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Articles 

KMG Chemicals Inc. Reports Operating Results (10-K)

October 14, 2011 | About:

KMG Chemicals Inc. (KMGB) filed Annual Report for the period ended 2011-07-31.

Kmg Chemicals Inc. has a market cap of $155 million; its shares were traded at around $13.69 with a P/E ratio of 13 and P/S ratio of 0.7. The dividend yield of Kmg Chemicals Inc. stocks is 0.8%. Kmg Chemicals Inc. had an annual average earning growth of 19.9% over the past 10 years.

Highlight of Business Operations:

In fiscal year 2011, income from operations of the penta segment was $6.5 million, as compared to $7.1 million in fiscal year 2010 and $8.7 million in fiscal year 2009. Income from operations for the penta segment decreased by $597,000, or 8.4%, in fiscal year 2011, and decreased by $1.6 million, or 18.5%, in fiscal year 2010 as compared to the respective prior year period. In fiscal year 2011, income from operations of the creosote segment was $8.3 million, as compared to $15.9 million in fiscal year 2010 and $13.4 million in fiscal year 2009. Income from operations for the creosote segment decreased by $7.6 million, or 48.1%, in fiscal year 2011, but increased by $2.5 million, or 18.3%, in fiscal year 2010 as compared to the respective prior year period. Gross margins for penta products were adversely affected toward the end of fiscal year 2011 by higher phenol prices. Over 90% of the decline in income from operations in wood treating chemicals in fiscal year 2011 as compared to fiscal year 2010, however, was because of increased costs and a lower average price on our creosote products. At the end of fiscal year 2010 we entered into a long-term contract to sell creosote to our largest customer. Although this arrangement has had the effect of increasing creosote volume substantially, margins declined from the unusually high levels experienced in fiscal year 2010 to what we believe is a more normal level. In fiscal 2010, income from operations for the penta segment was held down by a decline in penta products volume as utilities reacted to the recession with reduced demand for utility poles, which more than offset the benefit of reduced amortization of about $778,000 on the year. Creosote segment income increased in fiscal year 2010 due to a favorable shift in product mix, as well as improved pricing. The improved segment income was concentrated in the first six months of the fiscal year. In the last half of fiscal year 2010, creosote segment income was down by 42.5% over the comparable period in the prior year, as our supply costs increased by approximately 9.7% over the prior year period. Operating expenses increased by approximately $890,000 in fiscal year 2010 over the prior year primarily due to a $320,000 increase in railcar maintenance costs as we took advantage of the slow down in demand to maintain our fleet, with the balance due primarily to higher storage and handling costs.

Net sales of wood treating chemicals increased to $104.1 million in fiscal year 2011 from $86.0 million in fiscal year 2010. Net sales of wood treating chemicals in fiscal year 2010 represented a decrease from net sales of $94.0 million in fiscal year 2009. The increase in net sales fiscal year 2011 for those products as compared to fiscal year 2010 was $18.1 million, or 21.1%, while the decrease in fiscal year 2010 from fiscal year 2009 was $8.0 million, or 8.5%. In fiscal year 2011, net sales of penta products was up over the prior year by $779,000, or 3.4%, while creosote product sales increased $17.3 million, or 27.4%. Penta product sales declined in fiscal year 2010 from fiscal year 2009 by $3.4 million, or 12.9%, and creosote product net sales decreased $4.6 million, or 6.7%. The increase in fiscal year 2011 in penta products net sales was because of a modest rebound in the volume of utility poles treated, as compared with the downturn in treating in fiscal 2010 because of overall economic conditions. Similarly, as economic conditions improved, creosote volume recovered in fiscal year 2011 from depressed levels in fiscal year 2010. Railroads generally react to lessened traffic by slowing maintenance programs. Demand for treated railroad crossties by railroads, the principal use for creosote, is now at approximately 21.0 million in fiscal year 2011. Demand had declined to about 18 million crossties per year in fiscal year 2010 from approximately 22.0 million crossties per year in fiscal year 2009, near the upper end of the historic range.

Income from operations of the electronic chemicals segment was $6.2 million in fiscal year 2011, as compared to $8.4 million in fiscal year 2010 and $1.5 million in fiscal year 2009. Income from operations of electronic chemicals thus decreased $2.2 million, or 25.9% in fiscal year 2011, and increased $6.9 million, or 465.4%, in fiscal year 2010 as compared to the respective prior year periods. In fiscal year 2011, income from operations was adversely impacted by duplicative expenses associated with the integration of our March 2010 acquisition of the electronic business of General Chemical, and by rising raw material costs. We incurred approximately $309,000 of third party integration expenses in fiscal year 2011, plus approximately $663,000 of integration expenses in fiscal year 2010. We recognized an overall increase in net operating expenses of $10.0 million in fiscal year 2011. That change was mainly caused by an increase of $8.3 million in freight, storage and handling expenses due to greater volume. Because we had the business acquired from General Chemical all of fiscal year 2011, we had approximately $970,000 of higher selling expenses resulting from higher employee costs. In fiscal year 2010, we saw a decrease of $1.1 million in net operating expenses as compared to the prior year due to lower distribution expenses from efficiency improvements as we integrated operations and facilities. To address the raw material costs increases that we experienced in fiscal year 2011, we implemented a global price increase that took effect during the second half of fiscal 2011. We believe those increases will recapture a large part of our increased raw material costs. The improvement in income from operations during fiscal year 2010, as compared with fiscal year 2009, was caused by improved sales on better economic conditions, particularly in North America. Our North American operations also benefited at the end of fiscal year 2010 from the acquisition from the business from General Chemical.

Selling, general and administrative expenses increased to $24.8 million in fiscal year 2011 from $23.4 million in fiscal year 2010, an increase of $1.4 million, or 5.9%. As a percentage of sales, those expenses were 9.3% and 11.2% in fiscal years 2011 and 2010, respectively. The increase in fiscal year 2011 over the prior year was primarily for increases in employee costs of $645,000, in permits and licenses of $349,000, in advertising costs of $143,000 and in utilities and fuel costs of $121,000. Offsetting these increases, however, was a decrease of $353,000 in integration costs in the current period.

Distribution expenses increased to $29.0 million in fiscal year 2011 from $19.3 million in fiscal year 2010, an increase of $9.6 million, or 49.9%. Approximately $8.3 million of the increase in distribution expense in fiscal year 2011 was from increased storage, handling and freight in our electronic chemicals segment, in large part on increased volume attributable to the acquisition of business from General Chemical. Distribution expense was 10.9% of net sales in fiscal year 2011 and 9.3% in the prior year. In electronic chemicals, distribution expense was 16.0% of net sales in fiscal year 2011 as compared to 14.3% in fiscal year 2010.

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About the author:

10qk
Charlie Tian, Ph.D., is the founder of GuruFocus. You can now order his book Invest Like a Guru on Amazon.

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