10-Q 1 kmg-10q_20161031.htm 10-Q kmg-10q_20161031.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-Q

 

 

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

For the quarterly period ended October 31, 2016

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

For the transition period from                  to                 .

Commission file number: 001-35577

 

KMG CHEMICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

Texas

 

75-2640529

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

300 Throckmorton Street,

Fort Worth, Texas

 

76102

(Address of principal executive offices)

 

(Zip Code)

(817)-761-6100

(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer

  

  

 

 

Accelerated filer

  

 

 

 

 

 

Non-accelerated filer

  

  

(Do not check if a smaller reporting company)

 

Smaller reporting company

  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

As of December 7, 2016, there were 11,855,857 shares of the registrant’s common stock outstanding.

 

 

 

 


TABLE OF CONTENTS

 

PART I — FINANCIAL INFORMATION

3

 

ITEM 1. FINANCIAL STATEMENTS

3

 

CONDENSED CONSOLIDATED BALANCE SHEETS AS OF OCTOBER 31, 2016 AND JULY 31, 2016

3

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE MONTHS ENDED OCTOBER 31, 2016 AND 2015

4

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE MONTHS ENDED OCTOBER 31, 2016 AND 2015

5

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED OCTOBER 31, 2016 AND 2015

6

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7

 

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

16

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

22

 

ITEM 4. CONTROLS AND PROCEDURES

22

 

PART II — OTHER INFORMATION

 

 

ITEM 1. LEGAL PROCEEDINGS

22

 

ITEM 1A. RISK FACTORS

22

 

ITEM 6. EXHIBITS

22

 

SIGNATURES

23

 

 

 

 

2


PART I — FINANCIAL INFORMATION

 

ITEM 1.

FINANCIAL STATEMENTS

KMG CHEMICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

 

 

 

October 31,

 

 

July 31,

 

 

 

2016

 

 

2016

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

17,606

 

 

$

12,428

 

Accounts receivable

 

 

 

 

 

 

 

 

Trade, net of allowances of $184 at October 31, 2016 and $210

   at July 31, 2016

 

 

34,446

 

 

 

33,324

 

Other

 

 

5,101

 

 

 

5,572

 

Inventories, net

 

 

34,851

 

 

 

37,401

 

Prepaid expenses and other

 

 

6,438

 

 

 

6,623

 

Total current assets

 

 

98,442

 

 

 

95,348

 

Property, plant and equipment, net

 

 

77,706

 

 

 

79,739

 

Goodwill

 

 

22,039

 

 

 

22,228

 

Intangible assets, net

 

 

32,968

 

 

 

33,906

 

Restricted cash

 

 

1,000

 

 

 

1,000

 

Other assets, net

 

 

4,828

 

 

 

4,807

 

Total assets

 

$

236,983

 

 

$

237,028

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

27,534

 

 

$

26,418

 

Accrued liabilities

 

 

10,977

 

 

 

11,252

 

Employee incentive accrual

 

 

3,142

 

 

 

5,999

 

Total current liabilities

 

 

41,653

 

 

 

43,669

 

Long-term debt

 

 

33,300

 

 

 

35,800

 

Deferred tax liabilities

 

 

9,982

 

 

 

9,948

 

Other long-term liabilities

 

 

4,299

 

 

 

4,422

 

Total liabilities

 

 

89,234

 

 

 

93,839

 

Commitments and contingencies

 

 

 

 

 

 

 

 

Stockholders’ equity

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

Common stock, $0.01 par value, 40,000,000 shares authorized, 11,888,664

   shares issued and outstanding at October 31, 2016 and 11,877,282 shares

   issued and outstanding at July 31, 2016

 

 

119

 

 

 

119

 

Additional paid-in capital

 

 

38,035

 

 

 

36,553

 

Accumulated other comprehensive loss

 

 

(14,358

)

 

 

(12,047

)

Retained earnings

 

 

123,953

 

