

 

     Three Months Ended
October 31,
 
     2012      2011  
     (Amounts in thousands)  

Sales

     

Electronic chemicals

   $ 39,507       $ 38,378   

Wood treating chemicals

     25,700         33,161   
  

 

 

    

 

 

 

Total sales for reportable segments

   $ 65,207       $ 71,539   
  

 

 

    

 

 

 

Depreciation and amortization

     

Electronic chemicals

   $ 1,550       $ 1,419   

Wood treating chemicals

     107         160   

Discontinued operations

     —           126   

Other

     100         60   
  

 

 

    

 

 

 

Total consolidated depreciation and amortization

   $ 1,757       $ 1,765   
  

 

 

    

 

 

 

Segment income from operations (1)

     

Electronic chemicals

   $ 5,072       $ 2,663   

Wood treating chemicals

     3,366         5,221   
  

 

 

    

 

 

 

Total segment income from operations

   $ 8,438       $ 7,884   
  

 

 

    

 

 

 

 

(1) 

Segment income from operations includes allocated corporate overhead expenses.

Corporate overhead expenses allocated to segment income from operations for the three months ended October 31, 2012 and 2011 were as follows:

 

     Three Months Ended
October 31,
 
     2012      2011  
     (Amounts in thousands)  

Electronic chemicals

   $ 1,403       $ 1,139   

Wood treating chemicals

     1,145         949   
  

 

 

    

 

 

 

Total corporate overhead expense allocation

   $ 2,548       $ 2,088   
  

 

 

    

 

 

 

 

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A reconciliation of total segment information to consolidated amounts is as follows:

 

     Three Months Ended
October 31,
 
     2012     2011  
     (Amounts in thousands)  

Sales

    

Total sales for reportable segments

   $ 65,207      $ 71,539   

Other (1)

     129        —     
  

 

 

   

 

 

 

Net sales

   $ 65,336      $ 71,539   
  

 

 

   

 

 

 

Segment income from operations

    

Total segment income from operations

   $ 8,438      $ 7,884   

Other corporate expense (2)

     (1,334     (893
  

 

 

   

 

 

 

Operating income

     7,104        6,991   

Interest expense, net

     (411     (550

Other expense, net

     (50     (75
  

 

 

   

 

 

 

Income from continuing operations before income taxes

   $ 6,643      $ 6,366   
  

 

 

   

 

 

 

 

(1) Reflects fees from the transition services agreement in connection with the sale of the animal health business.
(2) 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.

11. Long-Term Obligations

The Company’s debt consisted of the following (in thousands):

 

     October 31,
2012
     July 31,
2012
 
     (Amounts in thousands)  

Senior secured debt

     

Note purchase agreement, maturing on December 31, 2014, interest rate of 7.43%

   $ 20,000       $ 20,000   

Secured debt

     

Revolving loan facility, maturing on December 31, 2016, variable interest rates based on LIBOR plus 2.00% (2.11% at October 31, 2012)

     2,000         4,000   
  

 

 

    

 

 

 

Total debt

     22,000         24,000   

Current maturities of long-term debt

     —           —     
  

 

 

    

 

 

 

Long-term debt, net of current maturities

   $ 22,000       $ 24,000   
  

 

 

    

 

 

 

To finance the acquisition of the electronic chemicals business in December 2007, the Company entered into an amended and restated credit agreement and a note purchase agreement with Wachovia Bank, National Association, a subsidiary of Wells Fargo & Co., Bank of America, N.A., The Prudential Insurance Company of America, and Pruco Life Insurance Company. The credit facility included a term loan facility and a revolving loan facility.

The Company amended these facilities in November 2011 to increase the amount that may be borrowed under the revolving loan to $60.0 million, extending the maturity to December 31, 2016 and allowing advances under the revolving loan facility without reference to a borrowing base restriction. The financial covenant for debt to capitalization was replaced by a current ratio minimum of 1.5 to 1.0. During the first quarter of fiscal year 2012, the Company paid off all outstanding advances under the credit facility’s term loan commitment, and in the November 2011 amendment, that aspect of the facility was deleted.

 

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The revolving loan bears interest at a varying rate of LIBOR plus a margin based on our funded debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”).

