10-Q 1 kmg-10q_20171031.htm 10-Q kmg-10q_20171031.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, 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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

  

 

 

 

 

 

 

 

 

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. 

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 6, 2017, there were 15,372,349 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, 2017 AND JULY 31, 2017

3

 

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

4

 

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

5

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED OCTOBER 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

20

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

26

 

ITEM 4. CONTROLS AND PROCEDURES

27

 

PART II — OTHER INFORMATION

 

 

ITEM 1. LEGAL PROCEEDINGS

27

 

ITEM 1A. RISK FACTORS

27

 

ITEM 6. EXHIBITS

27

 

SIGNATURES

28

 

 

 

 

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,

 

 

 

2017

 

 

2017

 

 

 

(Unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

29,863

 

 

$

20,708

 

Accounts receivable

 

 

 

 

 

 

 

 

Trade, net of allowances of $214 at October 31, 2017 and $263

   at July 31, 2017

 

 

51,946

 

 

 

51,168

 

Other

 

 

4,271

 

 

 

6,168

 

Inventories, net

 

 

46,174

 

 

 

46,482

 

Prepaid expenses and other

 

 

8,216

 

 

 

8,617

 

Total current assets

 

 

140,470

 

 

 

133,143

 

Property, plant and equipment, net

 

 

106,747

 

 

 

105,435

 

Goodwill

 

 

229,746

 

 

 

224,391

 

Intangible assets, net

 

 

310,834

 

 

 

320,401

 

Other assets, net

 

 

7,017

 

 

 

9,061

 

Total assets

 

$

794,814

 

 

$

792,431

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Accounts payable

 

$

32,064

 

 

$

29,570

 

Accrued liabilities

 

 

12,689

 

 

 

12,456

 

Employee incentive accrual

 

 

4,283

 

 

 

7,713

 

Current portion of long-term debt

 

 

 

 

 

3,167

 

Total current liabilities

 

 

49,036

 

 

 

52,906

 

Long-term debt, net

 

 

352,867

 

 

 

523,102

 

Deferred tax liabilities

 

 

32,934

 

 

 

37,944

 

Other long-term liabilities

 

 

4,964

 

 

 

4,763

 

Total liabilities

 

 

439,801

 

 

 

618,715

 

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, 15,365,646 shares issued and outstanding at October 31, 2017 and 11,889,649 shares issued and outstanding at July 31, 2017

 

 

154

 

 

 

119

 

Additional paid-in capital

 

 

218,927

 

 

 

42,535

 

Accumulated other comprehensive loss

 

 

(10,334

)

 

 

(9,712

)

Retained earnings

 

 

146,266

 

 

 

140,774

 

Total stockholders’ equity

 

 

355,013

 

 

 

173,716

 

Total liabilities and stockholders’ equity

 

$

794,814

 

 

$

792,431

 

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,

 

 

 

 

2017

 

 

 

2016

 

Net sales

 

$

110,664

 

 

$

76,495

 

Cost of sales

 

 

64,183

 

 

 

46,811

 

Gross profit

 

 

46,481

 

 

 

29,684

 

Distribution expenses

 

 

9,442

 

 

 

9,102

 

Selling, general and administrative expenses

 

 

13,339

 

 

 

11,366

 

Amortization of intangible assets

 

 

3,511

 

 

 

535

 

Restructuring charges

 

 

109

 

 

 

 

Operating income

 

 

20,080

 

 

 

8,681

 

Other (expense) income

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(8,094

)

 

 

(177

)

Loss on the extinguishment of debt

 

 

(4,175

)

 

 

 

Derivative fair value gain

 

 

849

 

 

 

 

Other, net

 

 

(181

)

 

 

230

 

Total other (expense) income, net

 

 

(11,601

)

 

 

53

 

Income before income taxes

 

 

8,479

 

 

 

8,734

 

Provision for income taxes

 

 

(2,629

)

 

 

(2,992

)

Net income

 

$

5,850

 

 

$

5,742

 

Earnings per share

 

 

 

 

 

 

 

 

Net income per common share basic

 

$

0.47

 

 

$

0.48

 

Net income per common share diluted

 

$

0.46

 

 

$

0.47

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

Basic

 

