10-Q 1 kmg-10q_20170131.htm 10-Q kmg-10q_20170131.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 January 31, 2017

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 March 6, 2017, there were 11,887,513 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 JANUARY 31, 2017 AND JULY 31, 2016

3

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME FOR THE THREE AND SIX MONTHS ENDED JANUARY 31, 2017 AND 2016

4

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME FOR THE THREE AND SIX MONTHS ENDED JANUARY 31, 2017 AND 2016

5

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JANUARY 31, 2017 AND 2016

6

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

7

 

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

17

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

23

 

ITEM 4. CONTROLS AND PROCEDURES

23

 

PART II — OTHER INFORMATION

 

 

ITEM 1. LEGAL PROCEEDINGS

24

 

ITEM 1A. RISK FACTORS

24

 

ITEM 6. EXHIBITS

24

 

SIGNATURES

25

 

 

 

 

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)

 

 

 

January 31,

 

 

July 31,

 

 

 

2017

 

 

2016

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

30,587

 

 

$

12,428

 

Restricted cash

 

 

1,000

 

 

 

 

Accounts receivable

 

 

 

 

 

 

 

 

Trade, net of allowances of $118 at January 31, 2017 and $210

   at July 31, 2016

 

 

35,309

 

 

 

33,324

 

Other

 

 

4,465

 

 

 

5,572

 

Inventories, net

 

 

35,870

 

 

 

37,401

 

Prepaid expenses and other

 

 

6,260

 

 

 

6,623

 

Total current assets

 

 

113,491

 

 

 

95,348

 

Property, plant and equipment, net

 

 

76,863

 

 

 

79,739

 

Goodwill

 

 

22,013

 

 

 

22,228

 

Intangible assets, net

 

 

32,542

 

 

 

33,906

 

Restricted cash

 

 

 

 

 

1,000

 

Other assets, net

 

 

5,010

 

 

 

4,807

 

Total assets

 

$

249,919

 

 

$

237,028

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

26,734

 

 

$

26,418

 

Accrued liabilities

 

 

10,680

 

 

 

11,252

 

Employee incentive accrual

 

 

3,150

 

 

 

5,999

 

Total current liabilities

 

 

40,564

 

 

 

43,669

 

Long-term debt

 

 

41,000

 

 

 

35,800

 

Deferred tax liabilities

 

 

9,058

 

 

 

9,948

 

Other long-term liabilities

 

 

4,450

 

 

 

4,422

 

Total liabilities

 

 

95,072

 

 

 

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, 11,887,513

   shares issued and outstanding at January 31, 2017 and 11,877,282 shares

   issued and outstanding at July 31, 2016

 

 

119

 

 

 

119

 

Additional paid-in capital

 

 

39,364

 

 

 

36,553

 

Accumulated other comprehensive loss

 

 

(14,718

)

 

 

(12,047

)

Retained earnings

 

 

130,082

 

 

 

118,564

 

Total stockholders’ equity

 

 

154,847

 

 

 

143,189

 

Total liabilities and stockholders’ equity

 

$

249,919

 

 

$

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

 

 

 

 

Six Months Ended

 

 

 

January 31,

 

 

 

 

January 31,

 

 

 

 

2017

 

 

 

2016

 

 

 

 

 

2017

 

 

 

2016

 

Net sales

 

$

79,071

 

 

$

70,859

 

 

 

 

$

155,566

 

 

$

147,509

 

Cost of sales

 

 

47,869

 

 

 

42,626

 

 

 

 

 

94,681

 

 

 

90,016

 

Gross profit

 

 

31,202

 

 

 

28,233

 

 

 

 

 

60,885

 

 

 

57,493

 

Distribution expenses

 

 

9,770

 

 

 

8,819

 

 

 

 

 

18,872

 

 

 

18,948

 

Selling, general and administrative expenses

 

 

12,392

 

 

 

12,722

 

 

 

 

 

24,293

 

 

 

23,937

 

Restructuring charges

 

 

 

 

 

555

 

 

 

 

 

 

 

 

1,021

 

Realignment charges

 

 

 