 

Ratio of Funded Debt to EBITDA

   Margin  

Equal to or greater than 3.0 to 1.0

     2.75

Equal to or greater than 2.5 to 1.0, but less than 3.0 to 1.0

     2.50

Equal to or greater than 2.0 to 1.0, but less than 2.5 to 1.0

     2.25

Equal to or greater than 1.5 to 1.0, but less than 2.0 to 1.0

     2.00

Less than 1.5 to 1.0

     1.75

Advances outstanding under the revolving loan bear interest at 2.11% as of October 31, 2012 (LIBOR plus 2.00%). The amount outstanding on the revolving loan at October 31, 2012 was $2.0 million.

Before the term loan facility was paid off and removed from the credit facility, the term facility required principal payments of $458,333 per month for the first 24 months, then, beginning January 2010, principal payments became $666,667 per month for the balance of the term prior to maturity. The purchase of the electronic chemical assets from General Chemical on March 29, 2010 was funded with available cash and borrowings on the revolving loan. During the first quarter of fiscal year 2012 the Company repaid the outstanding balance of the term loan with borrowings on the revolving loan. The Company used the proceeds received on the sale of its animal health business to repay $10.0 million of the balance on the revolving loan on March 2, 2012.

The financing for the acquisition of the electronic chemicals business in fiscal year 2008 included a $20.0 million note purchase agreement with the Prudential Insurance Company of America. Advances under the note purchase agreement mature December 31, 2014, and bear interest at 7.43% per annum. Principal is payable at maturity. At October 31, 2012, $20.0 million was outstanding under the note purchase agreement.

Loans under the amended and restated credit facility and the note purchase agreement are secured by the Company’s assets, including inventory, accounts receivable, equipment, intangible assets, and real property. The credit facility and the note purchase agreement have restrictive covenants, including that the Company must maintain a fixed charge coverage ratio of 1.5 to 1.0, a ratio of funded debt to EBITDA (as adjusted for extraordinary items, with lender consent) of 3.0 to 1.0, and a current ratio of at least 1.5 to 1.0.

12. 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 effective tax rate for continuing operations for the three months ended October 31, 2012 and 2011 was 36.7% and 39.3%, respectively. In general, differences between these effective tax rates and the rate of 35.0% are primarily due to foreign and state income taxes.

13. Litigation and Other Contingencies

The Company is subject to contingencies, including litigation relating to environmental laws and regulations, commercial disputes and other matters. Certain of these contingencies are discussed below. The ultimate resolution of these contingencies is subject to significant uncertainty, and should the Company fail to prevail in any of them or should several of them be resolved against the Company in the same reporting period, these matters could, individually or in the aggregate, be material to the consolidated financial statements. The ultimate outcome of these matters, however, cannot be determined at this time, nor can the amount of any potential loss be reasonably estimated, and as a result 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.

A lawsuit was filed against the Company’s wholly-owned subsidiary, KMG de Mexico, relating to the title to the land on which its facility in Matamoros is located. The plaintiffs claim that their title to the land is superior to the person from whom our subsidiary bought the land. The plaintiffs are seeking to have our subsidiary’s purchase overturned, and to recover the land and certain improvements or their value. The lawsuit was initially filed in 1998 in Matamoros, Mexico under Adolfo Cazares Rosas, et al vs. KMG de Mexico and Guillermo Villarreal. In January 2008, the case was sent by the appeals court back to the lower court to obtain additional factual information, and on April 20, 2009 the plaintiffs were required to re-file the case in the First Civil Court in Matamoros, Tamaulipas, Mexico as Adolfo Cazares, Luis Escudero and Juan Cue vs. KMG de Mexico and Guillermo Villarreal. In June 2011 the lower court ruled against KMG de Mexico, and held that the plaintiffs had superior title to the land, but that verdict was overturned on appeal in May 2012, and the case has been returned to the trial court for further action. The Company intends to continue to vigorously defend KMG de Mexico.

 

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The Company’s subsidiary in Italy is currently under examination by the taxing authority there for the period ended July 31, 2009. Adjustments were proposed by the taxing authority at the end of April 2011 that would result in approximately $1.6 million of additional income tax (including interest and penalties), if all the adjustments are sustained. The Company provided additional information in response to the proposed adjustments, and intends to vigorously defend its tax positions. The ultimate outcome of this examination is subject to uncertainty and no amount has been recorded in the consolidated financial statements.

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.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

We manufacture, formulate and distribute specialty chemicals globally. We operate businesses engaged in electronic chemicals and industrial wood treating chemicals. Our electronic chemicals are sold to the semiconductor industry, where they are used primarily to clean and etch silicon wafers in the production of semiconductors. Our wood treating chemicals, pentachlorophenol (“penta”) and creosote are used by our industrial customers primarily to extend the useful life of utility poles and railroad crossties.

