We manufacture, formulate and distribute specialty chemicals globally. We
operate businesses engaged in electronic chemicals and industrial wood treating
chemicals. Our electronic chemicals are used in the manufacturing of
semiconductors. Our wood treating chemicals, pentachlorophenol ("penta") and
creosote are used by our industrial customers primarily to extend the useful
life of utility poles and railroad crossties.
Sale of the Animal Health Business
On March 1, 2012, we sold certain assets of our animal health business to Bayer
Healthcare, LLC for a purchase price of approximately $10.2 million, including
$1.0 million held in escrow. The purchase price was paid in cash, subject to the
escrow, and we used the proceeds to reduce the amount outstanding on our
revolving indebtedness. The escrowed amount is being held pending final
acceptance by EPA of certain studies being performed at its request on
tetrachlorvinphos, the active ingredient used in Rabon products. The escrowed
funds are to be released to us once the EPA has finally accepted the studies,
the buyer has voluntarily canceled the products, or after five years. The
escrowed funds are to be released to the buyer if the EPA cancels products to
which the studies pertain before the funds are distributed to us. The sale
included inventory, equipment and product registrations. We retained the real
estate and building at our facility in Elwood, Kansas, and we will operate it to
manufacture products for the buyer under a transition services agreement for one
year, subject to two six-month extensions.
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Results of Operations
Three and Nine Month Periods Ended April 30, 2012 compared with Three and Nine
Month Periods Ended April 30, 2011
Segment Data
Segment data is presented for our two reportable segments for the three and nine
month periods ended April 30, 2012 and 2011. The segment data should be read in
conjunction with our condensed consolidated financial statements and related
notes thereto included elsewhere in this report. We previously had four
reportable segments for electronic chemicals, penta, creosote and animal health.
During the first quarter of fiscal year 2012 we re-evaluated the criteria used
to determine operating segments and concluded that our two wood treating product
segments met the criteria of a single operating segment. As a result our
reportable segments were revised to reflect a change combining those two
reportable segments. The animal health business was sold in March 2012, and
results of that former segment are included as discontinued operations. Prior
year information has been reclassified to conform to the current period
presentation.
Three Months Ended Nine Months Ended
April 30, April 30,
2012 2011 2012 2011
(Amounts in thousands)
Sales
Electronic Chemicals $ 39,422 $ 38,509 $ 116,396 $ 111,303
Wood Treating Chemicals 27,157 23,390 88,697 73,357
Net sales $ 66,579 $ 61,899 $ 205,093 $ 184,660
Net Sales
Net sales increased $4.7 million, or 7.6%, to $66.6 million in the third quarter
of fiscal year 2012 as compared to $61.9 million for the same period of the
prior year. For the nine months, net sales increased $20.4 million, or 11.1%, to
$205.1 million in the first nine months of fiscal year 2012 as compared with
$184.7 million for the same period of the prior year.
In the third quarter of fiscal year 2012, the electronic chemicals segment had
net sales of $39.4 million, an increase of $913,000, or 2.4%, as compared to
$38.5 million for the prior year period. For the nine month period, the segment
had net sales of $116.4 million, an increase of $5.1 million, or 4.6%, as
compared to $111.3 million in the prior year. We implemented price increases
over the past twelve months in response to increased raw material costs. We
expect demand for our electronic chemicals products to improve in calendar 2012,
and we will have additional business from a new semiconductor fabrication
facility that has come on stream.
Net sales of wood treating chemicals increased $3.8 million, or 16.1%, to $27.2
million in the third quarter of fiscal year 2012 as compared to $23.4 million
for the prior year period. For the nine month period, the segment had net sales
of $88.7 million, an increase of $15.3 million, or 20.9%, as compared to
$73.4 million in the prior year. The increase in net sales for the quarter was
due primarily to increases in price, while the increase for the nine month
period was attributable almost evenly to higher volumes and increases in price.
We expect to see generally flat demand in the segment through the balance of the
fiscal year.
Gross Profit
Gross profit increased by $3.8 million, or 22.9%, to $20.6 million in the third
quarter of fiscal year 2012 from $16.8 million in the same quarter of the prior
year. Gross profit as a percentage of sales increased to 30.9% in the third
quarter of fiscal year 2012 from 27.1% in the third quarter of fiscal year 2011.
For the nine month period, we had gross profit of $56.4 million, an increase of
$5.3 million, or 10.4%, as compared to $51.1 million in the prior year. Gross
profit as a percentage of sales was flat for the nine months at 27.5% in fiscal
year 2012 and 27.7% in the prior fiscal year.
