Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended January 31, 2010
or
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o |
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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: 000-29278
KMG CHEMICALS, INC.
(Exact name of registrant as specified in its charter)
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Texas
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75-2640529 |
(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.) |
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9555 West Sam Houston Parkway South, Suite 600 |
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Houston, Texas
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77099 |
(Address of principal executive offices)
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(Zip Code) |
(713) 600-3800
(Registrants 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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of 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
o No o
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):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
As of March 11, 2010, there were 11,190,811 shares of the registrants common stock outstanding.
PART I FINANCIAL INFORMATION
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ITEM 1. |
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FINANCIAL STATEMENTS |
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands except for share and per share data)
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January 31, |
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July 31, |
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2010 |
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2009 |
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(unaudited) |
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ASSETS |
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CURRENT ASSETS: |
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Cash and cash equivalents |
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$ |
8,754 |
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$ |
7,174 |
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Accounts receivable: |
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Trade, net of allowances of $708 and $595 at January 31, 2010 and July 31, 2009, respectively |
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21,555 |
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21,206 |
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Other |
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2,105 |
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1,896 |
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Inventories, net |
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30,189 |
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28,163 |
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Current deferred tax assets |
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698 |
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698 |
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Prepaid expenses and other current assets |
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583 |
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1,638 |
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Total current assets |
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63,884 |
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60,775 |
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PROPERTY, PLANT AND EQUIPMENT, net |
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52,821 |
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54,834 |
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DEFERRED TAX ASSETS |
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920 |
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923 |
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GOODWILL |
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3,778 |
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3,778 |
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INTANGIBLE ASSETS, net |
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19,662 |
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20,149 |
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RESTRICTED CASH |
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203 |
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313 |
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OTHER ASSETS, net |
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2,726 |
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2,736 |
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TOTAL ASSETS |
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$ |
143,994 |
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$ |
143,508 |
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LIABILITIES & STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES: |
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Accounts payable |
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$ |
14,308 |
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$ |
16,606 |
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Accrued liabilities |
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4,108 |
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7,151 |
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Current deferred tax liabilities |
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324 |
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328 |
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Current portion of long-term debt |
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8,012 |
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6,966 |
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Total current liabilities |
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26,752 |
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31,051 |
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LONG-TERM DEBT, net of current portion |
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35,321 |
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39,326 |
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DEFERRED TAX LIABILITIES |
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1,471 |
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874 |
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OTHER LONG-TERM LIABILITIES |
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1,249 |
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1,280 |
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Total liabilities |
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64,793 |
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72,531 |
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COMMITMENTS AND CONTINGENCIES |
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STOCKHOLDERS EQUITY |
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Preferred stock, $.01 par value, 10,000,000 shares authorized, none issued |
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Common stock, $.01 par value, 40,000,000 shares authorized, 11,183,925 shares issued and
outstanding at January 31, 2010 and 11,101,345 shares issued and outstanding at July 31, 2009 |
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112 |
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111 |
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Additional paid-in capital |
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23,514 |
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23,084 |
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Accumulated other comprehensive loss |
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(1,810 |
) |
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(1,464 |
) |
Retained earnings |
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57,385 |
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49,246 |
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Total stockholders equity |
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79,201 |
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70,977 |
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TOTAL LIABILITIES AND STOCKHOLDERS EQUITY |
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$ |
143,994 |
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$ |
143,508 |
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See notes to consolidated financial statements.
2
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
(in thousands except for per share data)
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Three Months Ended |
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Six Months Ended |
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January 31, |
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January 31, |
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2010 |
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2009 |
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2010 |
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2009 |
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NET SALES |
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$ |
45,134 |
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$ |
44,207 |
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$ |
94,548 |
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$ |
96,440 |
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COST OF SALES |
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28,422 |
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30,471 |
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59,445 |
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67,174 |
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Gross Profit |
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16,712 |
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13,736 |
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35,103 |
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29,266 |
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SELLING, GENERAL AND ADMINISTRATIVE EXPENSES |
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9,788 |
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11,229 |
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20,229 |
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23,234 |
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Operating income |
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6,924 |
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2,507 |
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14,874 |
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6,032 |
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OTHER INCOME (EXPENSE): |
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Interest income |
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1 |
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4 |
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2 |
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6 |
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Interest expense |
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(535 |
) |
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(785 |
) |
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(1,092 |
) |
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(1,664 |
) |
Other, net |
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(71 |
) |
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(247 |
) |
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(99 |
) |
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(280 |
) |
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Total other expense, net |
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(605 |
) |
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(1,028 |
) |
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(1,189 |
) |
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(1,938 |
) |
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INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES |
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6,319 |
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1,479 |
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13,685 |
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4,094 |
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Provision for income taxes |
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(2,356 |
) |
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(572 |
) |
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(5,102 |
) |
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(1,571 |
) |
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INCOME FROM CONTINUING OPERATIONS |
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3,963 |
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|
907 |
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8,583 |
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2,523 |
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DISCONTINUED OPERATIONS |
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Loss from discontinued operations, before income taxes |
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(7 |
) |
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(7 |
) |
Income tax benefit |
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3 |
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3 |
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Loss from discontinued operations |
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(4 |
) |
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(4 |
) |
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NET INCOME |
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$ |
3,963 |
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$ |
903 |
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$ |
8,583 |
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$ |
2,519 |
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EARNINGS PER SHARE: |
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Basic |
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Income from continuing operations |
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$ |
0.36 |
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$ |
0.08 |
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$ |
0.77 |
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$ |
0.23 |
|
Loss from discontinued operations |
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Net income |
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$ |
0.36 |
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|
$ |
0.08 |
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$ |
0.77 |
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$ |
0.23 |
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Diluted |
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Income from continuing operations |
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$ |
0.35 |
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$ |
0.08 |
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$ |
0.75 |
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$ |
0.22 |
|
Loss from discontinued operations |
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Net income |
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$ |
0.35 |
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$ |
0.08 |
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$ |
0.75 |
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$ |
0.22 |
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WEIGHTED AVERAGE SHARES OUTSTANDING: |
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Basic |
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11,162 |
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|
11,083 |
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|
11,153 |
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|
11,076 |
|
Diluted |
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|
11,420 |
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|
11,221 |
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|
11,397 |
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|
11,222 |
|
See notes to consolidated financial statements.
3
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
|
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Six Months Ended |
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|
January 31, |
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|
2010 |
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|
2009 |
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CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income |
|
$ |
8,583 |
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$ |
2,519 |
|
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
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Depreciation and amortization |
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2,817 |
|
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|
3,388 |
|
Amortization of loan costs included in interest expense |
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|
44 |
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|
44 |
|
Stock-based compensation expense |
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|
212 |
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|
236 |
|
Bad debt expense |
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|
171 |
|
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|
133 |
|
Inventory valuation adjustment |
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|
(59 |
) |
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|
Deferred rental income |
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|
(43 |
) |
Deferred income tax expense (benefit) |
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|
589 |
|
|
|
(376 |
) |
Tax benefit from stock-based awards |
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|
(81 |
) |
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|
(34 |
) |
Changes in operating assets and liabilities, net of effects of acquisition: |
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Accounts receivable trade |
|
|
(584 |
) |
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|
8,252 |
|
Accounts receivable other |
|
|
(236 |
) |
|
|
(952 |
) |
Inventories |
|
|
(2,030 |
) |
|
|
(10,016 |
) |
Prepaid expenses and other current assets |
|
|
1,015 |
|
|
|
823 |
|
Accounts payable |
|
|
(2,277 |
) |
|
|
(3,752 |
) |
Accrued liabilities |
|
|
(2,948 |
) |
|
|
(546 |
) |
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
5,216 |
|
|
|
(324 |
) |
|
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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|
Additions to property, plant and equipment |
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|
(500 |
) |
|
|
(2,230 |
) |
Cash used in connection with the electronic chemicals acquisition |
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|
|
|
|
|
(3,257 |
) |
Change in restricted cash |
|
|
110 |
|
|
|
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|
Net cash used in investing activities |
|
|
(390 |
) |
|
|
(5,487 |
) |
|
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|
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|
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
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|
|
|
|
Net borrowings under revolver credit agreement |
|
|
|
|
|
|
11,766 |
|
Principal payments on borrowings on term loan |
|
|
(2,958 |
) |
|
|
(6,750 |
) |
Proceeds from exercise of stock options and warrants |
|
|
138 |
|
|
|
119 |
|
Tax benefit from stock-based awards |
|
|
81 |
|
|
|
34 |
|
Payment of dividends |
|
|
(445 |
) |
|
|
(443 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(3,184 |
) |
|
|
4,726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
EFFECT OF EXCHANGE RATE CHANGES ON CASH |
|
|
(62 |
) |
|
|
(275 |
) |
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS |
|
|
1,580 |
|
|
|
(1,360 |
) |
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD |
|
|
7,174 |
|
|
|
2,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
CASH AND CASH EQUIVALENTS AT END OF PERIOD |
|
$ |
8,754 |
|
|
$ |
1,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
|
|
|
|
|
|
|
|
Cash paid for interest |
|
$ |
1,060 |
|
|
$ |
1,665 |
|
Cash paid for income taxes |
|
$ |
7,183 |
|
|
$ |
653 |
|
See notes to consolidated financial statements.