 

12,410

 

 

 

11,880

 

Diluted

 

 

12,727

 

 

 

12,152

 

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,

 

 

 

2017

 

 

2016

 

Net income

 

$

5,850

 

 

$

5,742

 

Other comprehensive income

 

 

 

 

 

 

 

 

Foreign currency translation loss

 

 

(622

)

 

 

(2,311

)

Total comprehensive income

 

$

5,228

 

 

$

3,431

 

 

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,

 

 

 

 

2017

 

 

 

2016

 

Cash flows from operating activities

 

 

 

 

 

 

 

 

Net income

 

$

5,850

 

 

$

5,742

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

7,109

 

 

 

3,552

 

Loss on extinguishment of debt

 

 

4,175

 

 

 

 

Stock-based compensation expense

 

 

1,608

 

 

 

1,425

 

Amortization of debt discounts and financing costs included in interest expense

 

 

493

 

 

 

 

Deferred income tax benefit

 

 

(1,185

)

 

 

188

 

Other

 

 

(195

)

 

 

182

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable — trade

 

 

(292

)

 

 

(1,657

)

Accounts receivable — other

 

 

2,013

 

 

 

1,240

 

Inventories

 

 

150

 

 

 

2,092

 

Other current and noncurrent assets

 

 

276

 

 

 

(153

)

Accounts payable

 

 

3,247

 

 

 

1,359

 

Accrued liabilities and other

 

 

(2,711

)

 

 

(3,064

)

Net cash provided by operating activities

 

 

20,538

 

 

 

10,906

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Additions to property, plant and equipment

 

 

(5,803

)

 

 

(2,634

)

Other investing activities

 

 

(898

)

 

 

 

Proceeds — insurance claim

 

 

 

 

 

250

 

Net cash used in investing activities

 

 

(6,701

)

 

 

(2,384

)

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from sale of common stock, net of issuance costs

 

 

175,669

 

 

 

 

Payments under credit facility

 

 

 

 

 

(2,500

)

Principal payments on borrowings on term loan

 

 

(178,000

)

 

 

 

Derivative fair value gain

 

 

(849

)

 

 

 

Excess tax benefit from stock-based awards

 

 

 

 

 

(57

)

Payment of dividends

 

 

(357

)

 

 

(353

)

Cash payments related to tax withholdings from stock-based awards

 

 

(850

)

 

 

 

Net cash used in financing activities

 

 

(4,387

)

 

 

(2,910

)

Effect of exchange rate changes on cash

 

 

(295

)

 

 

(434

)

Net increase in cash, cash equivalents and restricted cash

 

 

9,155

 

 

 

5,178

 

Cash, cash equivalents and restricted cash at beginning of period

 

 

20,708

 

 

 

13,428

 

Cash, cash equivalents and restricted cash at end of period

 

$

29,863

 

 

$

18,606

 

Supplemental disclosures of cash flow information

 

 

 

 

 

 

 

 

Cash paid for interest

 

$

7,344

 

 

$

128

 

Cash paid for income taxes, net

 

$

1,212

 

 

$

2,230

 

Supplemental disclosure of non-cash investing activities

 

 

 

 

 

 

 

 

Purchase of property, plant and equipment through accounts payable

 

$

710

 

 

$

482

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

6


NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Basis of Presentation

The condensed consolidated balance sheet as of July 31, 2017, 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, 2017.

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.

The following table provides a brief description of recent Accounting Standard Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”):

Standard

 

Description

 

Effective Date

 

Effect on the Financial Statements or Other Significant Matters

In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.

 

The new guidance improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.

 

 

August 1, 2019. Early adoption is permitted.

 

The Company is currently evaluating the impact of adoption on its financial statements and related disclosures, but does not expect adoption will have a material impact as the Company does not currently utilize hedge accounting for derivative instruments.

In January 2017, the FASB issued ASU 2017-04, Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment.

 

The new guidance simplifies subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.

 

August 1, 2020. Early adoption is permitted.

 

The Company adopted the new guidance as of August 1, 2017, as part of the FASB's simplification initiative. The adoption of the new guidance did not have a material impact to the Company.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments

 

The new guidance 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.

