Attached files
file | filename |
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EX-32.2 - EX-32.2 - KMG CHEMICALS INC | kmg-ex322_17.htm |
EX-32.1 - EX-32.1 - KMG CHEMICALS INC | kmg-ex321_18.htm |
EX-31.2 - EX-31.2 - KMG CHEMICALS INC | kmg-ex312_19.htm |
EX-31.1 - EX-31.1 - KMG CHEMICALS INC | kmg-ex311_20.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 |
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75-2640529 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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300 Throckmorton Street, Fort Worth, Texas |
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76102 |
(Address of principal executive offices) |
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(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 |
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☐ |
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Accelerated filer |
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☒ |
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Non-accelerated filer |
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☐ |
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(Do not check if a smaller reporting company) |
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Smaller reporting company |
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☐ |
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||||||
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Emerging growth company |
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☐ |
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.
2
PART I — FINANCIAL INFORMATION
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except for share and per share amounts)
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October 31, |
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July 31, |
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2017 |
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2017 |
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(Unaudited) |
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Assets |
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Current assets |
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|
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Cash and cash equivalents |
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$ |
29,863 |
|
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$ |
20,708 |
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Accounts receivable |
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|
|
|
|
|
|
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Trade, net of allowances of $214 at October 31, 2017 and $263 at July 31, 2017 |
|
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51,946 |
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|
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51,168 |
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Other |
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4,271 |
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|
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6,168 |
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Inventories, net |
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46,174 |
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|
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46,482 |
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Prepaid expenses and other |
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8,216 |
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8,617 |
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Total current assets |
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140,470 |
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133,143 |
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Property, plant and equipment, net |
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106,747 |
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105,435 |
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Goodwill |
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229,746 |
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224,391 |
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Intangible assets, net |
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310,834 |
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320,401 |
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Other assets, net |
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7,017 |
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9,061 |
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Total assets |
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$ |
794,814 |
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$ |
792,431 |
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Liabilities and stockholders’ equity |
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|
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Current liabilities |
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|
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|
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Accounts payable |
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$ |
32,064 |
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$ |
29,570 |
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Accrued liabilities |
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12,689 |
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|
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12,456 |
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Employee incentive accrual |
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4,283 |
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7,713 |
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Current portion of long-term debt |
|
|
— |
|
|
|
3,167 |
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Total current liabilities |
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49,036 |
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|
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52,906 |
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Long-term debt, net |
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352,867 |
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|
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523,102 |
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Deferred tax liabilities |
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32,934 |
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37,944 |
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Other long-term liabilities |
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4,964 |
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4,763 |
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Total liabilities |
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439,801 |
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618,715 |
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Commitments and contingencies |
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Stockholders’ equity |
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Preferred stock, $0.01 par value, 10,000,000 shares authorized, none issued |
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— |
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— |
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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 |
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154 |
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|
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119 |
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Additional paid-in capital |
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218,927 |
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42,535 |
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Accumulated other comprehensive loss |
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(10,334 |
) |
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(9,712 |
) |
Retained earnings |
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146,266 |
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140,774 |
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Total stockholders’ equity |
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355,013 |
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|
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173,716 |
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Total liabilities and stockholders’ equity |
|
$ |
794,814 |
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$ |
792,431 |
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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)
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Three Months Ended |
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October 31, |
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|||||
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2017 |
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2016 |
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Net sales |
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$ |
110,664 |
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$ |
76,495 |
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Cost of sales |
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64,183 |
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46,811 |
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Gross profit |
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46,481 |
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29,684 |
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Distribution expenses |
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9,442 |
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9,102 |
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Selling, general and administrative expenses |
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13,339 |
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11,366 |
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Amortization of intangible assets |
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3,511 |
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|
535 |
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Restructuring charges |
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109 |
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— |
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Operating income |
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20,080 |
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8,681 |
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Other (expense) income |
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Interest expense, net |
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(8,094 |
) |
|
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(177 |
) |
Loss on the extinguishment of debt |
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(4,175 |
) |
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— |
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Derivative fair value gain |
|
|
849 |
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|
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— |
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Other, net |
|
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(181 |
) |
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230 |
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Total other (expense) income, net |
|
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(11,601 |
) |
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53 |
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Income before income taxes |
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8,479 |
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8,734 |
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Provision for income taxes |
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(2,629 |
) |
|
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(2,992 |
) |
Net income |
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$ |
5,850 |
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$ |
5,742 |
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Earnings per share |
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Net income per common share basic |
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$ |
0.47 |
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$ |
0.48 |
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Net income per common share diluted |
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$ |
0.46 |
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$ |
0.47 |
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Weighted average shares outstanding |
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Basic |
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12,410 |
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11,880 |
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Diluted |
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12,727 |
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12,152 |
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See accompanying notes to condensed consolidated financial statements.