 

 

118,564

 

Total stockholders’ equity

 

 

147,749

 

 

 

143,189

 

Total liabilities and stockholders’ equity

 

$

236,983

 

 

$

237,028

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

3


KMG CHEMICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

(In thousands, except for per share amounts)

 

 

 

Three Months Ended

 

 

 

October 31,

 

 

 

 

2016

 

 

 

2015

 

Net sales

 

$

76,495

 

 

$

76,650

 

Cost of sales

 

 

46,811

 

 

 

47,390

 

Gross profit

 

 

29,684

 

 

 

29,260

 

Distribution expenses

 

 

9,102

 

 

 

10,129

 

Selling, general and administrative expenses

 

 

11,901

 

 

 

11,215

 

Restructuring charges

 

 

 

 

 

466

 

Realignment charges

 

 

 

 

 

130

 

Operating income

 

 

8,681

 

 

 

7,320

 

Other (expense) income

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(177

)

 

 

(152

)

Other, net

 

 

230

 

 

 

(17

)

Total other (expense) income, net

 

 

53

 

 

 

(169

)

Income before income taxes

 

 

8,734

 

 

 

7,151

 

Provision for income taxes

 

 

(2,992

)

 

 

(2,560

)

Net income

 

$

5,742

 

 

$

4,591

 

Earnings per share

 

 

 

 

 

 

 

 

Net income per common share basic

 

$

0.48

 

 

$

0.39

 

Net income per common share diluted

 

$

0.47

 

 

$

0.39

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

11,880

 

 

 

11,697

 

Diluted

 

 

12,152

 

 

 

11,865

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

4


KMG CHEMICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(In thousands)

 

 

 

Three Months Ended

 

 

 

October 31,

 

 

 

2016

 

 

2015

 

Net income

 

$

5,742

 

 

$

4,591

 

Other comprehensive income

 

 

 

 

 

 

 

 

Foreign currency translation loss

 

 

(2,311

)

 

 

(484

)

Total comprehensive income

 

$

3,431

 

 

$

4,107

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

5


KMG CHEMICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

 

 

Three Months Ended

 

 

 

October 31,

 

 

 

 

2016

 

 

 

2015

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

5,742

 

 

$

4,591

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

3,552

 

 

 

3,545

 

Non-cash restructuring and realignment charges

 

 

 

 

 

105

 

Stock-based compensation expense

 

 

1,425

 

 

 

939

 

Deferred income tax expense

 

 

188

 

 

 

86

 

Other

 

 

182

 

 

 

110

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable — trade

 

 

(1,657

)

 

 

1,099

 

Accounts receivable — other

 

 

1,240

 

 

 

160

 

Inventories

 

 

2,092

 

 

 

2,310

 

Other current and noncurrent assets

 

 

(153

)

 

 

420

 

Accounts payable

 

 

1,359

 

 

 

(7,850

)

Accrued liabilities and other

 

 

(3,064

)

 

 

2,450

 

Net cash provided by operating activities

 

 

10,906

 

 

 

7,965

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(2,634

)

 

 

(3,616

)

Proceeds — insurance claim

 

 

250

 

 

 

 

Net cash used in investing activities

 

 

(2,384

)

 

 

(3,616

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Payments under credit facility

 

 

(2,500

)

 

 

(1,500

)

Excess tax benefit from stock-based awards

 

 

(57

)

 

 

10

 

Payment of dividends

 

 

(353

)

 

 

(351

)

Net cash used in financing activities

 

 

(2,910

)

 

 

(1,841

)

Effect of exchange rate changes on cash

 

 

(434

)

 

 

373

 

Net increase in cash and cash equivalents

 

 

5,178

 

 

 

2,881

 

Cash and cash equivalents at beginning of period

 

 

12,428

 

 

 

7,517

 

Cash and cash equivalents at end of period

 

$

17,606

 

 

$

10,398

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

128

 