 

August 1, 2020. Early adoption is permitted.

 

The Company does not expect adoption will have a material impact on its financial statements and related disclosures.

 

7


In February 2016, the FASB issued ASU 2016-02, Leases.

 

The new guidance supersedes the lease guidance under FASB Accounting Standards Codification ("ASC") Topic 840, Leases, resulting in the creation of FASB ASC Topic 842, Leases. The guidance requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases.

 

August 1, 2019. Early adoption is permitted.

 

The Company is currently evaluating its population of leases, and is continuing to assess all potential impacts of the standard, but currently believes the most significant impact relates to its accounting for manufacturing and logistics equipment, and real estate operating leases. The Company anticipates recognition of additional assets and corresponding liabilities related to leases upon adoption, but cannot quantify these at this time. The Company plans to adopt the standard effective August 1, 2019.

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2014-09.

 

The new guidance 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 provides alternative methods of adoption. Subsequent guidance issued after May 2014 did not change the core principle of ASU 2014-09.

 

August 1, 2018.

 

The Company is currently reviewing its revenue contracts to assess the potential impact on its condensed consolidated financial statements. The Company plans to adopt the revenue guidance effective August 1, 2018, and expects to utilize the modified retrospective method of adoption.

 

2. Acquisitions

On June 15, 2017, the Company completed the acquisition of Flowchem Holdings LLC (“Flowchem”). The consideration paid on the closing date was the purchase price of $495.0 million plus $11.4 million for cash acquired. Based in Waller, Texas, Flowchem is a global provider of drag-reducing agents, related support services and equipment to midstream crude oil and refined fuel pipeline operators. To finance the acquisition the Company entered into a new credit agreement providing for a seven year syndicated term loan of $550.0 million. See Note 11 for further discussion of the Company’s credit agreement. The Company expensed transaction and acquisition-related costs of approximately $0.4 million in the three months ended October 31, 2017, which is included in selling, general and administrative expenses on the Company’s consolidated statement of income.

The Company has accounted for the purchase using the acquisition method of accounting for business combinations. Accordingly, the purchase price has been allocated to the underlying assets and liabilities in proportion to their respective fair values. The following table summarizes the acquired assets and assumed liabilities and the preliminary acquisition accounting for the fair value of the assets and liabilities recognized in the condensed consolidated balance sheet at October 31, 2017 (in thousands):

Cash

 

$

11,445

 

Accounts receivable

 

 

11,280

 

Inventory

 

 

9,310

 

Other assets

 

 

499

 

Property, plant and equipment, net

 

 

19,665

 

Intangible assets

 

 

 

 

Customer relationships

 

 

205,467

 

Trade names and trademark

 

 

32,353

 

Proprietary manufacturing process

 

 

39,323

 

Total assets

 

$

329,342

 

Current liabilities

 

 

3,132

 

Deferred tax liability

 

 

24,484

 

Net identifiable assets acquired

 

 

301,726

 

Goodwill

 

 

204,717

 

Fair value of net assets acquired

 

$

506,443

 

 

8


 

This purchase price allocation is preliminary and is pending the finalization of the third-party valuation analysis. The fair value of the accounts receivable acquired was $11.3 million, equivalent to the amount the Company expects to be collected. The $204.7 million of goodwill was assigned to the performance materials segment, and the Company expects $155.9 million of goodwill to be tax deductible. The goodwill is primarily attributable to the assembled workforce of Flowchem and the allocation of proceeds in excess of the fair value of net identifiable assets acquired. Final accounting is incomplete for the customer relationships, trade names and trademark, proprietary manufacturing process, inventories, deferred taxes and goodwill acquired June 15, 2017, as the Company has not yet finalized the detailed valuation analyses as of October 31, 2017.

During the fiscal quarter ended October 31, 2017, measurement period adjustments were made to the preliminary purchase price allocation recorded in the consolidated financial statements for the fiscal year ended July 31, 2017. The acquired intangible assets, deferred tax liabilities and goodwill were adjusted as a result of additional analyses performed on the estimates used in the calculation of the fair value of the assets acquired and liabilities assumed. The measurement period adjustments to the amortizable intangible assets resulted in an immaterial reduction in the amortization expense recognized in the Company’s condensed consolidated statements of income for the three months ended October 31, 2017, and a reduction in the estimated amortization expense going forward.