4
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
(1) Basis of Presentation.
The (a) consolidated balance sheet as of July 31, 2009, which has
been derived from audited consolidated financial statements, and (b) the unaudited consolidated
financial statements included herein have been prepared pursuant to the rules and regulations of
the Securities and Exchange Commission (SEC) 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. Management 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 consolidated financial statements included herein should be read in
conjunction with the consolidated financial statements and notes thereto included in the Companys
Annual Report on Form 10-K for the year ended July 31, 2009.
These 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.
The Company has evaluated all events and transactions occurring after the balance sheet date
but before the financial statements were issued and has included the appropriate disclosures in
this Report.
(2) Business Acquisition.
On February 25, 2010, the Company entered into a definitive
agreement to acquire certain assets of General Chemical Performance Products, LLC (General
Chemical) for $25.5 million in cash and additional liabilities of approximately $850,000. The
cash amount includes an estimated $7.0 million for inventories. The acquisition, which will include
a 48,000 square foot manufacturing facility in Hollister, California, as well as the equipment
related to the business at Hollister and at General Chemicals Bay Point, California facility, is
scheduled to close upon the satisfaction of the closing conditions which should be completed before
the end of March 2010. The real estate and most employees at Bay Point will be retained by General
Chemical and after the closing, General Chemical will operate the Bay Point facility to produce
electronic chemicals for the Company under a long-term toll manufacturing agreement. The Company
plans to fund the acquisition with available cash and borrowings on the Companys revolving credit
facility.
(3) Recent Accounting Standards.
The Company has considered all recently issued Financial
Accounting Standards Board (FASB) accounting standards updates and
SEC rules and interpretative releases, and believes that only the following could
have a material impact on the Companys consolidated financial statements.
In June 2009, the FASB issued its Accounting Standards Codification (Codification) which
establishes the source of authoritative GAAP to be applied by nongovernmental entities. The
Codification was created by combining the various sources of then-existing non-SEC accounting and
reporting standards. Rules and interpretive releases of the SEC under authority of federal
securities laws are also sources of authoritative GAAP for SEC registrants. This guidance, which is
effective for financial statements issued for interim and annual periods ending after September 15,
2009, supersedes all then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification will become
non-authoritative. The Company adopted this guidance on August 1, 2009, which did not have a
material impact on its consolidated financial statements.
In November 2008, the FASB issued new accounting guidance for intangible assets acquired in a
business combination or asset acquisition that an entity does not intend to actively use but
intends to hold as defensive intangible assets to prevent others from obtaining access to them,
referred to as defensive intangible assets. Historically, these assets have been typically
allocated little or no value. Under this guidance defensive intangible assets are required to be
accounted for as a separate identifiable asset recognized at fair value with an assigned useful
life. The effective date of this guidance is for fiscal years beginning on or after December 15,
2008. The Company adopted this guidance on August 1, 2009, which did not have a material impact on
its financial statements, and will apply the requirements prospectively to intangible assets
acquired after the adoption date.
In April 2008, the FASB issued new accounting guidance for the determination of the useful
life of intangible assets. This guidance amends the factors an entity should consider when
developing renewal or extension assumptions for determining the useful life of recognized
intangible assets. The guidance is intended to improve the consistency between the useful life of
recognized intangible assets and the period of expected cash flows used to measure the fair value
of assets accounted for under guidance specific to business combinations and other GAAP. The
guidance also requires expanded disclosure related to an entitys intangible assets. The guidance
is effective for fiscal years beginning after December 15, 2008 and interim periods within those
fiscal years, and shall be applied prospectively to intangible assets recognized as of, and
subsequent to, the effective date. The Company adopted this guidance on August 1, 2009, which did
not have a material impact on its consolidated financial statements. It is the Companys policy to
expense costs as incurred in connection with the renewal or extension of its intangible assets.
5
In December 2007, the FASB issued new accounting guidance which establishes revised principles
and requirements for the recognition and measurement of assets and liabilities in a business
combination. This new guidance requires (i) recognition of the fair values of acquired assets and
assumed liabilities at the acquisition date, (ii) contingent consideration to be recorded at
acquisition date at fair value, (iii) transaction costs to be expensed as incurred, (iv)
pre-acquisition contingencies to be accounted for at acquisition date at fair value and (v) costs
of a plan to exit an activity or terminate or relocate employees to be accounted for as
post-combination costs. The FASB issued additional guidance in February 2009 which amended certain
provisions related to the accounting for contingencies in a business combination. The guidance
under these new issuances is effective for fiscal years beginning on or after December 15, 2008.
The Company adopted the new guidance on August 1, 2009, which did not have a material impact on its
consolidated financial statements, and will apply the requirements prospectively to business
combinations that occur after the date of adoption.
In September 2006, the FASB issued new accounting guidance for the accounting of fair value
measurements which defines fair value, establishes a framework for measuring fair value in GAAP and
expands disclosure about fair value measurements. In February 2008, the FASB issued additional
guidance which deferred the effective date of certain items under the September 2006 guidance
including nonfinancial assets and liabilities that are recognized or disclosed at fair value in the
financial statement on a non-recurring basis until fiscal years beginning after November 15, 2008.
The Company adopted the provisions of this new guidance for financial assets and liabilities and
nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually) effective August 1, 2008, which did not have an
material impact on its consolidated financial statements. The Company elected to apply the deferral
for nonfinancial assets and liabilities recognized or disclosed on a non-recurring basis, including
its goodwill, indefinite-lived intangibles and non-financial assets measured at fair value for
annual impairment assessment, and adopted this guidance on August 1, 2009 which did not have a
material impact on its consolidated financial statements.
(4) 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 potentially dilutive common shares. The
following table presents information necessary to calculate basic and diluted earnings per share
for the periods indicated:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(Amounts in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations |
|
$ |
3,963 |
|
|
$ |
907 |
|
|
$ |
8,583 |
|
|
$ |
2,523 |
|
Loss from discontinued operations |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
3,963 |
|
|
$ |
903 |
|
|
$ |
8,583 |
|
|
$ |
2,519 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - Basic |
|
|
11,162 |
|
|
|
11,083 |
|
|
|
11,153 |
|
|
|
11,076 |
|
Dilutive effect of options, warrants and stock awards |
|
|
258 |
|
|
|
138 |
|
|
|
244 |
|
|
|
146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding - Diluted |
|
|
11,420 |
|
|
|
11,221 |
|
|
|
11,397 |
|
|
|
11,222 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share from continuing operations |
|
$ |
0.36 |
|
|
$ |
0.08 |
|
|
$ |
0.77 |
|
|
$ |
0.23 |
|
Basic earnings per share on loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.36 |
|
|
$ |
0.08 |
|
|
$ |
0.77 |
|
|
$ |
0.23 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share from continuing operations |
|
$ |
0.35 |
|
|
$ |
0.08 |
|
|
$ |
0.75 |
|
|
$ |
0.22 |
|
Diluted earnings per share on loss from discontinued operations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.35 |
|
|
$ |
0.08 |
|
|
$ |
0.75 |
|
|
$ |
0.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6
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
potentially dilutive securities not included in the computation of diluted earnings per share for
the periods ended January 31, 2010 and during the first and second quarters of 2009 there were
31,868 and 58,990 stock based awards outstanding, respectively, that were not included in the
computation of diluted earnings per share.
(5) Inventories.
Inventories are summarized in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
July 31, |
|
|
|
2010 |
|
|
2009 |
|
Raw materials and supplies |
|
$ |
5,129 |
|
|
$ |
5,865 |
|
Finished products |
|
|
25,357 |
|
|
|
22,693 |
|
Less reserve for inventory obsolescence |
|
|
(297 |
) |
|
|
(395 |
) |
|
|
|
|
|
|
|
Inventories, net |
|
$ |
30,189 |
|
|
$ |
28,163 |
|
|
|
|
|
|
|
|
(6) Property, Plant and Equipment.