 

 

 

 

 

 

 

 

 

 

130

 

Operating income

 

 

9,040

 

 

 

6,137

 

 

 

 

 

17,720

 

 

 

13,457

 

Other (expense) income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(172

)

 

 

(252

)

 

 

 

 

(349

)

 

 

(404

)

Other, net

 

 

(285

)

 

 

149

 

 

 

 

 

(55

)

 

 

132

 

Total other (expense) income, net

 

 

(457

)

 

 

(103

)

 

 

 

 

(404

)

 

 

(272

)

Income before income taxes

 

 

8,583

 

 

 

6,034

 

 

 

 

 

17,316

 

 

 

13,185

 

Provision for income taxes

 

 

(2,097

)

 

 

(2,055

)

 

 

 

 

(5,089

)

 

 

(4,615

)

Net income

 

$

6,486

 

 

$

3,979

 

 

 

 

$

12,227

 

 

$

8,570

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share basic

 

$

0.55

 

 

$

0.34

 

 

 

 

$

1.03

 

 

$

0.73

 

Net income per common share diluted

 

$

0.53

 

 

$

0.33

 

 

 

 

$

1.00

 

 

$

0.72

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

11,882

 

 

 

11,717

 

 

 

 

 

11,881

 

 

 

11,707

 

Diluted

 

 

12,293

 

 

 

11,915

 

 

 

 

 

12,203

 

 

 

11,890

 

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

 

 

Six Months Ended

 

 

 

January 31,

 

 

January 31,

 

 

 

2017

 

 

2016

 

 

2017

 

 

2016

 

Net income

 

$

6,486

 

 

$

3,979

 

 

$

12,227

 

 

$

8,570

 

Other comprehensive income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation loss

 

 

(360

)

 

 

(1,914

)

 

 

(2,671

)

 

 

(2,398

)

Total comprehensive income

 

$

6,126

 

 

$

2,065

 

 

$

9,556

 

 

$

6,172

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

5


KMG CHEMICALS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In thousands)

 

 

 

Six Months Ended

 

 

 

January 31,

 

 

 

 

2017

 

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

12,227

 

 

$

8,570

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,048

 

 

 

7,024

 

Non-cash restructuring and realignment charges

 

 

 

 

 

105

 

Stock-based compensation expense

 

 

3,087

 

 

 

2,297

 

Deferred income tax expense

 

 

(821

)

 

 

(1,334

)

Excess tax benefit from stock-based awards

 

 

(685

)

 

 

 

Other

 

 

53

 

 

 

204

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable — trade

 

 

(2,585

)

 

 

894

 

Accounts receivable — other

 

 

2,531

 

 

 

(1,816

)

Inventories

 

 

1,002

 

 

 

1,159

 

Other current and noncurrent assets

 

 

(302

)

 

 

3,291

 

Accounts payable

 

 

951

 

 

 

(5,805

)

Accrued liabilities and other

 

 

(3,083

)

 

 

(492

)

Net cash provided by operating activities

 

 

19,423

 

 

 

14,097

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(5,310

)

 

 

(6,001

)

Proceeds — insurance claim

 

 

250

 

 

 

 

Net cash used in investing activities

 

 

(5,060

)

 

 

(6,001

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Borrowings under credit facility

 

 

17,000

 

 

 

 

Payments under credit facility

 

 

(11,800

)

 

 

(6,000

)

Excess tax benefit from stock-based awards

 

 

 

 

 

15

 

Payment of dividends

 

 

(709

)

 

 

(703

)

Cash payments related to tax withholdings from stock-based awards

 

 

(277

)

 

 

 

Net cash provided by (used in) financing activities

 

 

4,214

 

 

 

(6,688

)

Effect of exchange rate changes on cash

 

 

(418

)

 

 

(25

)

Net increase in cash, cash equivalents and restricted cash

 

 

18,159

 

 

 

1,383

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

13,428

 

 

 

8,517

 

Cash, cash equivalents and restricted cash at end of period

 

$

31,587

 

 

$

9,900

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

244

 

 

$

321

 

Cash paid for income taxes, net

 

$

4,740

 

 

$

4,797

 

Supplemental disclosure of non-cash investing activities

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment through accounts payable

 

$

206

 

 

$

2,525

 

 

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 January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017‑01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”). ASU 2017-01 affects all companies and other reporting organizations that must determine whether they have acquired or sold a business. For public companies, the amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company will apply the guidance to acquisitions occurring after the effective date to determine whether such acquisitions meet the definition of a business.