 

 

October 31, 2017

 

 

Measurement Period Adjustment

 

 

July 31, 2017

 

Customer relationships

 

$

205,467

 

 

$

(9,415

)

 

$

214,882

 

Trade names and trademark

 

 

32,353

 

 

 

3,402

 

 

 

28,951

 

Proprietary manufacturing process

 

 

39,323

 

 

 

78

 

 

 

39,245

 

Deferred tax liability

 

 

24,484

 

 

 

(562

)

 

 

25,046

 

Goodwill

 

 

204,717

 

 

 

5,371

 

 

 

199,346

 

 

On February 1, 2017, the Company completed the acquisition of the assets of Sealweld Corporation (“Sealweld”), a privately held corporation organized under the laws of the Province of Alberta, Canada, for CAD$22.3 million in cash (or approximately US$17.2 million, at an exchange rate of 0.77 CAD$ to US$ at February 1, 2017), which included CAD$5.5 million (or approximately US$4.2 million, at an exchange rate of 0.77 CAD$ to US$ at February 1, 2017) for estimated working capital. Sealweld is based in Calgary, Alberta, Canada, with additional facilities in the United States and the United Arab Emirates. Sealweld is a global supplier of high-performance products and services for industrial valve and actuator maintenance, including lubricants, sealants, cleaners, valve fittings, tools and equipment. Additionally, Sealweld provides routine and emergency valve maintenance services and technician training for many of the world’s largest pipeline operators. The Company completed the acquisition by borrowing $17.0 million on the revolving loan under its revolving credit facility. See Note 11 for further discussion of the Company’s revolving credit facility. Sealweld is included in the performance materials segment. The Company expensed transaction and acquisition-related costs of approximately twelve thousand dollars in the three months ended October 31, 2017, which is included in selling, general and administrative expenses on the Company’s condensed consolidated statement of income.

The following table summarizes the acquired assets and assumed liabilities and the preliminary acquisition accounting for the fair value of the assets and liabilities recognized in the condensed consolidated balance sheet at October 31, 2017 (in thousands):

Cash

 

$

69

 

Accounts receivable

 

 

2,937

 

Inventory

 

 

2,350

 

Other assets

 

 

38

 

Property, plant and equipment, net

 

 

4,192

 

Intangible assets

 

 

 

Trade name/trademark

 

 

2,185

 

Non-compete agreements

 

 

2,254

 

Customer relationships

 

 

2,348

 

Total assets acquired

 

$

16,373

 

Current liabilities

 

 

1,172

 

Deferred taxes

 

 

681

 

Net identifiable assets acquired

 

 

14,520

 

Goodwill

 

 

2,671

 

Fair value of net assets acquired

 

$

17,191

 

 

9


This purchase price allocation is preliminary and is pending the finalization of the third party valuation analysis. The fair value of the accounts receivable acquired was $2.9 million, equivalent to the contractual amount acquired. The Company expects all acquired accounts receivable to be collected. The $2.6 million of goodwill was assigned to the performance materials segment, and the Company expects $0.1 million of goodwill to be tax deductible. The goodwill is primarily attributable to the assembled workforce of Sealweld.

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 condensed consolidated statements of cash flows:

 

 

October 31,

 

 

October 31,

 

 

Current Presentation

 

2017

 

 

2016

 

 

Cash and cash equivalents

 

$

29,863

 

 

$

17,606

 

 

Restricted cash

 

 

 

 

 

1,000

 

 

Total cash, cash equivalents and restricted cash

 

$

29,863

 

 

$

18,606

 

 

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

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 317,000 and 272,000 dilutive shares related to stock-based awards for the three months ended October 31, 2017 and 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. There were no potentially dilutive securities that were not included for the three months ended October 31, 2017, and 11,160 potentially diluted securities that were not included for the three months ended October 31, 2016.

On October 23, 2017, the Company completed an underwritten public offering of 3,450,000 shares of its common stock, including 450,000 shares issued pursuant to the underwriters’ exercise of their option to purchase additional shares, at a public offering price of $54 per share, resulting in estimated net proceeds of approximately $175.7 million after deducting underwriting commissions and estimated offering expenses.