Property, plant and equipment and related accumulated
depreciation and amortization are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
July 31, |
|
|
|
2010 |
|
|
2009 |
|
Land |
|
$ |
8,855 |
|
|
$ |
8,946 |
|
Buildings and improvements |
|
|
30,565 |
|
|
|
30,546 |
|
Equipment |
|
|
27,366 |
|
|
|
26,679 |
|
Leasehold improvements |
|
|
132 |
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
66,918 |
|
|
|
66,324 |
|
Less accumulated depreciation and amortization |
|
|
(14,856 |
) |
|
|
(12,605 |
) |
|
|
|
|
|
|
|
|
|
|
52,062 |
|
|
|
53,719 |
|
Construction-in-progress |
|
|
759 |
|
|
|
1,115 |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
$ |
52,821 |
|
|
$ |
54,834 |
|
|
|
|
|
|
|
|
(7) Stock-Based Compensation.
The Company has stock-based incentive plans which are described
in more detail in note 12 to the consolidated financial statements in the Companys Annual Report
on Form 10-K for fiscal year 2009. The Company recognized stock-based compensation costs of
approximately $126,000 for each of the three months ended January 31, 2010 and 2009, and
approximately $212,000 and $236,000, respectively, for the six months ended January 31, 2010 and
2009 which are recorded as selling, general and administrative expenses in the consolidated
statements of income.
As of January 31, 2010, the unrecognized compensation costs related to outstanding stock-based
awards was approximately $506,000, including $48,000 related to outstanding unvested stock options
expected to be recognized over a weighted-average period of two years and $458,000 related to
unvested performance and time-based stock awards expected to be recognized over a weighted-average
period of approximately one year.
A summary of stock option and stock activity is presented below.
Stock Options and Warrants
A summary of activity for the six months ended January 31, 2010 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
Shares |
|
|
Exercise Price |
|
|
|
|
|
|
|
|
|
|
Outstanding on July 31, 2009 |
|
|
339,500 |
|
|
$ |
3.97 |
|
Granted |
|
|
|
|
|
|
|
|
Exercised |
|
|
(27,500 |
) |
|
|
5.00 |
|
Forfeited/Expired |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on January 31, 2010 |
|
|
312,000 |
|
|
|
3.88 |
|
|
|
|
|
|
|
|
7
The following table summarizes information about stock options outstanding at January 31, 2010
based on fully vested (currently exercisable) stock option awards and stock options awards expected
to vest:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Remaining |
|
|
Aggregate |
|
|
|
Options |
|
|
Average |
|
|
Contractual |
|
|
Intrinsic Value |
|
|
|
Outstanding |
|
|
Exercise Price |
|
|
Term (years) |
|
|
(in thousands) (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fully vested and currently exercisable |
|
|
232,000 |
|
|
$ |
3.73 |
|
|
|
4.73 |
|
|
$ |
2,325 |
|
Expected to vest |
|
|
80,000 |
|
|
|
4.32 |
|
|
|
12.03 |
|
|
|
754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding stock options |
|
|
312,000 |
|
|
|
3.88 |
|
|
|
6.60 |
|
|
$ |
3,079 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The aggregate intrinsic value is computed based on the closing price of the Companys stock
on January 29, 2010. |
No options were granted in the first six months of fiscal years 2010 or 2009.
The total intrinsic value of options/warrants exercised in the first six months of fiscal years 2010
and 2009 was approximately $282,000 and $119,000, respectively.
Performance Shares
During the six months ended January 31, 2010, there were no performance-based stock awards
vested or granted.
As of January 31, 2010, the outstanding performance-based stock awards consisted of Series 1
and Series 2 awards granted to certain executives in fiscal years 2009 and 2008, are summarized
below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Closing |
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum |
|
|
Stock Price |
|
|
3-Year |
|
Expected |
|
|
|
|
|
|
Series |
|
Award |
|
|
(Fair Value) |
|
|
Measurement |
|
Percentage of |
|
|
Shares Expected |
|
Date of Grant |
|
Award |
|
(Shares) |
|
|
on Grant Date |
|
|
Period Ending |
|
Vesting |
|
|
to Vest |
|
2009 Award |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/02/2008 |
|
Series 1 |
|
|
54,745 |
|
|
$ |
3.19 |
|
|
07/31/2011 |
|
|
68.75 |
% |
|
|
37,637 |
|
12/02/2008 |
|
Series 2 |
|
|
36,497 |
|
|
$ |
3.19 |
|
|
07/31/2011 |
|
|
20.0 |
% |
|
|
7,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91,242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
44,936 |
|
2008 Award |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
03/03/2008 |
|
Series 1 |
|
|
23,220 |
|
|
$ |
16.76 |
|
|
07/31/2010 |
|
|
52.5 |
% |
|
|
12,191 |
|
03/03/2008 |
|
Series 2 |
|
|
15,480 |
|
|
$ |
16.76 |
|
|
07/31/2010 |
|
|
0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,700 |
|
|
|
|
|
|
|
|
|
|
|
|
|
12,191 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
129,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
57,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series 1: Vesting for the 2009 and 2008 Series 1 awards are 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 estimated
quarterly using the Companys budget, actual results and long term projections. Based on
performance through January 31, 2010, 68.75% and 52.5% of the outstanding awards are projected to
vest for the 2009 and 2008 Series 1 awards, respectively, at the end of their measurement periods.
Series 2: Vesting of the 2009 and 2008 Series 2 awards are subject to performance requirements
pertaining to the growth rate in the Companys basic earnings per share over a three year period.
The achievement of performance requirements is estimated quarterly using the Companys budget,
actual results and long-term projections. Based on performance through January 31, 2010, 20.0% and
0% of the outstanding awards are projected to vest for the 2009 and 2008 Series 2 awards,
respectively at the end of their measurement periods.
The weighted-average grant-date fair value of performance awards outstanding at the beginning
and end of the six months ended January 31, 2010 was $6.09 per
share.
8
Time Based Shares
A summary of activity for time-based stock awards for the six months ended January 31, 2010 is
presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average |
|
|
|
|
|
|
|
Grant-Date |
|
|
|
Shares |
|
|
Fair Value |
|
Outstanding on July 31, 2009 |
|
|
31,959 |
|
|
$ |
6.61 |
|
Granted (1) |
|
|
21,944 |
|
|
|
15.95 |
|
Vested |
|
|
(20,100 |
) |
|
|
4.95 |
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding on January 31, 2010 |
|
|
33,803 |
|
|
$ |
13.66 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
The number of shares granted is related to the fiscal year 2010 non-employee director awards
noted below, and calculated based on the aggregate value of the award of $350,000 divided by the
Companys closing stock price on the date of grant on December 8, 2009. The number of shares
reflected here does not represent the actual number of shares expected to vest, since the shares
vested will be determined on the last trading day at the end of each three-month service period beginning
December 1, 2009. |
During the six months ended January 31, 2010, a grant was made to non-employee
directors under time-based awards whereby each non-employee director will be issued shares having a
value of $50,000 for service as a director for the twelve-month period ending November 30, 2010.
Each non-employee director shall be issued shares in quarterly installments for service as a
director in the preceding three months in an amount equal in value to $12,500 valued on the closing
price of the Companys stock price as of the last trading day of each three month service period
ending in February, May, August and November. The aggregate grant-date fair value of $350,000 for
the award will be recognized on a straight-line basis over the twelve-month requisite service
period beginning December 1, 2009.
The total fair value of shares vested during the six months ended January 31, 2010 and 2009
was approximately $99,000 and $68,000, respectively.
(8) Intangible Assets.