 

$

151

 

Cash paid for income taxes, net

 

$

2,230

 

 

$

1,371

 

Supplemental disclosure of non-cash investing activities

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment through accounts payable

 

$

482

 

 

$

137

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

 

1. Basis of Presentation

The consolidated balance sheet as of July 31, 2016, which has been derived from audited consolidated financial statements, and the unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting. As permitted under those requirements, certain footnotes or other financial information that are normally required by generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted. The Company believes that the disclosures made are adequate to make the information not misleading and in the opinion of management reflect all adjustments, including those of a normal recurring nature, that are necessary for a fair presentation of financial position and results of operations for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of results of operations to be expected for the full year. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2016.

These condensed consolidated financial statements are prepared using certain estimates by management and include the accounts of KMG Chemicals, Inc. and its subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.

In August 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2016‑18, “Statement of Cash Flows (Topic 230): Restricted Cash” (“ASU 2016-18”). ASU 2016-18 is intended to address diversity in practice that exists in the classification and presentation of changes in restricted cash on the statement of cash flows. The amendments require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the new guidance and does not believe this standard will have a material impact on its consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016‑15, “Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments” (“ASU 2016-15”). ASU 2016-15 is intended to address how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This update addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice. The amendments are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The Company is evaluating the new guidance and does not believe this standard will have a material impact on its consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments." ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for a fiscal year beginning after December 15, 2018, including interim periods within that fiscal year. Entities will apply the standard's provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. The Company is evaluating the new guidance and does not believe this standard will have a material impact on its consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, “Compensation—Stock Compensation (Topic 718), Improvements to Employee Share-based Payment Accounting.” ASU 2016-09 simplifies several aspects of the accounting for employee share-based payment transactions for both public and nonpublic entities, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. ASU 2016-09 is effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted. The Company is planning to early adopt the standard beginning in the second quarter of fiscal 2017, and the impact on its consolidated financial statements and footnote disclosures is not expected to be material.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842),” which is intended to increase transparency and comparability of accounting for lease transactions. The ASU will require all leases with lease terms exceeding one year to be recognized on the balance sheet as lease assets and lease liabilities and will require both quantitative and qualitative disclosures regarding key information about leasing arrangements. Lessor accounting is largely unchanged. The guidance is effective beginning January 1, 2019 with an option to early adopt. The Company is evaluating whether to early adopt and the effect that ASU 2016-02 will have on its consolidated financial statements, and footnote disclosures.

 

7


In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes (Topic 740), Balance Sheet Classification of Deferred Taxes,” which requires deferred tax liabilities and assets to be classified as noncurrent in the Balance Sheet. The standard will be effective for financial statements issued for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted for financial statements that have not been previously issued. The ASU may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented. The Company adopted this ASU on a prospective basis in the second quarter of fiscal year 2016. This change in accounting principle did not have an impact on the Company’s results of operations, cash flow or stockholders’ equity.

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. In August 2015, the FASB voted to delay the effective date of ASU 2014-09 by one year to annual reporting periods beginning after December 15, 2017, including interim reporting periods within that reporting period. Earlier application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. Adoption can occur using one of two prescribed transition methods. In March and April 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)” and ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing” which provide supplemental adoption guidance and clarification to ASC 2014-09. ASU 2016-08 and ASU 2016-10 must be adopted concurrently with the adoption of ASU 2014-09. The Company is currently evaluating the impact that these new standards will have on its consolidated financial statements and footnote disclosures.

2. Earnings Per Share

Basic earnings per share have been computed by dividing net income by the weighted average shares outstanding. Diluted earnings per share have been computed by dividing net income by the weighted average shares outstanding plus potentially dilutive common shares. There were approximately 272,000 and 168,000 dilutive shares related to stock-based awards for the three months ended October 31, 2016 and 2015, respectively.