5. Inventories, net

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

 

 

October 31,

 

 

July 31,

 

 

 

2017

 

 

2017

 

Raw materials

 

$

9,856

 

 

$

9,124

 

Work in process

 

 

3,644

 

 

 

3,763

 

Supplies

 

 

906

 

 

 

884

 

Finished products

 

 

32,357

 

 

 

33,341

 

Less: reserve for inventory obsolescence

 

 

(589

)

 

 

(630

)

Inventories, net

 

$

46,174

 

 

$

46,482

 

 

 

10


6. Property, Plant and Equipment

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

 

 

October 31,

 

 

July 31,

 

 

 

2017

 

 

2017

 

Land

 

$

12,546

 

 

$

12,632

 

Buildings and improvements

 

 

51,788

 

 

 

50,973

 

Equipment

 

 

108,131

 

 

 

106,379

 

Leasehold improvements

 

 

2,755

 

 

 

2,755

 

 

 

 

175,220

 

 

 

172,739

 

Less: accumulated depreciation and amortization

 

 

(80,404

)

 

 

(76,974

)

 

 

 

94,816

 

 

 

95,765

 

Construction-in-progress

 

 

11,931

 

 

 

9,670

 

Property, plant and equipment, net(1)

 

$

106,747

 

 

$

105,435

 

 

 

(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 obtained an updated third party market analysis on the property and has increased marketing and advertising efforts and expects the sale of the property to be completed during fiscal year 2018.

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 2017. The Company recognized stock-based compensation costs of approximately $1.6 million and $1.4 million for the three months ended October 31, 2017 and 2016, respectively. The Company also recognized the related tax benefits of $0.6 million and $0.5 million for the three months ended October 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 October 31, 2017, the unrecognized compensation costs related to stock-based awards was approximately $7.1 million, which is expected to be recognized over a weighted-average period of 1.6 years.

 

11


Performance-Based Stock Awards

There were 382,910 and 373,798 non-vested performance-based restricted stock unit (“RSU”) awards outstanding at October 31, 2017 and August 1, 2017, respectively, which reflected the number of RSUs granted under outstanding awards that were expected to vest as of such dates. There were no performance-based RSU awards that vested during the three months ended October 31, 2017. As of October 31, 2017, the non-vested performance-based RSU awards consisted of Series 1, Series 3 and Series 4 awards granted to certain executives and employees in fiscal years 2017 and 2016 as summarized below reflecting the target number of RSUs under the awards. Upon vesting, each RSU is converted to one share of common stock.

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forfeitures(2)

 

 

(654

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Series 1

 

 

9,877

 

 

$

34.95

 

 

7/31/2019

 

 

184

%

 

 

18,201

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      4/28/2017

 

Series 4, Tranche 1

 

 

4,545

 

 

$

52.55

 

 

7/31/2019

 

 

 

 

 

 

 

 

      10/21/2016

 

Series 4, Tranche 1

 

 

44,337

 

 

$

29.11

 

 

7/31/2019

 

 

 

 

 

 

 

 

 

 

Forfeitures(2)

 

 

(4,957

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Series 4, Tranche 1

 

 

43,925

 

 

 

 

 

 

 

 

 

100

%

 

 

43,925

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

      4/28/2017

 

Series 4, Tranche 2

 

 

4,546

 

 

$

52.55

 

 

7/31/2019

 

 

 

 

 

 

 

 

      10/21/2016

 

Series 4, Tranche 2

 

 

44,337

 

 

$

29.11

 

 

7/31/2019

 

 

 

 

 

 

 

 

 

 

Forfeitures(2)

 

 

(4,957

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Series 4, Tranche 2

 

 

43,926

 

 

 

 

 

 

 

 

 

184

%

 

 

80,944

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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)

 

 

(12,983

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Series 1

 

 

58,805

 

 

 

 

 

 

 

 

 

196

%

 

 

115,433

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1/19/2016

 

Series 3

 

 

82,938

 

 

$

20.89

 

 

7/31/2020

 

 

150

%

 

 

124,407

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

The percentage vesting for performance-based RSU awards is currently estimated at 184% and 196% of the target award for Series 1 awards granted in fiscal years 2017 and 2016 awards, respectively, 150% of the target award for Series 3 awards granted in fiscal year 2016, and 100% and 184% of the target award for the first and second tranches, respectively, of the Series 4 awards granted in fiscal year 2017.