Intangible assets are summarized as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, 2010 |
|
|
|
Original |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Cost |
|
|
Amortization |
|
|
Amount |
|
Intangible assets subject to amortization: (range of useful life): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creosote supply contract (10 years) |
|
$ |
4,000 |
|
|
$ |
(3,556 |
) |
|
$ |
444 |
|
Other creosote related assets (5 years) |
|
|
131 |
|
|
|
(131 |
) |
|
|
|
|
Penta supply contract and other related assets (3-5 years) |
|
|
7,288 |
|
|
|
(7,282 |
) |
|
|
6 |
|
Animal health trademarks (4-5 years) |
|
|
364 |
|
|
|
(354 |
) |
|
|
10 |
|
Animal health product registrations and other related assets (5-20 years) |
|
|
6,165 |
|
|
|
(1,498 |
) |
|
|
4,667 |
|
Electronic chemicals-related contracts (3-5 years) |
|
|
1,014 |
|
|
|
(679 |
) |
|
|
335 |
|
Electronic chemicals-related trademarks and patents (10-15 years) |
|
|
117 |
|
|
|
(21 |
) |
|
|
96 |
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets subject to amortization |
|
$ |
19,079 |
|
|
$ |
(13,521 |
) |
|
|
5,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creosote product registrations and other creosote related assets |
|
|
|
|
|
|
|
|
|
|
5,339 |
|
Penta product registrations |
|
|
|
|
|
|
|
|
|
|
8,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
14,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net |
|
|
|
|
|
|
|
|
|
$ |
19,662 |
|
|
|
|
|
|
|
|
|
|
|
|
|
9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
July 31, 2009 |
|
|
|
Original |
|
|
Accumulated |
|
|
Carrying |
|
|
|
Cost |
|
|
Amortization |
|
|
Amount |
|
Intangible assets subject to amortization: (range of useful life): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creosote supply contract (10 years) |
|
$ |
4,000 |
|
|
$ |
(3,422 |
) |
|
$ |
578 |
|
Other creosote related assets (5 years) |
|
|
131 |
|
|
|
(129 |
) |
|
|
2 |
|
Penta supply contract and other related assets (3-5 years) |
|
|
7,288 |
|
|
|
(7,273 |
) |
|
|
15 |
|
Animal health trademarks (4-5 years) |
|
|
364 |
|
|
|
(349 |
) |
|
|
15 |
|
Animal health product registrations and other related assets (5-20 years) |
|
|
6,165 |
|
|
|
(1,328 |
) |
|
|
4,837 |
|
Electronic chemicals-related contracts (3-5 years) |
|
|
1,014 |
|
|
|
(516 |
) |
|
|
498 |
|
Electronic chemicals-related trademarks and patents (10-15 years) |
|
|
117 |
|
|
|
(17 |
) |
|
|
100 |
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets subject to amortization |
|
$ |
19,079 |
|
|
$ |
(13,034 |
) |
|
|
6,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Creosote product registrations and other creosote related assets |
|
|
|
|
|
|
|
|
|
|
5,339 |
|
Penta product registrations |
|
|
|
|
|
|
|
|
|
|
8,765 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets not subject to amortization |
|
|
|
|
|
|
|
|
|
|
14,104 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total intangible assets, net |
|
|
|
|
|
|
|
|
|
$ |
20,149 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization are amortized over their estimated useful lives.
Amortization expense was approximately $244,000 and $549,000 for the three month periods ended
January 31, 2010 and 2009, respectively and $487,000 and $1.3 million for the six month periods
ended January 31, 2010 and 2009, respectively.
(9) Dividends.
Dividends of approximately $223,000 ($0.02 per share) and $222,000 ($0.02 per
share) were declared and paid in the second quarter of fiscal years 2010 and 2009, respectively.
Dividends of approximately $445,000 ($.04 per share) and $443,000 ($0.04 per share) were declared
and paid in the first six months of fiscal years 2010 and 2009, respectively.
(10) Comprehensive Income (Loss).
The Companys other comprehensive income (loss) includes
foreign currency translation gains and losses which are recognized as accumulated other
comprehensive income (loss) in the consolidated balance sheets. The following table summarizes
total comprehensive income (loss) for the applicable periods (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Net income |
|
$ |
3,963 |
|
|
$ |
903 |
|
|
$ |
8,583 |
|
|
$ |
2,519 |
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net foreign currency translation loss |
|
|
(1,372 |
) |
|
|
(472 |
) |
|
|
(346 |
) |
|
|
(4,706 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
2,591 |
|
|
$ |
431 |
|
|
$ |
8,237 |
|
|
$ |
(2,187 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
10
(11) Segment Information.
The Company operates five reportable segments organized around its
three product lines: wood preserving chemicals, animal health pesticides and electronic chemicals.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(Amounts in thousands) |
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic Chemicals North America (1) |
|
$ |
18,365 |
|
|
$ |
17,513 |
|
|
$ |
36,444 |
|
|
$ |
38,743 |
|
Electronic Chemicals International (2) |
|
|
4,529 |
|
|
|
4,104 |
|
|
|
9,461 |
|
|
|
9,068 |
|
Penta |
|
|
5,107 |
|
|
|
5,842 |
|
|
|
11,050 |
|
|
|
12,969 |
|
Creosote |
|
|
14,670 |
|
|
|
14,507 |
|
|
|
34,197 |
|
|
|
32,038 |
|
Animal Health |
|
|
2,463 |
|
|
|
2,241 |
|
|
|
3,396 |
|
|
|
3,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales for reportable segments |
|
$ |
45,134 |
|
|
$ |
44,207 |
|
|
$ |
94,548 |
|
|
$ |
96,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic Chemicals North America |
|
$ |
748 |
|
|
$ |
638 |
|
|
$ |
1,443 |
|
|
$ |
1,264 |
|
Electronic Chemicals International |
|
|
210 |
|
|
|
190 |
|
|
|
411 |
|
|
|
384 |
|
Penta |
|
|
154 |
|
|
|
457 |
|
|
|
309 |
|
|
|
1,094 |
|
Creosote |
|
|
69 |
|
|
|
75 |
|
|
|
139 |
|
|
|
149 |
|
Animal Health |
|
|
191 |
|
|
|
190 |
|
|
|
383 |
|
|
|
379 |
|
Other general corporate |
|
|
66 |
|
|
|
60 |
|
|
|
132 |
|
|
|
118 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total consolidated depreciation and amortization |
|
$ |
1,438 |
|
|
$ |
1,610 |
|
|
$ |
2,817 |
|
|
$ |
3,388 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income (loss) from operations (3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic Chemicals North America |
|
$ |
2,594 |
|
|
$ |
1,192 |
|
|
$ |
3,924 |
|
|
$ |
2,750 |
|
Electronic Chemicals International |
|
|
443 |
|
|
|
276 |
|
|
|
591 |
|
|
|
244 |
|
Penta |
|
|
1,558 |
|
|
|
1,453 |
|
|
|
4,035 |
|
|
|
3,187 |
|
Creosote |
|
|
4,480 |
|
|
|
1,874 |
|
|
|
11,206 |
|
|
|
4,168 |
|
Animal Health |
|
|
133 |
|
|
|
(330 |
) |
|
|
(290 |
) |
|
|
(538 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income from operations |
|
$ |
9,208 |
|
|
$ |
4,465 |
|
|
$ |
19,466 |
|
|
$ |
9,811 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
July 31, |
|
|
|
2010 |
|
|
2009 |
|
Assets |
|
|
|
|
|
|
|
|
Electronic Chemicals North America |
|
$ |
47,864 |
|
|
$ |
49,610 |
|
Electronic Chemicals International |
|
|
27,448 |
|
|
|
26,258 |
|
Penta |
|
|
20,359 |
|
|
|
20,169 |
|
Creosote |
|
|
19,016 |
|
|
|
18,894 |
|
Animal Health |
|
|
17,451 |
|
|
|
17,157 |
|
|
|
|
|
|
|
|
Total assets for reportable segments |
|
$ |
132,138 |
|
|
$ |
132,088 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Net of intersegment transactions of $20,000 and $19,000 for the three and six month periods
ended January 31, 2010, respectively, and $10,000 and $101,000 for the three and six month
periods ended January 31, 2009, respectively, which were eliminated in consolidated sales. |
|
(2) |
|
Net of intersegment transactions of $260,000 and $605,000 for the three and six month periods
ended January 31, 2010, respectively, and $127,000 and $361,000 for the three and six month
periods ended January 31, 2009, respectively, which were eliminated in consolidated sales. |
|
(3) |
|
Certain reclassifications of prior year amounts have been made to conform to current year
presentation. |
11
A reconciliation of total segment information to consolidated amounts is as follows:
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
July 31, |
|
|
|
2010 |
|
|
2009 |
|
|
|
(Amounts in thousands) |
|
Assets: |
|
|
|
|
|
|
|
|
Total assets for reportable segments |
|
$ |
132,138 |
|
|
$ |
132,088 |
|
Total assets for discontinued operations (1) |
|
|
784 |
|
|
|
856 |
|
Cash and cash equivalents |
|
|
7,595 |
|
|
|
6,613 |
|
Prepaid and other current assets |
|
|
623 |
|
|
|
1,070 |
|
Other |
|
|
2,854 |
|
|
|
2,881 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
143,994 |
|
|
$ |
143,508 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales for reportable segments |
|
$ |
45,134 |
|
|
$ |
44,207 |
|
|
$ |
94,548 |
|
|
$ |
96,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales |
|
$ |
45,134 |
|
|
$ |
44,207 |
|
|
$ |
94,548 |
|
|
$ |
96,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment income from operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total segment income from operations (2) |
|
$ |
9,208 |
|
|
$ |
4,465 |
|
|
$ |
19,466 |
|
|
$ |
9,811 |
|
Other corporate expense (2) |
|
|
(2,284 |
) |
|
|
(1,958 |
) |
|
|
(4,592 |
) |
|
|
(3,779 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
6,924 |
|
|
|
2,507 |
|
|
|
14,874 |
|
|
|
6,032 |
|
Interest income |
|
|
1 |
|
|
|
4 |
|
|
|
2 |
|
|
|
6 |
|
Interest expense |
|
|
(535 |
) |
|
|
(785 |
) |
|
|
(1,092 |
) |
|
|
(1,664 |
) |
Other expense, net |
|
|
(71 |
) |
|
|
(247 |
) |
|
|
(99 |
) |
|
|
(280 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
|
$ |
6,319 |
|
|
$ |
1,479 |
|
|
$ |
13,685 |
|
|
$ |
4,094 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes approximately $784,000 and $830,000 as of January 31, 2010 and July 31, 2009,
respectively, of long-term deferred tax assets related to discontinued operations. |
|
(2) |
|
Certain reclassifications of prior year amounts have been made to conform to current year
presentation. |
Other corporate expenses as disclosed in the table above represent those expenses that could
not be directly identified with a particular business segment. Those expenses include acquisition
transaction costs and almost all expenses associated with the Companys Houston headquarters, such
as executives and other employees, outside legal and accounting services, board compensation,
expenses associated with being a publicly traded entity, audit expense and fees related to the
listing of our stock.