Sale of the Animal Health Business

On March 1, 2012, we sold certain assets of our animal health business to Bayer Healthcare, LLC for a purchase price of approximately $10.2 million, including $1.0 million held in escrow. The escrowed amount is being held pending final acceptance by the United States Environmental Protection Agency of certain studies being performed at its request on tetrachlorvinphos. We retained the real estate and building at our facility in Elwood, Kansas, and we operate it to manufacture products for the buyer under a transition services agreement for one year, subject to two six-month extensions.

Results of Operations

Three Month Period Ended October 31, 2012 compared with Three Month Period Ended October 31, 2011

Segment Data

Segment data is presented for our two reportable segments for the three month periods ended October 31, 2012 and 2011. The segment data should be read in conjunction with our condensed consolidated financial statements and related notes thereto included elsewhere in this report. Our animal health business was sold in March 2012, and results of that former segment are included as discontinued operations. Prior year information has been reclassified to conform to the current period presentation.

 

     Three Months Ended
October 31,
 
     2012      2011  
     (Amounts in thousands)  

Sales

     

Electronic chemicals

   $ 39,507       $ 38,378   

Wood treating chemicals

     25,700         33,161   
  

 

 

    

 

 

 

Total sales for reportable segments

   $ 65,207       $ 71,539   
  

 

 

    

 

 

 

Net Sales

Segment net sales decreased $6.3 million, or 8.9%, to $65.2 million in the first quarter of fiscal year 2013 as compared to $71.5 million for the same period of the prior year. Although net sales in our electronic chemicals segment were up $1.1 million in the first quarter of fiscal year 2013 over the prior year period, that increase was offset by a $7.5 million decline in net sales in our wood treating chemicals segment.

In the first quarter of fiscal year 2013, the electronic chemicals segment had net sales of $39.5 million, an increase of $1.1 million, or 2.9%, as compared to $38.4 million for the prior year period. The first quarter sales for fiscal year 2013 were affected by weakening demand, particularly in Europe. We expect demand for our electronic chemicals products to decline in the second quarter of fiscal 2013 from first quarter levels before strengthening in the second half of the fiscal year in calendar 2013.

 

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Net sales of wood treating chemicals decreased $7.5 million, or 22.5%, to $25.7 million in the first quarter of fiscal year 2013 as compared to $33.2 million for the prior year period. The decrease in net sales for the quarter was due to a decrease in creosote sales volume. Creosote sales volume in the first quarter of fiscal 2013 was adversely impacted by customers pre-treating railroad ties with boron solutions as a way of reducing the amount of creosote needed. Some customers have adopted that practice as a way of holding down costs in response to higher creosote pricing. We anticipate further weakening of demand for wood treating chemicals in the second fiscal quarter before strengthening in the second half of fiscal 2013.

Gross Profit

Gross profit increased by $1.4 million, or 7.6%, to $20.1 million in the first quarter of fiscal year 2013 from $18.7 million in the same quarter of the prior year. Gross profit as a percentage of sales increased to 30.7% in the first quarter of fiscal year 2013 from 26.1% in the first quarter of fiscal year 2012. The increase in aggregate gross profit for the quarter was due to the completed integration of our fiscal 2010 acquisition in the electronic chemicals segment, and due to the reduced weighting of creosote in our overall product portfolio. Creosote is our lowest gross margin product, and sales of that product decline as a percentage of our total revenue, the decline has the effect of increasing our overall gross profit margin.

Other companies may include certain of the 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 increased to $7.1 million in the first quarter of fiscal year 2013 from $6.1 million in the prior year period, a 16.2% increase. Distribution expenses were approximately 10.8% and 8.5% of net sales for the first quarter of fiscal years 2013 and 2012, respectively. The increase in distribution expenses was primarily attributable to an increase in average freight costs and a decline in tender of performance by our lowest cost carrier.

Selling, General and Administrative Expenses

Selling, general, and administrative expenses increased $317,000, or 5.6%, to $5.9 million in the first quarter of fiscal year 2013 from $5.6 million in the same quarter of fiscal year 2012. Those expenses were 9.1% and 7.8% of net sales in the first quarter of fiscal years 2013 and 2012, respectively. The increase in the current period was due to $577,000 of additional project costs primarily for consulting and professional services.