In January 2017, the FASB issued ASU No. 2017-04, “Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment” (“ASU 2017-04”). To simply the subsequent measurement of goodwill, ASU 2017-04 eliminates step two from the goodwill impairment test. A public business entity should adopt the amendments for its annual goodwill impairment tests or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The guidance could impact the Company if a goodwill impairment is identified after adoption. The Company plans to adopt the guidance effective August 1, 2017.

In August 2016, the FASB issued 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 early adopted ASU 2016-18 during the three months ended January 31, 2017 and disclosure revisions have been made for the periods presented on the condensed consolidated statements of cash flows. See note 3.

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 early adopted ASU 2016-15 at the beginning of fiscal year 2017, but there was no impact on the 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 but does not believe this standard will have a material impact on its consolidated financial statements, as the Company has not experienced significant losses related to its credit accounts. The Company plans to adopt the guidance effective August 1, 2020, the beginning of the first fiscal period after the effective date.

 

7


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 has elected to early adopt this ASU beginning in the second quarter of fiscal year 2017, and has applied the effects of the adoption from the beginning of the annual period of adoption. During the three and six month periods ended January 31, 2017, stock-based compensation excess tax benefits or deficiencies are reflected in the consolidated statements of income as a component of the provision for income taxes, whereas they previously were recognized in additional paid in capital on the condensed consolidated balance sheets. Additionally, the consolidated statements of cash flows presents excess tax benefits as an operating activity for the six months ended January 31, 2017, while the historical periods have not been adjusted, which is consistent with the adoption of this portion of the standard on a prospective basis. Further, tax cash payments made on an employee’s behalf for shares withheld upon vesting or settlement are required to be presented as a financing activity, and the consolidated statement of cash flows for the six months ended January 31, 2017 has been revised to reflect these amounts as payments related to stock-based awards. Tax cash payments made on an employee’s behalf for shares withheld upon vesting or settlement for the six months ended January 31, 2016 were immaterial to the condensed consolidated financial statements. Additionally, the Company did not have any unrecognized tax benefits related to its share-based payment awards at the date of adoption. Finally, the Company has elected to account for forfeitures as they occur, rather than estimate expected forfeitures. Historically, estimated forfeitures were immaterial to the consolidated financial statements. The amendments in the standard that required use of a modified retrospective transition method did not materially impact the Company. Therefore, the Company did not recognize a cumulative-effect adjustment to retained earnings upon adoption as of August 1, 2016. See note 12 for information regarding the additional impact on the consolidated financial statements.

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 currently scoping its significant lease arrangements to assess the potential impact on its consolidated financial statements. The Company plans to adopt the guidance effective October 31, 2019.

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, April and December 2016, the FASB issued ASU 2016-08, “Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, ASU 2016-10, “Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,” and ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers,” which provide supplemental adoption guidance and clarification to ASC 2014-09. ASU 2016-08, ASU 2016-10 and ASU 2016-20 must be adopted concurrently with the adoption of ASU 2014-09. The Company is currently scoping its revenue contracts to assess the potential impact on its consolidated financial statements. The Company plans to adopt the revenue guidance effective October 31, 2018, although it has not yet selected a transition method.

