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KMG Chemicals Inc. Reports Operating Results (10-Q)
Posted by: gurufocus (IP Logged)
Date: March 11, 2011 06:00PM

KMG Chemicals Inc. (KMGB) filed Quarterly Report for the period ended 2011-01-31. Kmg Chemicals Inc. has a market cap of $206.8 million; its shares were traded at around $18.3 with a P/E ratio of 14.7 and P/S ratio of 1. The dividend yield of Kmg Chemicals Inc. stocks is 0.4%. Kmg Chemicals Inc. had an annual average earning growth of 19.9% over the past 10 years.



Highlight of Business Operations:

Net sales of animal health pesticides increased by $665,000, or 27.0%, to $3.1 million in the second quarter of fiscal year 2011 as compared with $2.5 million in the prior year period. For the six month comparison, net sales in the animal health segment increased $883,000, or 26.0%, to $4.3 million in fiscal year 2011 from $3.4 million in fiscal year 2010. The increase was primarily driven by improvement in demand for pest control in the United States in the feed animal sector. However, we have seen a significant increase in orders for ear tag products in Australia, and because we are continuing to add registered products in South America, we see increased animal health sales in that region. Although we are working to have EPA re-establish appropriate tolerances, pending a successful conclusion of that effort, sales of our Rabon products in the U.S. may be adversely affected. Sales of our Rabon products in the U.S. constituted approximately 2% of our fiscal year 2010 consolidated net sales. Seasonal usage of animal health pesticides is dependent on varying seasonal patterns, weather conditions and weather-related pressure from pests, as well as customer marketing programs and requirements. Our revenue from the animal health pesticides segment is seasonal and weighted to the third and fourth quarters of our fiscal year. Revenues from products subject to significant seasonal variations represented 5.0% of our fiscal year 2010 revenues.

Distribution expenses increased $3.0 million, or 68.8%, to $7.4 million in the second quarter of fiscal year 2011 as compared with $4.4 million in the prior year period. For the six month comparison, distribution expense increased $4.3 million, or 46.3%, to $13.7 million in fiscal year 2011 from $9.4 million in fiscal year 2010. Distribution expenses were approximately 11.3% and 10.8% of net sales for the second quarter and for the first six months of fiscal year 2011, respectively, and 9.7% and 9.9% for the comparable prior year periods.

We recognized an increase in distribution expense in our electronic chemicals segment of approximately $2.7 million and $3.8 million for the three and six months ended January 31, 2011, respectively, as compared to the same prior year periods. The increase was primarily due to increased expense on greater volume from the General Chemical acquisition for storage, handling and freight of about $2.4 million and $3.5 million for the three and six month periods, respectively, as compared to the prior year periods. For electronic chemicals, distribution expense was 17.4% of net sales in the second quarter and 15.9% for the six month period in fiscal year 2011, as compared to 15.6% and 16.9%, respectively, for the comparable periods in the prior year. The increase in distribution expense as a percent of sales was due to higher diesel fuel costs, the impact of our integration effort and additional freight incurred to meet shortage conditions arising from unscheduled plant outages at two suppliers in the United States. Those suppliers have now resumed production. Our two wood preservatives segments and our animal health segments had an aggregate increase of approximately $300,000 and $500,000 in distribution expenses in the second quarter and first six months of fiscal year 2011, respectively, mainly because of higher freight costs, storage and steaming costs for creosote storage and higher, volume related railcar cleaning expenses. With increased creosote throughput and milder temperatures, we expect storage and steaming costs will decline in the second half of the fiscal year.

Selling, general and administrative expenses associated with our electronic chemicals segment increased approximately $710,000, to $3.1 million, in the second quarter of fiscal year 2011 as compared to $2.4 million for the second quarter of fiscal year 2010, and increased $1.1 million, to $6.0 million, for the six month period as compared to the same prior year period. The increases in both the three and six month periods were primarily related to higher employee costs of approximately $300,000 and $500,000, respectively. The three and six month periods included integration costs of approximately $61,000 and $237,000, respectively, in connection with the electronic chemicals business we acquired from General Chemical in March 2010. We also recognized modest increases in other professional services for both the three and six month periods. Selling, general and administrative expenses related to each of our other segments were relatively flat.

Net cash provided by operating activities was $10.4 million for the first six months of fiscal year 2011 as compared to $5.2 million for the comparable period in 2010. Net income adjusted for depreciation and amortization increased cash to $9.8 million in the first six months of fiscal year 2011. Changes in operating assets and liabilities included an increase of $1.6 million in accounts payable and a decrease in prepaid expenses and other current assets of approximately $939,000, both of which had a favorable impact on cash. The increase in accounts payable was primarily related to our recently acquired electronic chemicals business and the timing of creosote purchases. Prepaid expense and other current assets decreased as a result of a reduction in prepaid insurance. Cash was unfavorably impacted by a decrease in accrued liabilities of $1.9 million and an increase in inventories of $632,000. Accrued liabilities decreased mainly as a result of a reduction in our employee bonus accrual. The net increase in inventories was due to increased inventories in our electronic chemicals segment mostly offset by reduced inventories in our creosote segment.

Net cash used in investing activities in the first six months of fiscal 2011 was $3.8 million as compared with $390,000 in the prior year period. We made additions to property, plant and equipment of $4.0 million during the first six months of fiscal year 2011 as compared to $500,000 in the same period of fiscal year 2010. In the first six months of fiscal year 2011 we spent approximately $1.3 million in connection with our ongoing expansion project at our Hollister, CA facility. We additionally made approximately $1.7 million of capital expenditures at our Pueblo, CO facility for equipment purchases and upgrades, some of which are in connection with our ongoing consolidation of our United States based electronic chemicals manufacturing. We also made expenditures of $411,000 for equipment at our Milan, Italy facility. The remaining capital expenditures were for normal equipment and system upgrades and purchases across our different locations. The expenditures in the prior year period were primarily in our electronic chemicals segment.

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