Outstanding stock-based awards are not included in the computation of diluted earnings per share under the treasury stock method if the effect of including them would be anti-dilutive. There were 11,160 and 14,783 potentially dilutive securities that were not included for the three months ended October 31, 2016 and 2015, respectively.

3. Inventories

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

 

 

October 31,

 

 

July 31,

 

 

 

2016

 

 

2016

 

Raw materials

 

$

7,764

 

 

$

7,429

 

Work in process

 

 

963

 

 

 

1,195

 

Supplies

 

 

997

 

 

 

968

 

Finished products

 

 

25,855

 

 

 

28,463

 

Less: reserve for inventory obsolescence

 

 

(728

)

 

 

(654

)

Inventories, net

 

$

34,851

 

 

$

37,401

 

 

 

8


4. Property, Plant and Equipment

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

 

 

 

October 31,

 

 

July 31,

 

 

 

2016

 

 

2016

 

Land

 

$

9,655

 

 

$

9,765

 

Buildings and improvements

 

 

38,564

 

 

 

39,974

 

Equipment

 

 

88,182

 

 

 

88,470

 

Leasehold improvements

 

 

2,460

 

 

 

2,460

 

 

 

 

138,861

 

 

 

140,669

 

Less: accumulated depreciation and amortization

 

 

(67,414

)

 

 

(65,958

)

 

 

 

71,447

 

 

 

74,711

 

Construction-in-progress

 

 

6,259

 

 

 

5,028

 

Property, plant and equipment, net(1)

 

$

77,706

 

 

$

79,739

 

 

 

 

 

(1)

In fiscal year 2016, as part of the Company’s ongoing review of its Milan production facilities, the Company determined that certain other facilities had excess capacity sufficient to absorb the manufacturing operations of one of its Milan plants. As a result, the Company committed to sell properties with a total estimated fair value, less costs to sell, of approximately $4.3 million at July 31, 2016. Assets held for sale are included in Prepaid expenses and other in Current assets. The Company expects the sale of the properties to be completed during fiscal year 2017. The fair value measurements were based on recent valuation appraisals.

5. Stock-Based Compensation

The Company has stock-based incentive plans which are described in more detail in the consolidated financial statements in the Company’s Annual Report on Form 10-K for fiscal year 2016. The Company recognized stock-based compensation costs of approximately $1.4 million and $939,000 for the three months ended October 31, 2016 and 2015, respectively. The Company also recognized the related tax benefits of $502,000 and $333,000 for the three months ended October 31, 2016 and 2015, respectively. Stock‑based compensation costs are recorded under selling, general and administrative expenses in the condensed consolidated statements of income.

As of October 31, 2016, the unrecognized compensation costs related to stock-based awards was approximately $8.5 million, which is expected to be recognized over a weighted-average period of 2.19 years.

 

9


Performance Shares

At August 1, 2016, there were 328,731 non-vested performance shares outstanding which reflected the number of shares under the awards expected to vest. No performance share awards vested during the three months ended October 31, 2016. As of October 31, 2016, the non-vested performance-based stock awards consisted of Series 1, Series 3 and Series 4 awards granted to certain executives and employees in fiscal years 2017, 2016 and 2015 as summarized below reflecting the target number of shares under the awards.

 

 

 

 

 

Target

 

 

 

 

 

 

 

 

Expected

 

 

Shares

 

 

 

Series

 

Award

 

 

Grant Date

 

 

Measurement

 

Percentage of

 

 

Expected

 

Date of Grant

 

Award

 

Shares

 

 

Fair Value

 

 

Period Ending

 

Vesting(1)

 

 

to Vest

 

Fiscal Year 2017 Awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      10/21/2016

 

Series 3

 

 

14,000

 

 

$

29.11

 

 

7/31/2017

 

 

100

%

 

 

14,000

 

      10/21/2016

 

Series 4

 

 

88,674

 

 

$

29.11

 

 

7/31/2019

 

 

100

%

 