The increase in aggregate gross profit for the quarter was due primarily to
pricing action in the electronic chemicals segment and, now that our
consolidation is complete, lower manufacturing costs.
Other companies may include certain of the costs that we record in cost of sales
as distribution expenses or selling, general and administrative expenses, and
may include certain of the costs that we record in distribution expenses or
selling, general and administrative expenses as a component of cost of sales,
resulting in a lack of comparability between our gross profit and that reported
by other companies.
Distribution Expenses
Distribution expenses were flat at $7.4 million in both the third quarter of
fiscal year 2012 and in the prior year period. Distribution expenses were
approximately 11.1% and 12.0% of net sales for the third quarter of fiscal years
2012 and 2011, respectively. For the nine month period, we had distribution
expenses of $19.3 million, a decrease of $1.5 million, or 7.0%, as compared to
$20.7 million in the prior year. Distribution expense as a percentage of sales
decreased for the nine months to 9.4% in fiscal year 2012 from 11.2% in the
prior fiscal year 2011. The decrease in distribution expenses was attributable
to electronic chemicals, which resulted from efficiency improvements in our
supply chain and the completion of our integration effort. The decline in
distribution expense as a percentage of revenue was attributable fairly evenly
to efficiency improvements in the electronic chemicals business and an increase
in the weighting of wood treating chemicals' share of total revenue. The
electronic chemicals business comprises over 75% of our distribution expenses.
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Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $1.1 million, or 21.3%,
to $6.3 million in the third quarter of fiscal year 2012 from $5.2 million in
the same quarter of fiscal year 2011. Those expenses were 9.5% and 8.4% of sales
in the third quarter of fiscal years 2012 and 2011, respectively. For the nine
month period, we had selling, general and administrative expenses of
$18.4 million, an increase of $2.5 million, or 15.9%, as compared to
$15.9 million in the prior year. Those expenses as a percentage of sales were
9.5% in fiscal year 2012 and 8.4% in fiscal year 2011 for the third quarter
comparison, and were 9.0% in fiscal year 2012 and 8.6% in fiscal year 2011 for
the nine month comparison. For the three months ended April 30, 2012, the
increase over the prior year was due to employee related expenses and for the
nine months ended April 30, 2012, the increase was mainly due to higher employee
related costs and non-recurring environmental costs of $1.7 million and
$1.1 million, respectively. The environmental expenses were for waste disposal
at our Tuscaloosa facility in connection with waste generated on installation of
new dissolving equipment, from disposal of out of specification material and
from disposal of creosote waste associated with cleaning rail cars.
Interest Expense
Interest expense was $504,000 and $571,000 in the third quarter of fiscal year
2012 and 2011, respectively, and $1.6 million and $1.8 million in the first nine
months of fiscal year 2012 and 2011, respectively. The decrease was due to lower
borrowings on our loan facility in fiscal year 2012 as compared to the same
periods of the prior year, in part because we paid off the outstanding balance
of $11.3 million on our term loan under that facility in the first quarter of
fiscal year 2012.
Income Taxes
Our effective tax rate for continuing operations was 38.3% and 34.4% in the
third quarter of fiscal years 2012 and 2011, respectively, and 39.2% and 33.8%
for the first nine months of fiscal years 2012 and 2011, respectively. The prior
year period income tax expense was net of discrete period adjustments reflecting
the reversal of the valuation allowance related to a foreign subsidiary of
$208,000 and $618,000 during the three and nine months ended April 30, 2011,
respectively.
Discontinued Operations
Discontinued operations reflected a net gain of $66,000 and $232,000 for the
three month periods ended April 30, 2012 and 2011, respectively, and a net loss
of $333,000 and a net gain of $195,000 for the nine month periods ended
April 30, 2012 and 2011, respectively. We incurred expense in each of the
periods in connection with the dismantling of the production facility related to
the agricultural chemical segment that was discontinued in fiscal year 2008. The
current year periods also included expense related to an accident at our
Matamoros facility during the dismantlement of that facility. We recognized a
pre-tax gain of approximately $90,000 on the sale of the animal health business.
We also recognized a pre-tax gain on the results of operation of that business
during the three months ended April 30, 2012 and 2011 of $292,000 and $442,000,
respectively, and a pre-tax gain of $56,000and $438,000 for the nine month ended
April 30, 2012 and 2011, respectively.