Interest Expense, net

Interest expense was $411,000 and $550,000 in the first quarter of fiscal years 2013 and 2012, respectively. The decrease was due to lower borrowings on our loan facility in fiscal year 2013 as compared to the same period of the prior year, in part because we paid off the outstanding balance on our term loan under that facility in the first quarter of fiscal year 2012.

Income Taxes

Our effective tax rate for continuing operations was 36.7% and 39.3% in the first quarter of fiscal years 2013 and 2012, respectively.

Our Mexico subsidiary has undistributed earnings. It is our intention to continue to remain permanently reinvested in Mexico on its prior year cumulative undistributed earnings. Additionally, any undistributed earnings of the Italian subsidiary are considered to be permanently reinvested. Accordingly, no provision for United States income taxes has been provided with respect to undistributed earnings. Upon repatriation of those earnings, we will be subject to both United States income taxes (subject to an adjustment for foreign tax credits) and potentially withholding taxes payable to the foreign country.

Discontinued Operations

Discontinued operations reflected a loss, before income taxes, of $102,000 and $526,000 for the first quarter of fiscal year 2013 and 2012, respectively. We sold our animal health business in March 2012. In the first quarter of fiscal year 2013, we had certain post-closing adjustments related to that sale, and the loss in fiscal year 2012 included a first quarter loss of $483,000 from that business. We also incurred expense in each of the periods in connection with the dismantling of the production facility related to the agricultural chemical segment that was discontinued in fiscal year 2008.

 

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Liquidity and Capital Resources

Cash Flows

Net cash provided by operating activities was $6.3 million for the first three months of fiscal year 2013 as compared to $13.6 million for the comparable period in 2012. Net income adjusted for depreciation and amortization increased cash by $5.9 million in fiscal year 2013 as compared to $5.3 million over the same period of the prior year. Cash flows from operating activities during the current period were favorably impacted by $2.7 million due to a reduction in trade accounts receivable from lower sales in our electronic chemicals segment in the first quarter of fiscal year 2013 versus the fourth quarter of fiscal year 2012, and also favorably impacted by $1.9 million of increased accounts payable from the timing of payments and inventory purchases in our wood treating segment. Operating cash flows were unfavorably impacted by a $5.0 million increase in inventories primarily due to the timing of creosote purchases and, to a lesser extent, higher inventories in our electronic chemicals segment.

Net cash used by investing activities in the first quarter of fiscal 2013 was $1.5 million as compared to $1.8 million in the prior year period, in each case for additions to property, plant and equipment.

Net cash used in financing activities was $2.3 million in the first quarter of fiscal year 2013 as compared to $8.4 million in the prior year period. In the first three months of fiscal year 2013, we made payments of $2.0 million on our revolving loan. In the prior year period we made principal payments of $11.3 million on the term loan indebtedness to pay it off entirely, borrowed $6.1 million on our revolving loan, and cleared the book overdraft outstanding at July 31, 2011 of $2.9 million. The book overdraft represented the amount in excess of the bank cash balance necessary to fund the checks that were paid but not yet cleared.

In the three month periods ended October 31, 2012 and 2011, we paid dividends of $342,000 and $283,000, respectively. It is our policy to pay dividends from available cash after taking into consideration our profitability, capital requirements, financial condition, growth, business opportunities and other factors which our board of directors may deem relevant.

Working Capital

We have a revolving line of credit under an amended and restated credit agreement. At October 31, 2012, we had $2.0 million outstanding under that revolving facility.

Management believes that our current credit facility, combined with cash flows from operations, will adequately provide for our working capital needs for current operations for the next twelve months.

Long Term Obligations

To finance the acquisition of the electronic chemicals business in December 2007, we entered into a credit agreement and a note purchase agreement with Wachovia Bank, National Association, a subsidiary of Wells Fargo & Co., Bank of America, N.A., The Prudential Insurance Company of America, and Pruco Life Insurance Company. The credit facility included a revolving loan facility and a term loan facility.

We amended the credit agreement in November 2011, raising the maximum amount that may be borrowed under the revolving loan facility from $50.0 million to $60.0 million, extending the maturity date of the credit agreement to December 31, 2016 and allowing advances under the revolving loan facility without reference to a borrowing base restriction. The financial covenant for debt to capitalization was replaced by a current ratio minimum of 1.5 to 1.0. During the first quarter of fiscal year 2012 we paid off all outstanding advances under the credit facility’s term loan commitment, and in the November 2011 amendment, that aspect of the facility was deleted.