 

88,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2016 Awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      3/10/2016

 

Series 1

 

 

14,625

 

 

$

21.89

 

 

10/31/2018

 

 

 

 

 

 

 

 

1/29/2016

 

Series 1

 

 

57,163

 

 

$

21.80

 

 

10/31/2018

 

 

 

 

 

 

 

 

 

 

Forfeitures(2)

 

 

(5,350

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Series 1

 

 

66,438

 

 

 

 

 

 

 

 

 

100

%

 

 

66,438

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1/19/2016

 

Series 3

 

 

82,938

 

 

$

20.89

 

 

7/31/2020

 

 

100

%

 

 

82,938

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal Year 2015 Awards

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3/26/2015

 

Series 1

 

 

21,173

 

 

$

25.85

 

 

7/31/2017

 

 

 

 

 

 

 

 

12/9/2014

 

Series 1

 

 

103,499

 

 

$

17.81

 

 

7/31/2017

 

 

 

 

 

 

 

 

 

 

Forfeitures(2)

 

 

(11,685

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Series 1

 

 

112,987

 

 

 

 

 

 

 

 

 

163

%

 

 

184,310

 

 

 

(1)

The percentage vesting for Series 1 performance share awards is currently estimated at 100% and 163% of the target award for the fiscal year 2016 and 2015 awards, respectively. The percentage vesting for Series 3 performance share awards is currently estimated at 100% of the target award for each of the fiscal year 2017 and 2016 awards. The percentage vesting for Series 4 performance share awards is currently estimated at 100% of the target award for the fiscal year 2017 awards.

(2)

Forfeitures include Series 1 awards that were granted in fiscal years 2016 and 2015 to certain employees that were forfeited at the termination of their employment.

Series 1: For the fiscal year 2016 and 2015 awards, vesting is subject to performance requirements composed of certain objectives including average annual return on invested capital and annual compound growth rate in the Company’s diluted earnings per share. These objectives are assessed quarterly using the Company’s budget, actual results and long-term projections. For each of the Series 1 awards, the expected percentage of vesting is evaluated through October 31, 2016, and reflects the percentage of shares projected to vest for the respective awards at the end of their measurement periods. For the fiscal year 2016 and 2015 awards, shares vested may increase to a maximum of 200% and 167%, respectively, of the target award on achievement of maximum performance objectives.

Series 3: In fiscal year 2017, Mr. Fraser was awarded (i) a performance-based Series 3 award for 10,000 shares of common stock (at maximum) having a performance requirement related to debt payments during the fiscal year, and (ii) a performance-based Series 3 award for 4,000 shares of common stock having certain organizational objectives as a performance requirement, and in each case such awards vest and are measured over a one year period beginning August 1 and ending July 31. These awards are expected to vest at 100% of the target award. In fiscal year 2016, Mr. Fraser was awarded (i) a performance-based Series 3 award for 10,000 shares of common stock (at maximum) having a performance requirement related to debt payments during the fiscal year, and (ii) a performance-based Series 3 award for 4,000 shares of common stock having certain organizational objectives as a performance requirement, and in each case such awards vest and are measured over a one year period beginning August 1 and ending July 31. These awards fully vested as of July 31, 2016 and 14,000 shares were issued on August 5, 2016. Awards to Mr. Fraser for fiscal year 2015 included (i) a performance-based Series 3 award for 10,000 shares of common stock (at maximum) having a performance requirement related to debt payments during the fiscal year, and (ii) a performance-based Series 3 award for 4,000 shares of common stock having certain organizational objectives as a performance requirement, and in each case such awards vest and are measured over a one year period beginning August 1 and ending July 31. The award for fiscal year 2015 was fully vested and 14,000 shares were issued on October 1, 2015. In fiscal year 2016 Mr. Fraser was also awarded a performance-based Series 3 award for 82,938 shares of common stock (at target) having performance requirements related to cumulative revenue and total stockholder return. The

 

10


measurement period for the fiscal year 2016 award begins on November 1, 2015 and the award vests one-third (1/3) at July 31, 2018, 2019 and 2020. The shares vested may increase to a maximum of 200% of the target award on achievement of maximum performance objectives. These awards are expected to vest at 100% of the target award.