(12) Long-Term Obligations.
The Companys debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
January 31, |
|
|
July 31, |
|
|
|
2010 |
|
|
2009 |
|
Senior Secured Debt: |
|
|
|
|
|
|
|
|
Note Purchase Agreement, maturing on December 31, 2014, interest rate of 7.43% |
|
$ |
20,000 |
|
|
$ |
20,000 |
|
Secured Debt: |
|
|
|
|
|
|
|
|
Term Loan Facility, maturing on December 31, 2012, variable interest rates
based on LIBOR plus 1.75% (1.98% at January 31, 2010) |
|
|
23,333 |
|
|
|
26,292 |
|
Revolving Loan Facility, maturing on December 31, 2012, variable interest
rates based on LIBOR plus 1.75% (1.98% at January 31, 2010) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
43,333 |
|
|
|
46,292 |
|
Current portion of long-term debt |
|
|
(8,012 |
) |
|
|
(6,966 |
) |
|
|
|
|
|
|
|
Long-term debt, net of current portion |
|
$ |
35,321 |
|
|
$ |
39,326 |
|
|
|
|
|
|
|
|
12
To finance the acquisition of the electronic chemicals business in fiscal year 2008, the
Company entered into an amended and restated credit agreement and a note purchase agreement. The
new credit agreement replaced and refinanced the Companys existing credit agreement with Wachovia
Bank, National Association, a subsidiary of Wells Fargo & Co. The credit facility included a
revolving loan facility of $35.0 million and a term loan facility of $35.0 million. The amended and
restated facility was entered into with Wachovia Bank, National Association, Bank of America, N.A.,
The Prudential Insurance Company of America, and Pruco Life Insurance Company. Advances under the
revolving loan and the term loan mature on December 31, 2012. They each bear interest at
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 |
% |
Currently, advances on the revolving facility and the term loan facility bear interest at
1.98% per annum (LIBOR plus 1.75%). The current facility refinanced $7.4 million of indebtedness
then outstanding under the Companys existing term loan facility with Wachovia Bank. For the first
24 months of the term facility, principal payments were $458,333 per month and then beginning in
January 2010 principal payments are $666,667 per month for the balance of the term prior to
maturity. At January 31, 2010, there was no amount outstanding on the revolving facility, and the
amount outstanding on the term loan was $23.3 million.
The Company also entered into a $20.0 million note purchase agreement with the Prudential
Insurance Company of America. Advances under the note purchase agreement mature on December 31,
2014, and bear interest at 7.43% per annum. Principal is payable at maturity. At January 31, 2010,
$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 Companys 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,
and a ratio of funded debt to EBITDA as amended effective January 30, 2009, of 3.5 to 1.0 through
January 31, 2009, 3.25 to 1.0 from February 1, 2009 through April 30, 2009 and 3.0 to 1.0
thereafter. The Company is also obligated to maintain a debt to capitalization ratio of not more
than 50% until April 30, 2010, and 45% thereafter. For purposes of calculating these financial
covenant ratios, the Company uses a pro forma EBITDA, but adds back extraordinary or non-recurring
expense or loss as may be approved by our lenders. On January 31, 2010, the Company was in
compliance with all of its debt covenants.
The Companys purchase of certain pentachlorophenol assets from Basic Chemical Company in
fiscal 2006 was financed in part by a $10.0 million loan from the seller. The indebtedness was
payable in five equal annual installments of $2.0 million plus interest at 4% per annum. That
indebtedness was paid in full on October 30, 2008.
(13) Discontinued Operations.
In fiscal year 2008 the Company discontinued operations of its
herbicide product line that had comprised the agricultural chemical segment. During the three and
six months ended January 31, 2009, there were no sales reported in discontinued operations, and the
Company reported a net loss from discontinued operations of $4,000. No amounts were recorded for
the three and six months ended January 31, 2010.
|
|
|
ITEM 2. |
|
MANAGEMENTS 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, industrial wood preservation chemicals and animal health
pesticides. Our electronic chemicals are used in the manufacturing of semiconductors. Our wood
preserving chemicals, pentachlorophenol (penta) and creosote, are used by our industrial
customers primarily to extend the useful life of utility poles and railroad crossties. Our animal
health pesticides are used on cattle, other livestock and poultry to protect the animals from flies
and other pests.
On February 25, 2010, we entered into a definitive purchase and sale agreement with General
Chemical Performance Products, LLC (GenChem) to acquire certain chemical manufacturing equipment
at Hollister, CA and at Pittsburg, CA (Bay Point), and a facility at Hollister, CA for a total cash
purchase price of $25.5 million plus additional liabilities of approximately $850,000. The purchase
price includes inventory estimated at $7.0 million. The assets comprise the high purity process
chemicals business of GenChem, a leading supplier of high purity wet process chemicals to the
semiconductor industry. The acquisition, which is expected to close in March 2010, is subject to
customary closing conditions. A copy of the purchase and sale agreement is attached to this Report
on Form 10-Q as Exhibit 2.5.
13
Results of Operations
Three and Six Month Periods Ending January 31, 2010 compared with Three and Six Month Periods
Ending January 31, 2009
Segment Data
Segment data is presented for our five reportable segments for the three and six month periods
ended January 31, 2010 and 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
January 31, |
|
|
January 31, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
(Amounts in thousands) |
|
Sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic Chemicals North America |
|
$ |
18,365 |
|
|
$ |
17,513 |
|
|
$ |
36,444 |
|
|
$ |
38,743 |
|
Electronic Chemicals International |
|
|
4,529 |
|
|
|
4,104 |
|
|
|
9,461 |
|
|
|
9,068 |
|
Penta |
|
|
5,107 |
|
|
|
5,842 |
|
|
|
11,050 |
|
|
|
12,969 |
|
Creosote |
|
|
14,670 |
|
|
|
14,507 |
|
|
|
34,197 |
|
|
|
32,038 |
|
Animal Health |
|
|
2,463 |
|
|
|
2,241 |
|
|
|
3,396 |
|
|
|
3,622 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sales for reportable segments |
|
$ |
45,134 |
|
|
$ |
44,207 |
|
|
$ |
94,548 |
|
|
$ |
96,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The segment data should be read with our consolidated financial statements and related notes
thereto included elsewhere in this report.
Net Sales
Net sales increased $927,000, or 2.1%, to $45.1 million in the second quarter of fiscal year
2010 as compared with $44.2 million for the same period of the prior year. For the first six months
of fiscal year 2010, however, net sales were down $1.9 million, a decline of 2.0%, to $94.5 million
from $96.4 million for the same period in the prior fiscal year. Although electronic chemical sales
have not recovered fully from the downturn they experienced beginning in the second quarter of
fiscal year 2009, sales of electronic chemicals in North America and internationally improved in
the second quarter of fiscal year 2010 as compared with the same quarter in fiscal year 2009.
Improved net sales in our creosote segment in the first six months of fiscal year 2010 were offset
by a decline in sales in our penta segment.
In the second quarter of fiscal year 2010, the electronic chemicals North America segment had
net sales of $18.4 million, an increase of $852,000, or 4.9%, as compared to the prior year period.
For the first six months of fiscal year, electronic chemical sales in North America were down as
compared to fiscal year 2009 by $2.3 million, a decline of 5.9%, to $36.4 million from
$38.7 million. Our electronic chemicals international segment had net sales of $4.5 million in the
second quarter of fiscal year 2010 as compared to $4.1 million for the prior year, an improvement
of $425,000, or 10.4%. The segment improved $393,000 in fiscal year 2010 for the full six months
over the prior year to $9.5 million from $9.1 million, a 4.3% improvement. Because of the
world-wide economic downturn, demand softened in both of our electronic chemicals segments
beginning in the second quarter of fiscal year 2009. We have seen improvement in both electronic
chemical segments in fiscal year 2010, and we are cautiously optimistic about market conditions for
the latter half of fiscal year 2010.