Advances under the revolving loan mature December 31, 2016. They each bear interest at varying rate of LIBOR plus a margin based on our funded debt to EBITDA, as described below.

 

Ratio of Funded Debt to EBITDA

   Margin  

Equal to or greater than 3.0 to 1.0

     2.75

Equal to or greater than 2.5 to 1.0, but less than 3.0 to 1.0

     2.50

Equal to or greater than 2.0 to 1.0, but less than 2.5 to 1.0

     2.25

Equal to or greater than 1.5 to 1.0, but less than 2.0 to 1.0

     2.00

Less than 1.5 to 1.0

     1.75

Advances under the revolving loan bear interest at 2.11% as of October 31, 2012 (LIBOR plus 2.00%). At October 31, 2012, $2.0 million was outstanding on the revolving facility.

 

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Before the term loan facility was paid off in October 2011, and removed from the credit facility, the term facility required principal payments of $458,333 per month for the first 24 months, then beginning January 2010 principal payments became $666,667 per month for the balance of the term prior to maturity. On March 2, 2012, we repaid $10.0 million of the balance on the revolving loan facility from proceeds received from the sale of the animal health business.

The financing for the acquisition of the electronic chemicals business in fiscal year 2008 included a $20.0 million note purchase agreement with the Prudential Insurance Company of America. Advances under the note purchase agreement mature December 31, 2014, and bear interest at 7.43% per annum. Principal is payable at maturity. At October 31, 2012, $20.0 million was outstanding under the note purchase agreement.

Loans under the amended and restated credit facility and the note purchase agreement are secured by our assets, including inventory, accounts receivable, equipment, intangible assets and real property. The credit facility and the note purchase agreement have restrictive covenants, including that we must maintain a fixed charge coverage ratio of 1.5 to 1.0, a ratio of funded debt to EBITDA of 3.0 to 1.0, and a current ratio of at least 1.5 to 1.0. For purposes of calculating these financial covenant ratios, we use a pro forma EBITDA. On October 31, 2012, 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

We are including the following discussion to inform our existing and potential security holders generally of some of the risks and uncertainties that can affect us and to take advantage of the “safe harbor” protection for forward-looking statements that applicable federal securities law affords. From time to time, our management or persons acting on our behalf make forward-looking statements to inform existing and potential security holders about our company. These forward-looking statements include information about possible or assumed future results of our operations. All statements, other than statements of historical facts, included or incorporated by reference in this report that address activities, events or developments that we expect or anticipate may occur in the future, including such things as future capital expenditures, business strategy, competitive strengths, goals, growth of our business and operations, plans and references to future successes may be considered forward-looking statements. Also, when we use words such as “anticipate,” “believe,” “estimate,” “intend,” “plan,” “project,” “forecast,” “may,” “should,” “budget,” “goal,” “expect,” “probably” or similar expressions, we are making forward-looking statements. Many risks and uncertainties may impact the matters addressed in these forward-looking statements. Our forward-looking statements speak only as of the date made and we will not update forward-looking statements unless the securities laws require us to do so.

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

 

  the loss of primary customers;

 

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

 

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

 

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

 

  the timing of planned capital expenditures;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

We are exposed to certain market risks in the ordinary course of our business, arising primarily from changes in interest rates and to a lesser extent foreign currency exchange rate fluctuations. 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, 2012. There has been no material change in that information.

 

ITEM 4. CONTROLS AND PROCEDURES

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

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.

PART II — OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

The information set forth in Note 13 to the condensed consolidated financial statements included in Item 1 of Part I of this report is incorporated herein by reference.

 

ITEM 1A. RISK FACTORS

There 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, 2012.

 

ITEM 5. OTHER INFORMATION

The Nominating and Corporate Governance Committee will consider recommendations for directors made by shareholders for fiscal year 2013, if such recommendations are received in writing, addressed to the chair of the committee, Mr. John C. Hunter, in care of the Company, at 9555 W. Sam Houston Parkway S., Suite 600, Houston, Texas 77099 by July 2, 2013.

 

ITEM 6. EXHIBITS

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.

 

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SIGNATURES

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/ J. Neal Butler        Date: December 10, 2012
  J. Neal Butler       
  President and Chief Executive Officer       
By:   /s/ John V. Sobchak        Date: December 10, 2012
  John V. Sobchak       
  Vice President and Chief Financial Officer       

 

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