Series 4: For the fiscal year 2017 awards, each award includes two tranches. For the first tranche, vesting is subject to the achievement of an adjusted earnings before interest, taxes and depreciation and amortization (“EBITDA”) metric. For the second tranche, vesting is subject to performance requirements composed of certain objectives including average annual return on invested capital and annual compound growth rate in the Company’s diluted earnings per share. These objectives are assessed quarterly using the Company’s budget, actual results and long-term projections. For each of the Series 4 awards, the expected percentage vesting is evaluated through October 31, 2016, and reflects the percentage of shares projected to vest at the end of the measurement period. For the fiscal year 2017 awards, the shares vested in the second tranche may increase to a maximum of 200% of the target award on achievement of maximum performance objectives.

The weighted-average per share grant-date fair value of the target award shares for performance-based awards outstanding was $22.23 and $17.36 at October 31, 2016 and August 1, 2016, respectively.

The weighted-average per share grant-date fair value of the target award shares for performance-based awards granted during the three months ended October 31, 2016 and 2015 was $29.11 and $21.04, respectively.

The weighted-average per share grant-date fair value of awards forfeited during the three months ended October 31, 2015 was $19.63.

Time-Based Shares

A summary of activity for time-based stock awards for the three months ended October 31, 2016 is presented below:

 

 

Shares

 

 

Weighted-Average Grant-Date

Fair Value

 

Non-vested on August 1, 2016

 

 

211,368

 

 

$

21.28

 

Granted (1)

 

 

4,837

 

 

 

27.14

 

Vested(2)

 

 

(11,587

)

 

 

23.99

 

Non-vested on October 31, 2016

 

 

204,618

 

 

 

21.27

 

 

 

(1)

Includes 4,837 shares granted to non-employee directors for service during the three month period ended October 31, 2016.

(2)

Includes 4,837 shares granted to non-employee directors for service for the three months ended October 31, 2016. The shares vest on the date of grant, and the Company recognizes compensation expense related to the awards over the respective service periods in accordance with GAAP. Includes 6,750 shares granted to certain employees and executives.

The total fair value of time-based shares vested during the three months ended October 31, 2016 and 2015 was approximately $278,000 and $474,000, respectively.  

 

 

11


6. Intangible Assets

Intangible assets are summarized as follows (in thousands):

 

 

Number of Years

 

 

October 31, 2016

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

Currency

 

 

 

 

 

 

 

Amortization

 

 

Original

 

 

Accumulated

 

 

Translation

 

 

Carrying

 

 

 

Period

 

 

Cost

 

 

Amortization

 

 

Adjustment

 

 

Amount

 

Intangible assets subject to amortization (range of

   useful life):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronic chemicals-related contracts (5-8 years)

 

 

6.6

 

 

$

2,204

 

 

$

(1,170

)

 

$

(144

)

 

$

890

 

Electronic chemicals-related trademarks and patents

   (10-15 years)

 

 

12.0

 

 

 

117

 

 

 

(91

)

 

 

 

 

 

26

 

Electronic chemicals-value of product qualifications

   (5-15 years)

 

 

14.1

 

 

 

14,100

 

 

 

(4,836

)

 

 

(1,198

)

 

 

8,066

 

Other chemicals-customer relationships (15 years)

 

 

15.0

 

 

 

10,291

 

 

 

(1,029

)

 

 

 

 

 

9,262

 

Other chemicals-Other related contracts (5 years)

 

 

5.0

 

 

 

152

 

 

 

(46

)

 

 

 

 

 

106

 

Electronic chemicals-Tolling/License Agreements (1-3 years)