4
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In thousands)
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Three Months Ended |
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October 31, |
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2017 |
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2016 |
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Net income |
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$ |
5,850 |
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$ |
5,742 |
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Other comprehensive income |
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Foreign currency translation loss |
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(622 |
) |
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(2,311 |
) |
Total comprehensive income |
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$ |
5,228 |
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$ |
3,431 |
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See accompanying notes to condensed consolidated financial statements.
5
KMG CHEMICALS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In thousands)
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Three Months Ended |
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October 31, |
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2017 |
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2016 |
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Cash flows from operating activities |
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Net income |
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$ |
5,850 |
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$ |
5,742 |
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Adjustments to reconcile net income to net cash provided by operating activities |
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|
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Depreciation and amortization |
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7,109 |
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3,552 |
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Loss on extinguishment of debt |
|
|
4,175 |
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|
|
— |
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Stock-based compensation expense |
|
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1,608 |
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|
1,425 |
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Amortization of debt discounts and financing costs included in interest expense |
|
|
493 |
|
|
|
— |
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Deferred income tax benefit |
|
|
(1,185 |
) |
|
|
188 |
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Other |
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(195 |
) |
|
|
182 |
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Changes in operating assets and liabilities |
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|
|
|
|
|
|
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Accounts receivable — trade |
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(292 |
) |
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(1,657 |
) |
Accounts receivable — other |
|
|
2,013 |
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|
|
1,240 |
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Inventories |
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|
150 |
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|
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2,092 |
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Other current and noncurrent assets |
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276 |
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|
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(153 |
) |
Accounts payable |
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3,247 |
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1,359 |
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Accrued liabilities and other |
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(2,711 |
) |
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(3,064 |
) |
Net cash provided by operating activities |
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20,538 |
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10,906 |
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Cash flows from investing activities |
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Additions to property, plant and equipment |
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(5,803 |
) |
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(2,634 |
) |
Other investing activities |
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(898 |
) |
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— |
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Proceeds — insurance claim |
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— |
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|
250 |
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Net cash used in investing activities |
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(6,701 |
) |
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(2,384 |
) |
Cash flows from financing activities |
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Proceeds from sale of common stock, net of issuance costs |
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175,669 |
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|
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— |
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Payments under credit facility |
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— |
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(2,500 |
) |
Principal payments on borrowings on term loan |
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(178,000 |
) |
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— |
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Derivative fair value gain |
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(849 |
) |
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— |
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Excess tax benefit from stock-based awards |
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— |
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|
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(57 |
) |
Payment of dividends |
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(357 |
) |
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(353 |
) |
Cash payments related to tax withholdings from stock-based awards |
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(850 |
) |
|
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— |
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Net cash used in financing activities |
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(4,387 |
) |
|
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(2,910 |
) |
Effect of exchange rate changes on cash |
|
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(295 |
) |
|
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(434 |
) |
Net increase in cash, cash equivalents and restricted cash |
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9,155 |
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|
|
5,178 |
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Cash, cash equivalents and restricted cash at beginning of period |
|
|
20,708 |
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|
|
13,428 |
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Cash, cash equivalents and restricted cash at end of period |
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$ |
29,863 |
|
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$ |
18,606 |
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Supplemental disclosures of cash flow information |
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|
|
|
|
|
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Cash paid for interest |
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$ |
7,344 |
|
|
$ |
128 |
|
Cash paid for income taxes, net |
|
$ |
1,212 |
|
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$ |
2,230 |
|
Supplemental disclosure of non-cash investing activities |
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|
|
|
|
|
|
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Purchase of property, plant and equipment through accounts payable |
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$ |
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.
|
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August 1, 2019. Early adoption is permitted. |
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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. |
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The new guidance simplifies subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test. |
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August 1, 2020. Early adoption is permitted. |
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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.
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In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments |
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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. |
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August 1, 2020. Early adoption is permitted. |
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The Company does not expect adoption will have a material impact on its financial statements and related disclosures. |
7
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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. |
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August 1, 2019. Early adoption is permitted. |
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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. |
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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
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 |
|
|
|