Liquidity and Capital Resources
Cash Flows
Net cash provided by operating activities was $22.9 million for the first nine
months of fiscal year 2012 as compared to $10.0 million for the comparable
period in 2011. Net income adjusted for depreciation and amortization increased
cash $15.2 million in the first nine months of fiscal year 2012 as compared to
$14.3 million over the same period of the prior year. Cash flows from operating
activities during the current period were favorably impacted by a decrease in
trade accounts receivable of $7.2 million and an increase in income taxes
payable of $2.3 million. The reduction in trade accounts receivable was due to
normal collections activity in our electronic chemicals segment, timing of sales
in our wood treating segment and lower balances related to the animal health
business which was sold on March 1, 2012. The increase in income taxes payable
was associated with the current year income tax accrual. Operating cash flows
were unfavorably impacted by an increase in inventories of $4.6 million
resulting mainly from the timing of creosote purchases.
Net cash provided by investing activities in the first nine months of fiscal
2012 was $5.3 million as compared to $5.6 million of net cash used in the prior
year period. In fiscal year 2012, we received proceeds of $10.2 million from the
sale of our animal health business. The additions to property, plant and
equipment were $3.9 million and $5.8 million in fiscal years 2012 and 2011,
respectively. In fiscal year 2012, the majority of the additions were for
electronic chemicals distribution and production equipment. In fiscal year 2011,
the additions were primarily for expansion at our Hollister, California facility
and for equipment at Pueblo, Colorado. During the current period cash and cash
equivalents were reduced by $1.0 million for cash that was restricted in
connection with the escrowed amount on the animal health sale.
Net cash used in financing activities was $24.8 million in the first nine months
of fiscal year 2012 as compared to $8.4 million in the comparable prior year
period. In the first nine months of fiscal year 2012, we made principal payments
of $11.3 million on the term loan indebtedness to pay it off entirely, had net
payments on our revolving loan of $9.9 million and cleared the book overdraft
outstanding at July 31, 2011 of $2.9 million. The book overdraft represented the
amount in excess of the bank cash balance necessary to fund the checks that were
paid but not yet cleared. In the prior year period, we had a net payment on our
revolving loan of $2.1 million and principal payments on our term loan of $6.0
million. In the nine month periods ended April 30, 2012 and 2011, we paid
dividends of $908,000 and $735,000, respectively. It is our policy to pay
dividends from available cash after taking into consideration our profitability,
capital requirements, financial condition, growth, business opportunities and
other factors which our board of directors may deem relevant.
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Working Capital
We have a revolving line of credit under an amended and restated credit
agreement. At April 30, 2012, we had $8.0 million outstanding under that
revolving facility.
Management believes that our current credit facility, combined with cash flows
from operations, will adequately provide for our working capital needs for
current operations for the next twelve months.
Long Term Obligations
To finance the acquisition of the electronic chemicals business in December
2007, we entered into a credit agreement and a note purchase agreement with
Wachovia Bank, National Association, a subsidiary of Wells Fargo & Co., Bank of
America, N.A., The Prudential Insurance Company of America, and Pruco Life
Insurance Company. The credit facility included a revolving loan facility and a
term loan facility.
We amended the credit agreement in March 2010, and amended it again in November
2011. The November 2011 amendment of the credit facility raises the maximum
amount that may be borrowed under the revolving loan facility from $50.0 million
to $60.0 million, extends the maturity date of the credit agreement to
December 31, 2016 and allows advances under the revolving loan facility without
reference to a borrowing base restriction. The financial covenant for debt to
capitalization was replaced by a current ratio minimum of 1.5 to 1.0. During the
first quarter of fiscal year 2012 we paid off all outstanding advances under the
credit facility's term loan commitment, and in the November 2011 amendment, that
aspect of the facility was deleted.
Advances under the revolving loan facility mature December 31, 2016 and bears
interest at a varying rate of LIBOR plus a margin based on our funded debt to
EBITDA, as described below.