2. Acquisitions

Subsequent to the date of the consolidated balance sheets, on February 1, 2017, the Company completed the acquisition of the assets of Sealweld Corporation, a privately held corporation organized under the laws of the Province of Alberta, Canada, for CAD$22.6 million in cash (or approximately US$17.4 million, at an exchange rate of 0.77 CAD$ to US$). The assets acquired include the ownership interests in Sealweld Corporation’s subsidiaries located in the United States. The acquired business supplies performance products and services for industrial valve and actuator maintenance, including lubricants, sealants, cleaners, valve fittings, tools and equipment, and provides routine and emergency valve maintenance services and technician training for pipeline operators. The acquisition will be be accounted for in accordance with ASC 805, Business Combinations, with identifiable assets acquired and liabilities assumed recorded at their estimated fair values as of the acquisition date. However, the initial accounting for the acquisition is not complete as certain information and analysis that may impact the initial valuations are still being obtained or reviewed as a result of the short time period since the closing of the acquisition. Accordingly, the Company cannot provide the required details of the significant assets and liabilities that were acquired in the acquisition as of the date of this report. The significant

 

8


assets and liabilities acquired for which the initial accounting is incomplete include property, plant and equipment, intangible assets, goodwill, working capital and deferred income taxes.

3. Cash, Cash Equivalents and Restricted Cash

The following table provides a reconciliation of cash, cash equivalents and restricted cash reported within the unaudited condensed consolidated balance sheets that sum to the total of the same amounts shown in the unaudited statements of cash flows:

 

 

January 31,

 

 

January 31,

 

 

Current Presentation

 

2017

 

 

2016

 

 

Cash and cash equivalents

 

$

30,587

 

 

$

8,900

 

 

Restricted cash

 

 

1,000

 

 

 

1,000

 

 

Total cash, cash equivalents and restricted cash

 

$

31,587

 

 

$

9,900

 

 

The Company’s restricted cash includes cash balances which are legally or contractually restricted to use. The Company’s restricted cash is included in current assets as of January 31, 2017 and other long term assets as of July 31, 2016 and includes proceeds that were placed in escrow in connection with the sale of the animal health business in fiscal year 2013.

4. Earnings Per Share

Basic earnings per share have been computed by dividing net income by the weighted average shares outstanding. Diluted earnings per share have been computed by dividing net income by the weighted average shares outstanding plus potentially dilutive common shares. There were approximately 412,000 and 321,000 dilutive shares related to stock-based awards for the three and six months ended January 31, 2017, respectively. There were approximately 198,000 and 183,000 dilutive shares related to stock-based awards for the three and six months ended January 31, 2016, 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. All outstanding stock awards were dilutive for the three months ended January 31, 2017. There were 97,000 performance-based shares that were not included in the computation of diluted earnings per share because the performance metrics have not been met as of January 31, 2017. There were 5,580 potentially dilutive securities that were not included for the six months ended January 31, 2017. There were 14,000 potentially dilutive securities that were not included for the three and six months ended January 31, 2016.

5. Inventories, net

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

 

 

January 31,

 

 

July 31,

 

 

 

2017

 

 

2016

 

Raw materials

 

$

7,053

 

 

$

7,429

 

Work in process

 

 

1,215

 

 

 

1,195

 

Supplies

 

 

970

 

 

 

968

 

Finished products

 

 

27,310

 

 

 

28,463

 

Less: reserve for inventory obsolescence

 

 

(678

)

 

 

(654

)

Inventories, net

 

$

35,870

 

 

$

37,401

 

 

 

9


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,

 

 

 

2017

 

 

2016

 

Land

 

$

9,528

 

 

$

9,765

 

Buildings and improvements

 

 

38,422

 

 

 

39,974

 

Equipment

 

 

89,409

 

 

 

88,470

 

Leasehold improvements

 

 

2,460

 

 

 

2,460

 

 

 

 

139,819

 

 

 

140,669

 

Less: accumulated depreciation and amortization

 

 

(69,834

)

 

 

(65,958

)

 

 

 

69,985

 

 

 

74,711

 

Construction-in-progress

 

 

6,878

 

 

 

5,028

 

Property, plant and equipment, net(1)

 

$

76,863

 

 

$

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 and January 31, 2017. 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.

7. 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 $1.7 million and $1.4 million for the three months ended January 31, 2017 and 2016, respectively, and $3.1 million and $2.3 million for the six months ended January 31, 2017 and 2016, respectively. The Company also recognized the related tax benefits of $595,000 and $482,000 for the three months ended January 31, 2017 and 2016, respectively, and $1.1 million and $816,000 for the six months ended January 31, 2017 and 2016, respectively. Stock‑based compensation costs are recorded under selling, general and administrative expenses in the condensed consolidated statements of income.