 

 

1.4

 

 

 

328

 

 

 

(162

)

 

 

(6

)

 

 

160

 

Total intangible assets subject to amortization

 

 

13.6

 

 

$

27,192

 

 

$

(7,334

)

 

$

(1,348

)

 

$

18,510

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other chemicals-penta product registrations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,765

 

Other chemicals-related trade name and trademark

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,885

 

Other chemicals-proprietary manufacturing process

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,808

 

Total intangible assets not subject to amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,458

 

Total intangible assets, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

32,968

 

 

 

 

Number of Years

 

 

July 31, 2016

 

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

Foreign

 

 

 

 

 

 

 

Average

 

 

 

 

 

 

 

 

 

 

Currency

 

 

 

 

 

 

 

Amortization

 

 

Original

 

 

Accumulated

 

 

Translation

 

 

Carrying

 

 

 

Period

 

 

Cost

 

 

Amortization

 

 

Adjustment

 

 

Amount

 

Intangible assets subject to amortization (range of

   useful life):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Electronic chemicals-related contracts (5-8 years)

 

 

6.6

 

 

$

2,204

 

 

$

(1,104

)

 

$

(117

)

 

$

983

 

Electronic chemicals-related trademarks and patents

   (10-15 years)

 

 

12.0

 

 

 

117

 

 

 

(87

)

 

 

 

 

 

30

 

Electronic chemicals-value of product qualifications

   (5-15 years)

 

 

14.1

 

 

 

14,100

 

 

 

(4,616

)

 

 

(831

)

 

 

8,653

 

Other chemicals-customer relationships (15 years)

 

 

15.0

 

 

 

10,291

 

 

 

(858

)

 

 

 

 

 

9,433

 

Other chemicals-other related contracts (5 years)

 

 

5.0

 

 

 

152

 

 

 

(38

)

 

 

 

 

 

114

 

Electronic chemicals- Tolling/License Agreements (1-3 years)

 

 

1.4

 

 

 

328

 

 

 

(93

)

 

 

 

 

 

235

 

Total intangible assets subject to amortization

 

 

13.6

 

 

$

27,192

 

 

$

(6,796

)

 

$

(948

)

 

$

19,448

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other chemicals-penta product registrations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,765

 

Other chemicals-related trade name and trademark

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,885

 

Other chemicals-proprietary manufacturing process

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,808

 

Total intangible assets not subject to amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

14,458

 

Total intangible assets, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

33,906

 

 

 

Intangible assets subject to amortization are amortized over their estimated useful lives. Amortization expense was approximately $535,000 and $499,000 for the three month periods ended October 31, 2016 and 2015, respectively.

 

12


7. Dividends

Dividends of approximately $0.35 million ($0.03 per share) and $0.35 million ($0.03 per share) were declared and paid in the first quarter of fiscal years 2016 and 2015, respectively. A dividend of $0.03 per share was approved by the Company’s board of directors on December 8, 2016 to be paid on January 5, 2017 to shareholders of record on December 23, 2016.

8. Segment Information

The Company has two reportable segments — electronic chemicals and other chemicals. In conjunction with the acquisition of the industrial lubricants business, the Company’s management, including the chief executive officer, who is the chief operating decision maker, determined that the Company’s operations should be reported as the electronic chemicals and other chemicals business segments.

 

 

 

Electronic Chemicals

 

 

Other Chemicals

 

 

Other Activities

 

 

Consolidated

 

 

 

(Amounts in thousands)

 

Three months ended October 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales

 

$

66,921

 

 

$

9,574

 

 

$

 

 

$

76,495

 

Depreciation and amortization(1)

 

$

2,852

 

 

$

287

 

 

$

413

 

 

$

3,552

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations(2)

 

$

8,062

 

 

$

3,681

 

 

$

(3,062

)

 

$

8,681

 

   Total other income (expense), net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

53

 

Income before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

$

8,734