Ratio of Funded Debt to EBITDA Margin
Equal to or greater than 3.0 to 1.0 2.75 %
Equal to or greater than 2.5 to 1.0, but less than 3.0 to 1.0 2.50 %
Equal to or greater than 2.0 to 1.0, but less than 2.5 to 1.0 2.25 %
Equal to or greater than 1.5 to 1.0, but less than 2.0 to 1.0 2.00 %
Less than 1.5 to 1.0 1.75 %
Advances outstanding under the revolving loan facility bear interest of 2.24% as
of April 30, 2012 and June 1, 2012. Before the term loan facility was paid off
and removed from the credit facility, the term facility required principal
payments of $458,333 per month for the first 24 months, then beginning January
2010 principal payments became $666,667 per month for the balance of the term
prior to maturity. On March 2, 2012, we repaid $10.0 million of the balance on
the revolving loan facility from proceeds received from the sale of the animal
health business. At April 30, 2012, $8.0 million was outstanding on the
revolving facility.
The financing for the acquisition of the electronic chemicals business in fiscal
year 2008 included a $20.0 million note purchase agreement with the Prudential
Insurance Company of America. Advances under the note purchase agreement mature
December 31, 2014, and bear interest at 7.43% per annum. Principal is payable at
maturity. At April 30, 2012, $20.0 million was outstanding under the note
purchase agreement.
Loans under the amended and restated credit facility and the note purchase
agreement are secured by our assets, including inventory, accounts receivable,
equipment, intangible assets and real property. The credit facility and the note
purchase agreement have restrictive covenants, including that we must maintain a
fixed charge coverage ratio of 1.5 to 1.0, a ratio of funded debt to EBITDA of
3.0 to 1.0, and a current ratio of at least 1.5 to 1.0. For purposes of
calculating these financial covenant ratios, we use a pro forma EBITDA. On
April 30, 2012, we were in compliance with all of our debt covenants.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements, such as financing or unconsolidated
variable interest entities.
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Disclosure Regarding Forward Looking Statements
We are including the following discussion to inform our existing and potential
security holders generally of some of the risks and uncertainties that can
affect us and to take advantage of the "safe harbor" protection for
forward-looking statements that applicable federal securities law affords. From
time to time, our management or persons acting on our behalf make
forward-looking statements to inform existing and potential security holders
about our company. These forward-looking statements include information about
possible or assumed future results of our operations. All statements, other than
statements of historical facts, included or incorporated by reference in this
report that address activities, events or developments that we expect or
anticipate may occur in the future, including such things as future capital
expenditures, business strategy, competitive strengths, goals, growth of our
business and operations, plans and references to future successes may be
considered forward-looking statements. Also, when we use words such as
"anticipate," "believe," "estimate," "intend," "plan," "project," "forecast,"
"may," "should," "budget," "goal," "expect," "probably" or similar expressions,
we are making forward-looking statements. Many risks and uncertainties may
impact the matters addressed in these forward-looking statements. Our
forward-looking statements speak only as of the date made and we will not update
forward-looking statements unless the securities laws require us to do so.
Some of the key factors which could cause our future financial results and
performance to vary from those expected include:
• the loss of primary customers;
• our ability to implement productivity improvements, cost reduction
initiatives or facilities expansions;
• market developments affecting, and other changes in, the demand for our
products and the entry of new competitors or the introduction of new
competing products;
• availability or increases in the price of our primary raw materials or
active ingredients;
• the timing of planned capital expenditures;
• our ability to identify, develop or acquire, and market additional product
lines and businesses necessary to implement our business strategy and our
ability to finance such acquisitions and development;
• the condition of the capital markets generally, which will be affected by
interest rates, foreign currency fluctuations and general economic
conditions;
• cost and other effects of legal and administrative proceedings,
settlements, investigations and claims, including environmental
liabilities which may not be covered by indemnity or insurance;
• the effects of weather, earthquakes, other natural disasters and terrorist
attacks;
• the ability to obtain registration and re-registration of our products
under applicable law;
• the political and economic climate in the foreign or domestic
jurisdictions in which we conduct business or instability in a region due
to criminal activity; and
• other United States or foreign regulatory or legislative developments
which affect the demand for our products generally or increase the
environmental compliance cost for our products or impose liabilities on
the manufacturers and distributors of such products.
The information contained in this report, including the information set forth
under the heading "Risk Factors", identifies additional factors that could cause
our results or performance to differ materially from those we express in our
forward-looking statements. Although we believe that the assumptions underlying
our forward-looking statements are reasonable, any of these assumptions and,
therefore, the forward-looking statements based on these assumptions, could
themselves prove to be inaccurate. In light of the significant uncertainties
inherent in the forward-looking statements which are included in this report and
the exhibits and other documents incorporated herein by reference, our inclusion
of this information is not a representation by us or any other person that our
objectives and plans will be achieved.