Net sales of penta products decreased $735,000, or 12.6%, to $5.1 million in the second
quarter of fiscal year 2010 as compared to net sales of $5.8 million in the prior year period. In
the first six months of fiscal year 2010, penta sales declined to $11.1 million from $13.0 million,
a decrease of $1.9 million, or 14.8%. The decrease in sales for the quarter and for the six month
period was from lower volume as we have seen a lessening of utility pole treating in response to
overall economic conditions. Additionally, the first quarter of fiscal year 2009 was an especially
strong quarter for penta sales, so the comparison for the six month period shows a particularly
marked decline.
Creosote net sales increased in the second quarter of fiscal year 2010, as compared with the
prior year period, by $163,000, or 1.1%, to $14.7 million from $14.5 million. Higher prices (and
particularly sales of a higher priced product mix) were partially offset by a significant volume
decline of approximately 18.3% in the second quarter as compared with the prior year period as the
rate of railroad tie replacement by major railroads continued at reduced levels. In the full six
months period, creosote net sales were up $2.2 million, or 6.7%, to $34.2 million from
$32.0 million in fiscal year 2009, again based on higher prices offset by a reduction in volume of
about 17.6%. We saw an overall decrease in volume in the latter half of fiscal year 2009, and since
then demand by railroads for crossties treated with creosote has been down from the top of the
historical range where it had been for several years. Railroads generally react to lessened rail
traffic by slowing maintenance programs. In addition to a reduced demand by the major railroads, a
large creosote customer purchased significant quantities of creosote from a source outside the
United States in the second quarter, and we anticipate that it may continue to do so in the
remainder of the fiscal year. That customer has also announced that it
plans to expand its wood treating capacity by purchasing the facilities of another large
customer.
14
Net sales of animal health pesticides increased by $222,000, or 9.9%, to $2.5 million in
the second quarter of fiscal year 2010 as compared with $2.2 million in the prior year period. For
the first six months of fiscal year 2010, net sales of animal health products were down $226,000,
or 6.2%, to $3.4 million from $3.6 million in the prior year. Seasonal usage of animal health
pesticides is dependent on varying seasonal patterns, weather conditions and weather-related
pressure from pests, as well as customer marketing programs and requirements. Although energy
prices have dropped significantly from recent highs, our farm and livestock customers continue to
be impacted by the effect of high costs for feed, fuel, and fertilizer. Our revenue from the animal
health pesticides segment is seasonal and weighted to the third and fourth fiscal quarters.
Revenues from products subject to significant seasonal variations represented less than 6.0% of our
fiscal year 2009 revenues.
Gross Profit
Gross profit increased by $3.0 million, or 21.7%, to $16.7 million in the second quarter of
fiscal year 2010 from $13.7 million in the same quarter the prior year. Gross profit increased by
$5.8 million, or 19.9%, to $35.1 million in the first six months of fiscal year 2010 from
$29.3 million in the same period of the prior year. Gross profit as a percentage of sales increased
to 37.0% in the second quarter of fiscal year 2010 from 31.1% in fiscal year 2009, and increased to
37.1% for the full six months of fiscal year 2010 from 30.3% in the prior year period. The improved
gross profit was mainly attributable to our creosote segment where we experienced a shift in sales
to a higher margin product in response to a temporary shortage of domestically produced creosote.
We believe that the temporary shortage has been alleviated. It is also worth noting that gross
profit margins in the first quarter of fiscal year 2009 were depressed by the rapid increase in
commodity prices that comprised our input costs, resulting in a more marked improvement in margins
in fiscal year 2010.
Other companies may include certain of the costs that we record in cost of sales as selling,
general and administrative expenses, and may include certain of the costs that we record in
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.
Selling, General and Administrative Expenses
Selling, general, and administrative expenses decreased $1.4 million in the second quarter of
fiscal year 2010 to $9.8 million, or 21.7% of net sales, from $11.2 million, or 25.4% of net sales,
for the same quarter of the prior fiscal year. Selling, general, and administrative expenses
decreased $3.0 million in the first six months of fiscal year 2010 to $20.2 million, or 21.4% of
net sales, from $23.2 million, or 24.1% of net sales, for the same period of the prior fiscal year.
Selling, general and administrative expenses associated with our two electronic chemicals
segments decreased approximately $1.0 million, to $5.5 million, in the second quarter of fiscal
year 2010 as compared to $6.5 million for the second quarter of fiscal year 2009, and decreased
$2.6 million, to $11.5 million, in the first six months of fiscal year 2010 compared to
$14.1 million in the first six months of fiscal year 2009.
We acquired our electronic chemicals business in December 2007 and incurred substantial
transitional services expense with the seller of that business until the end of September 2008, as
well as incurring fees to consultants assisting in the integration of the business. The
transitional services expense we incurred with the seller in the first two months of fiscal year
2009 came while we built and staffed our post-transition infrastructure. We incurred non-recurring
fees to consultants assisting in the transition of approximately $434,000 in the first quarter of
fiscal year 2009 and believe that the redundant systems added approximately $600,000 in additional
expense in the first six months of fiscal year 2009.
Additionally, distribution expenses in our two electronic chemicals segments, which are
included as a sales expense, decreased by approximately $1.0 million, to $3.5 million in the second
quarter of the current period as compared to $4.5 million in the same period a year ago, and
decreased $2.0 million, to $7.7 million from $9.7 million for the first six months of fiscal year
2009. The reduction in distribution expenses for both the three and six months ended January 31,
2010 as compared to the same prior year periods was primarily due to lower storage, handling,
packaging and freight costs resulting from improved efficiencies in our electronic chemicals
business supply chain. Distribution expenses as a percentage of aggregate net sales for our
electronic chemicals segments for the six months ended January 31, 2010 and 2009 was approximately
16.9% and 20.4%, respectively.
15
Outside of electronic chemicals, amortization expenses were lower by approximately $300,000
and $790,000 in the three and six months ended January 31, 2010 as compared with the prior year
period, because certain penta segment assets that we acquired in an earlier acquisition were fully
amortized by January 2009. Distribution expenses for our wood preservative chemicals and animal health segments, which represented approximately 3.4% and 3.3% of the aggregate net sales of
those segments in the six months ended January 31, 2010 and 2009, respectively, were flat in the
current period as compared to the same period a year ago.
Other corporate expenses for the second quarter of fiscal year 2010 increased by $326,000
compared to the same period in fiscal year 2009, and increased by $813,000 in the six months ended
January 31, 2010 compared to the same period in fiscal year 2009. The increase was due primarily
to an increase in other professional services and employee related costs. In the second quarter of
fiscal year 2010, we incurred expense of $315,000 related to our proposed acquisition of certain
electronic chemicals assets from GenChem.
Interest Expense
Interest expense was $535,000 in the second quarter of fiscal year 2010 as compared with
$785,000, in the same period of fiscal year 2009. Interest expense was $1.1 million and
$1.7 million for the six month period ended January 31, 2010 and 2009, respectively. The decrease
was due to principal reductions on the indebtedness we incurred to fund the acquisition of the
electronic chemicals business in fiscal year 2008 and the acquisition of certain penta assets in
fiscal year 2005.
Income Taxes
Our effective tax rate was 37.3% and 38.7% in the second quarter of fiscal years 2010 and
2009, respectively, and 37.3% and 38.4% in the first six months of fiscal years 2010 and 2009,
respectively.
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities was $5.2 million for the first six months of fiscal
year 2010 and net cash used in operating activities was $324,000 for the first six months of fiscal
year 2009. Net income adjusted for depreciation and amortization increased cash to $11.4 million
in the first six months of fiscal year 2010. Cash was unfavorably impacted by changes in certain
operating assets and liabilities, including decreases of $2.3 million and $2.9 million in accounts
payable and accrued liabilities, respectively, and an increase of $2.0 million in inventory. The
decrease in accounts payable was primarily related to the timing of vendor payments in connection
with creosote purchases, while the decrease in accrued liabilities was due to second quarter tax
payments. Cash was favorably impacted by a decrease of $1.0 million in prepaid expenses and other
current assets, mainly due to amortization of prepaid insurance.
Net cash used in investing activities in the first six months of fiscal 2010 was $390,000 as
compared with $5.5 million in the prior year period. We made additions to property, plant and
equipment of $500,000 during the first six months of fiscal year 2010 primarily in our electronic
chemicals segments as compared to $2.2 million in the first six months of fiscal year 2009 when we
incurred $1.2 million for purchases of software and shipping containers for our electronic
chemicals business and $496,000 for the purchase of additional land adjacent to our facility in
Matamoros. We also spent $2.9 million in the first six months of fiscal year 2009 to purchase
additional inventory and accounts receivable in Israel pertaining to our acquisition of the
electronic chemicals business.