(2)

Forfeitures include Series 1 and Series 4 awards that were granted to certain employees in fiscal years 2017 and 2016 but that were forfeited at the termination of their employment.

Series 1: For the fiscal year 2017 and 2016 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, 2017, and reflects the percentage of RSUs projected to vest for the respective awards at the end of their measurement periods. For the fiscal year 2017 and 2016 awards, RSUs vested may increase to a maximum of 200% of the target award on achievement of maximum performance objectives.

Series 3: In fiscal year 2016 Mr. Fraser was 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 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 150% 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 for average annual return on invested capital and annual compound growth

 

12


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, 2017, and reflects the percentage of RSUs projected to vest at the end of the measurement period. For the fiscal year 2017 awards, the RSUs 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 RSUs for performance-based awards outstanding was $25.60 and $25.49 at October 31, 2017 and August 1, 2017, respectively.

The weighted-average per share grant-date fair value of the target award RSUs for performance-based awards granted during the three months ended October 31, 2016 was $29.11.  No performance-based RSU awards were granted during the three months ended October 31, 2017.

The weighted-average per share grant-date fair value of performance-based awards forfeited during the three months ended October 31, 2017 and 2016 was $27.47 and $19.63, respectively.

Time-Based Stock Awards

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

 

 

Shares

 

 

Weighted-Average Grant-Date

Fair Value

 

Non-vested on August 1, 2017

 

 

173,603

 

 

$

24.37

 

Granted (1)

 

 

2,220

 

 

 

55.13

 

Vested(2)

 

 

(8,970

)

 

 

30.00

 

Forfeited

 

 

(385

)

 

 

27.47

 

Non-vested on October 31, 2017

 

 

166,468

 

 

 

24.46

 

 

 

(1)

Includes 2,220 shares granted to non-employee directors for service during the three months ended October 31, 2017.

(2)

Includes 2,220 shares granted to non-employee directors for service for the three months ended October 31, 2017. The shares vest on the date of grant, and the Company recognizes compensation expense on such date. Includes 6,750 time-based RSU awards granted to certain employees and executives, and the Company recognizes compensation expense related to the awards over the respective service periods in accordance with GAAP. Upon vesting, each RSU was converted to one share of common stock.

The total fair value of time-based stock awards vested during the three months ended October 31, 2017 and 2016 was approximately $0.3 million and $0.3 million, respectively.  

 

 

13


8. Intangible Assets

Intangible assets are summarized as follows (in thousands):

 

 

Number of Years

 

 

October 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-value of product qualifications

   (5-15 years)

 

 

14.1

 

 

$

14,100

 

 

$

(5,694

)

 

$

(806

)

 

$

7,600

 

Performance materials-customer relationships

   (15-20 years)

 

 

19.7

 

 

 

218,106

 

 

 

(5,685

)

 

 

11

 

 

 

212,432

 

Performance materials-proprietary manufacturing process

   (15 years)

 

 

15.0

 

 

 

39,323

 

 

 

(983

)

 

 

 

 

 

38,340

 

Electronic chemicals-other (1-15 years)

 

 

7.4

 

 

 

2,649

 

 

 

(1,816

)

 

 

(121

)

 

 

712

 

Performance materials-other (5-15 years)

 

 

6.2

 

 

 

3,160

 

 

 

(426

)

 

 

10

 

 

 

2,744

 

Total intangible assets subject to amortization

 

 

18.5

 

 

$

277,338

 

 

$

(14,604

)

 

$

(906

)

 

$

261,828

 

Intangible assets not subject to amortization:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Performance materials-penta product registrations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

8,765

 

Performance materials-related trade name and trademark

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

37,433

 

Performance materials-proprietary manufacturing process

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,808

 

Total intangible assets not subject to amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

49,006

 

Total intangible assets, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

310,834

 

 

 

 

 

Number of Years

 

 

July 31, 2017

 

 

 

Weighted