As of January 31, 2017, the unrecognized compensation costs related to stock-based awards was approximately $9.0 million, which is expected to be recognized over a weighted-average period of 2.08 years.

 

10


Performance Shares

There were 503,556 and 328,731 non-vested performance shares outstanding at January 31, 2017 and August 1, 2016, respectively, which reflected the number of shares under the awards expected to vest as of such dates. No performance share awards vested during the six months ended January 31, 2017. As of January 31, 2017, 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      12/8/2016

 

Series 1

 

 

10,531

 

 

$

34.95

 

 

7/31/2019

 

 

100

%

 

 

10,531

 

      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

 

 

 

 

 

 

 

 

 

188

%

 

 

124,634

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

(12,435

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Series 1

 

 

112,237

 

 

 

 

 

 

 

 

 

163

%

 

 

182,779

 

 

 

(1)

The percentage vesting for Series 1 performance share awards is currently estimated at 100%, 188% and 163% of the target award for the fiscal year 2017, 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 2017, 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 January 31, 2017, and reflects the percentage of shares projected to vest for the respective awards at the end of their measurement periods. For the fiscal year 2017, 2016 and 2015 awards, shares vested may increase to a maximum of 200%, 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

 

11


common stock (at target) having performance requirements related to cumulative revenue and total stockholder return. The 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 January 31, 2017, 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 $22.44 and $17.36 at January 31, 2017 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 six months ended January 31, 2017 and 2016 was $29.64 and $21.06, respectively.

The weighted-average per share grant-date fair value of awards forfeited during the six months ended January 31, 2017 and 2016 was $25.85 and $21.90, respectively.

Time-Based Shares

A summary of activity for time-based stock awards for the six months ended January 31, 2017 is presented below:

 

 

 

Shares

 

 

Weighted-Average Grant-Date

Fair Value

 

Non-vested on August 1, 2016

 

 

211,368

 

 

$

21.28

 

Granted (1)

 

 

18,803

 

 

 

33.25

 

Vested(2)

 

 

(18,474

)

 

 

24.96

 

Forfeited

 

 

(250

)

 

 

25.85

 

Non-vested on January 31, 2017

 

 

211,447

 

 

 

22.00

 

 

 

(1)

Includes 8,224 shares granted to non-employee directors for service during the six month period ended January 31, 2017.

(2)

Includes 8,224 shares granted to non-employee directors for service for the six months ended January 31, 2017. 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 10,250 shares granted to certain employees and executives.

The total fair value of time-based shares vested during the six months ended January 31, 2017 and 2016 was approximately $461,000 and $694,000, respectively.  

 

 

12


8. Intangible Assets

Intangible assets are summarized as follows (in thousands):

 

 

Number of Years

 

 

January 31, 2017

 

 

 

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

 

 

$

(1,233

)

 

$

(150

)

 

$

821

 

Electronic chemicals-related trademarks and patents

   (10-15 years)

 

 

12.0

 

 

 

117

 

 

 

(93

)

 

 

 

 

 

24

 

Electronic chemicals-value of product qualifications

   (5-15 years)

 

 

14.1

 

 

 

14,100

 

 

 

(5,049

)

 

 

(1,092

)

 

 

7,959

 

Other chemicals-customer relationships (15 years)

 

 

15.0

 

 

 

10,291

 

 

 

(1,201

)

 

 

 

 

 

9,090

 

Other chemicals-Other related contracts (5 years)

 

 

5.0

 

 

 

152

 

 

 

(53

)

 

 

 

 

 

99

 

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

 

 

1.4

 

 

 

328

 

 

 

(228

)

 

 

(9

)

 

 

91

 

Total intangible assets subject to amortization

 

 

13.6

 

 

$

27,192

 

 

$

(7,857

)

 

$

(1,251

)

 

$

18,084

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

32,542

 

 

 

 

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

)