In the first six months of fiscal year 2010, we made principal payments of $3.0 million on the
term loan indebtedness we incurred when we purchased the electronic chemicals business. In the
first six months of fiscal year 2009, we made principal payments of $6.8 million on our
indebtedness which included $2.8 million related to debt incurred when we purchased the electronic
chemicals business, and $4.0 million of principal outstanding on seller-financed indebtedness
incurred when we purchased certain penta assets in fiscal year 2006. In the first six months of
fiscal year 2009 we had $11.8 million of net borrowings on our revolving loan facility. We paid
dividends of $445,000 and $443,000 in the first six months of fiscal years 2010 and 2009,
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 January
31, 2010, we had no amount outstanding under that revolving facility, and our net borrowing base
availability was $25.4 million. 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.
16
Long Term Obligations
To finance the acquisition of the electronic chemicals business in fiscal year 2008, we entered into an amended
and restated credit agreement and a note purchase agreement. The new credit agreement replaced and
refinanced our existing credit agreement with Wachovia Bank, National Association, a subsidiary of
Wells Fargo Company. The new credit facility included a revolving loan facility of $35.0 million
and a term loan facility of $35.0 million. The amended and restated facility was entered into with
Wachovia Bank, National Association, Bank of America, N.A., The Prudential Insurance Company of
America, and Pruco Life Insurance Company. Advances under the revolving loan and the term loan
mature on December 31, 2012. They each bear interest at varying rate of LIBOR plus a margin based
on our funded debt to 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 |
% |
Currently, advances on the revolving facility and the term loan facility bear interest at
1.98% per annum (LIBOR plus 1.75%). Through December 31, 2009 principal payments on the term loan
were $458,333 per month, and then beginning in January 2010 principal payments are $666,667 per
month for the balance of the term prior to maturity. At January 31, 2010, we had no amount
outstanding on the revolving facility, and the amount outstanding on the term loan was
$23.3 million.
We plan to fund the pending GenChem acquisition with available cash and borrowings under the
revolving facility.
We also entered into a $20.0 million note purchase agreement with the Prudential Insurance
Company of America. Advances under the note purchase agreement mature on December 31, 2014, and
bear interest at 7.43% per annum. Principal is payable at maturity. At January 31, 2010, $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 maintaining a fixed charge coverage ratio of 1.5 to 1.0, and a ratio of funded debt to
EBITDA, as amended effective January 30, 2009, of 3.5 to 1.0 through January 31, 2009, 3.25 to 1.0
from February 1, 2009 through April 30, 2009, and 3.0 to 1.0 thereafter. We must also maintain a
debt to capitalization ratio of not more than 50% until April 30, 2010, and 45% thereafter. For
purposes of calculating these financial covenant ratios, we use a pro forma EBITDA, but add back
extraordinary or non-recurring expense or loss as may be approved by our lenders. On
January 31, 2010, we were in compliance with all our debt covenants.
Our purchase of certain penta assets from Basic Chemical Company in fiscal year 2006 was
financed in part by a $10.0 million loan from the seller. The indebtedness was payable in five
equal annual installments of $2.0 million plus interest at 4% per annum. That indebtedness was paid
in full on October 30, 2008.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, such as financing or unconsolidated variable
interest entities.
Recent Accounting Standards
In June 2009, the Financial Accounting Standards Board (FASB) issued its Accounting
Standards Codification (Codification) which establishes the source of authoritative accounting
principles generally accepted in the United States of America (GAAP) to be applied by
nongovernmental entities. The Codification was created by combining the various sources of
then-existing non-Securities and Exchange Commission (SEC) accounting and reporting standards.
Rules and interpretive releases of the SEC under authority of federal securities laws are also
sources of authoritative GAAP for SEC registrants. This guidance, which is effective for financial
statements issued for interim and annual periods ending after September 15, 2009, supersedes all
then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC
accounting literature not included in the Codification will become non-authoritative. The Company
adopted this guidance on August 1, 2009, which did not have a material impact on its consolidated
financial statements.
17
In November 2008, the FASB issued new accounting guidance for intangible assets acquired in a
business combination or asset acquisition that an entity does not intend to actively use but
intends to hold as defensive intangible assets to prevent others from obtaining access to them,
referred to as defensive intangible assets. Historically, these assets have been typically
allocated little or no value. Under this guidance defensive intangible assets are required to be
accounted for as a separate identifiable asset recognized at fair value with an assigned useful
life. The effective date of this guidance is for fiscal years beginning on or after December 15,
2008. The Company adopted this guidance on August 1, 2009, which did not have a material impact on
its financial statements, and will apply the requirements prospectively to intangible assets
acquired after the adoption date.
In April 2008, the FASB issued new accounting guidance for the determination of the useful
life of intangible assets. This guidance amends the factors an entity should consider when
developing renewal or extension assumptions for determining the useful life of recognized
intangible assets. The guidance is intended to improve the consistency between the useful life of
recognized intangible assets and the period of expected cash flows used to measure the fair value
of assets accounted for under guidance specific to business combinations and other GAAP. The
guidance also requires expanded disclosure related to an entitys intangible assets. The guidance
is effective for fiscal years beginning after December 15, 2008 and interim periods within those
fiscal years, and shall be applied prospectively to intangible assets recognized as of, and
subsequent to, the effective date. The Company adopted this guidance on August 1, 2009, which did
not have a material impact on its consolidated financial statements. It is the Companys policy to
expense costs as incurred in connection with the renewal or extension of its intangible assets.
In December 2007, the FASB issued new accounting guidance which establishes revised principles
and requirements for the recognition and measurement of assets and liabilities in a business
combination. This new guidance requires (i) recognition of the fair values of acquired assets and
assumed liabilities at the acquisition date, (ii) contingent consideration to be recorded at
acquisition date at fair value, (iii) transaction costs to be expensed as incurred, (iv)
pre-acquisition contingencies to be accounted for at acquisition date at fair value and (v) costs
of a plan to exit an activity or terminate or relocate employees to be accounted for as
post-combination costs. The FASB issued additional guidance in February 2009 which amended certain
provisions related to the accounting for contingencies in a business combination. The guidance
under these new issuances is effective for fiscal years beginning on or after December 15, 2008.
The Company adopted the new guidance on August 1, 2009, which did not have a material impact on its
consolidated financial statements, and will apply the requirements prospectively to business
combinations that occur after the date of adoption.
In September 2006, the FASB issued new accounting guidance for the accounting of fair value
measurements which defines fair value, establishes a framework for measuring fair value in GAAP and
expands disclosure about fair value measurements. In February 2008, the FASB issued additional
guidance which deferred the effective date of certain items under the September 2006 guidance
including nonfinancial assets and liabilities that are recognized or disclosed at fair value in the
financial statement on a non-recurring basis until fiscal years beginning after November 15, 2008.
The Company adopted the provisions of this new guidance for financial assets and liabilities and
nonfinancial assets and liabilities that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually) effective August 1, 2008, which did not have an
material impact on its consolidated financial statements. The Company elected to apply the deferral
for nonfinancial assets and liabilities recognized or disclosed on a non-recurring basis, including
its goodwill, indefinite-lived intangibles and non-financial assets measured at fair value for
annual impairment assessment, and adopted this guidance on August 1, 2009 which did not have a
material impact on its consolidated financial statements.
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in conformity with GAAP. The preparation of
these consolidated financial statements requires the use of estimates, judgments, and assumptions
that affect the reported amounts of assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the periods
presented. There were no significant changes in our critical accounting policies as described in
our Annual Report on Form 10-K for the fiscal year ended July 31, 2009.
18
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:
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the loss of primary customers; |
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our ability to implement productivity improvements, cost reduction initiatives or
facilities expansions; |
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market developments affecting, and other changes in, the demand for our products
and the introduction of new competing products; |
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availability or increases in the price of our primary raw materials or active
ingredients; |
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the timing of planned capital expenditures; |
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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; |
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the condition of the capital markets generally, which will be affected by interest
rates, foreign currency fluctuations and general economic conditions; |
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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; |
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the ability to obtain registration and re-registration of our products under
applicable law; |
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the political and economic climate in the foreign or domestic jurisdictions in
which we conduct business; and |
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other United States or foreign regulatory or legislative developments which affect
the demand for our products generally or increase the environmental compliance cost for
our products or impose liabilities on the manufacturers and distributors of such
products. |
The information contained in this report, including the information set forth under the
heading Risk Factors, identifies additional factors that could cause our results or performance
to differ materially from those we express in our forward-looking statements. Although we believe
that the assumptions underlying our forward-looking statements are reasonable, any of these
assumptions and, therefore, the forward-looking statements based on these assumptions, could
themselves prove to be inaccurate. In light of the significant uncertainties inherent in the
forward-looking statements which are included in this report and the exhibits and other documents
incorporated herein by reference, our inclusion of this information is not a representation by us
or any other person that our objectives and plans will be achieved.
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ITEM 3. |
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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.
Interest Rate Sensitivity
As of January 31, 2010 our fixed rate debt consisted of $20.0 million of term notes with an
interest rate of 7.43%, maturing on December 31, 2014.
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As of January 31, 2010 our variable rate debt consisted of a credit facility with an interest
rate of LIBOR plus 1.75%, maturing on December 31, 2012. On January 31, 2010, we had no amount
borrowed on our $35.0 million revolving credit line under that facility, and $23.3 million borrowed
on a term loan under that same facility. Principal payments on the term loan were $458,333 per
month until December 31, 2009 and they are $666,667 per month for the remaining term of the
facility.
Based on the outstanding balance of the term loan and LIBOR rate as of January 31, 2010, a
1.0% change in the interest rate would result in a change of approximately $193,000 in interest
expense for the next twelve months.
Foreign Currency Exchange Rate Sensitivity
We are exposed to fluctuations in foreign currency exchange rates from our electronic
chemicals international segment. This segment uses a different functional currency than the U.S.
Dollar which is our consolidated reporting currency. Currency translation gains and losses result
from the process of translating the segments financial statements from its functional currency
(Euros) into our reporting currency. Currency translation gains and losses have no impact on the
consolidated statements of income and are recorded as accumulated other comprehensive income or loss within
stockholders equity in our consolidated balance sheets. Assets and liabilities have been
translated using exchange rates in effect at the balance sheet dates. Revenues and expenses have
been translated using the average exchange rates during the period.
During the three and six months ended January 31, 2010, we recognized foreign currency
translation losses of approximately $1.4 million and $346,000, respectively, as accumulated other
comprehensive loss in the consolidated balance sheets. At January 31, 2010, the cumulative foreign
currency translation loss reflected in accumulated other comprehensive loss was approximately
$1.8 million.
Additionally we have limited exposure to certain transactions denominated in a currency other
than the functional currency in our Italy operations. Accordingly, we recognize exchange gains or
losses in our consolidated statement of operations from these transactions. We believe the impact
of changes in foreign currency exchange rates does not have a material effect on our results of
operations or cash flows.
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ITEM 4. |
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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 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
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ITEM 1. |
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LEGAL PROCEEDINGS |
We have previously reported that a lawsuit was filed in 2007 against us in Superior Court,
Fulton County, Georgia (Atlanta) styled John Bailey, et al vs. Cleveland G. Meredith et al. The
plaintiffs are persons living near the wood treating facility of one of our customers. The
plaintiffs complain that air emissions from the wood treating facility have caused harm to their
property and person, and claim that we are also responsible because we sold wood preservative
chemicals to the facility. Given the inherent uncertainties of litigation, the ultimate outcome
cannot be predicted at this time, nor can the amount of any potential loss be reasonably estimated.
We have discontinued the operation of our agricultural herbicide product line, referred to as
MSMA, but in connection with that product line we were a member of the MSMA task force. As
previously reported, an entity related to the MSMA task force, Arsonate Herbicide Products,
Limited) (AHP), was sued by Albaugh, Inc. in 2007 claiming that AHP overbilled it for certain
task force expenses. Although Albaugh Inc. had agreed to reimburse AHP for certain task force
expenses for MSMA studies and registration support costs, it now claims that it was overbilled for many years by at least $900,000. The
case was tried in October 2009 in the U.S. District Court for the So. District of Iowa, and styled
as Albaugh, Inc. vs. Arsonate Herbicide Products, Limited. The court has not yet rendered a ruling
in the case. The ultimate outcome cannot be predicted at this time, nor can the amount of any
potential loss be reasonably estimated.
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We have previously reported that a lawsuit was filed against our subsidiary, KMG de Mexico,
respecting the title to the land on which our facility in Matamoros is located. The plaintiffs
claim that their title to the land was superior to the person from whom our subsidiary bought the
land. The lawsuit was initially filed in 1998 Matamoros, Mexico under Adolfo Cazares Rosas, et al
vs. KMG de Mexico and Guillermo Villarreal. The plaintiffs are seeking to have our purchase
overturned and to recover the land or its value. In January 2008, the case was sent by the appeals
court back to the lower court to obtain additional factual information, and in 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.
The ultimate outcome of this litigation cannot be determined at this time, nor can the amount of
any potential loss be reasonably estimated.
We are periodically a party to other legal proceedings and claims that arise in the ordinary
course of business. We do not believe that the outcome of any of those matters will have a material
adverse effect on our business, financial condition and operating results.
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, 2009.
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ITEM 2. |
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
Not applicable.
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ITEM 3. |
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DEFAULTS UPON SENIOR SECURITIES |
Not applicable.
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ITEM 4. |
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SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
Our annual shareholders meeting was held on December 8, 2009. At that meeting, the
shareholders voted to elect all the nominees to our board of directors as follows:
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Votes |
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Nominees |
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Votes For |
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Against |
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Abstentions |
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David L. Hatcher |
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10,019,618 |
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84,471 |
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107,473 |
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J. Neal Butler |
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10,020,724 |
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83,365 |
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107,473 |
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Gerald G. Ermentrout |
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10,084,959 |
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19,130 |
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107,473 |
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Christopher T. Fraser |
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10,100,144 |
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3,945 |
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107,473 |
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George W. Gilman |
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10,020,724 |
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83,365 |
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107,473 |
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Fred C. Leonard, III |
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10,003,713 |
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100,376 |
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107,473 |
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Charles L. Mears |
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10,016,300 |
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87,789 |
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107,473 |
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Stephen A. Thorington |
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10,104,089 |
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0 |
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107,473 |
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Richard L. Urbanowski |
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10,086,301 |
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17,788 |
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107,473 |
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The foregoing persons compose our full board of directors. The shareholders also voted to
approve and ratify the Companys 2009 Long-Term Incentive Plan. The vote was 6,093,597 for,
2,060,482 against and 25,807 abstentions. They also voted to approve the appointment of UHY LLP as
our independent registered public accounting firm for fiscal year 2010. The vote was 10,183,220
for, 12,752 against and 15,590 abstentions.
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ITEM 5. |
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OTHER INFORMATION |
The Nominating and Corporate Governance Committee will consider recommendations for directors
made by shareholders for fiscal year 2011, if such recommendations are received in writing,
addressed to the chair of the committee, Mr. Urbanowski, in care of the Company, at 9555 W. Sam Houston Parkway S., Suite 600, Houston, Texas 77099 by July 2,
2010.
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The financial statements are filed as part of this report in 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.
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2.1 |
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Asset Purchase Agreement dated June 7, 2005 between the company and Basic Chemicals Company,
LLC, filed previously as Exhibit 10.26 to the companys report on Form 8-K filed June 13, 2005
and incorporated herein by reference. |
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2.2 |
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Asset Purchase Agreement dated February 22, 2006 between the company and Boehringer Ingelheim
Vetmedica, Inc., filed previously as Exhibit 10.30 to the companys report on Form 8-K filed
February 27, 2006, and incorporated herein by reference. |
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2.3 |
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Asset Purchase Agreement by and among Wood Protection Products, Inc., KMG-Bernuth, Inc. and
James R. Forshaw filed previously as Exhibit 2.1(v) to the companys report on Form 8-K filed
December 19, 2003, and incorporated herein by reference. |
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2.4 |
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Asset Purchase Agreement dated October 19, 2007 between the company and Air Products and
Chemicals, Inc., filed previously as Exhibit 10.36 to the companys report on Form 8-K filed
October 24, 2007, and incorporated herein by this reference. |
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2.5 |
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Asset Purchase Agreement dated February 25, 2010 between the company and General Chemical
Performance Products LLC, filed herewith and incorporated herein by reference. |
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10.39 |
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Amended and Restated Credit Agreement with Wachovia Bank, National Association dated December
31, 2007 and initially filed as Exhibit 10.39 to the companys report on Form 8-K filed January
7, 2008, without exhibits and schedules, and re-filed herewith to include such exhibits and
schedules. |
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31.1 |
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Certificates under Section 302 the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer. |
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31.2 |
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Certificates under Section 302 the Sarbanes-Oxley Act of 2002 of the Chief Financial Officer. |
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32.1 |
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Certificates under Section 906 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer. |
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32.2 |
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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.
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KMG Chemicals, Inc. |
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By:
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/s/ J. Neal Butler
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Date: March 12, 2010 |
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J. Neal Butler
President and Chief Executive Officer |
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By:
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/s/ John V. Sobchak
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Date: March 12, 2010 |
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John V. Sobchak
Vice President and Chief Financial Officer |
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