This excerpt taken from the KMGB 8-K filed Oct 14, 2008.
As previously reported, in the second half of fiscal 2008, demand for Animal Health pesticides, particularly high margin ear tag products, was down significantly due to a number of factors, including the delay in the onslaught of the fly season due to unseasonably cool spring weather in key markets, coupled with higher feed, fuel and fertilizer prices, which curtailed discretionary purchases by cattle growers. As a result, Animal Health sales were $11.7 million in fiscal 2008 compared to $14.1 million in the prior fiscal year.
Commenting on its Animal Health business, Neal Butler, President and CEO of KMG, stated, Despite the severe downturn in the market during fiscal 2008, the segment still contributed over $1 million to operating income. We are convinced that Animal Health is a sound market,
and we expect to achieve more normalized sales levels domestically in the new fiscal year. To diversify our customer base and minimize the seasonality of this business, we are moving aggressively to penetrate Latin American markets. We have received registrations in Puerto Rico, Mexico and Argentina, and initial shipments have been made to all three countries, with shipments to Mexico and Argentina occurring in the first quarter of fiscal 2009. We have also applied for registrations in Colombia, Venezuela and Brazil and still others are planned. We have targeted the Latin America market, not only because of its large cattle populations, but also because these countries have either year-round warm weather or are situated below the equator so their seasons are opposite those in the northern hemisphere.
KMGs Penta revenues were well ahead of the prior year throughout the first half; however, Penta revenues in the third fiscal quarter of 2008 were substantially lower than the previous year. The 25% decline in third quarter Penta sales was due to a sharp price increase for #2 oil, which wood treaters use to blend with Penta to treat poles. Penta revenues were $26.4 million for all of fiscal 2008, down 7% from $28.4 million in fiscal 2007. A 35% increase in the cost of a key petroleum-based component resulted in higher unit costs and lower gross margins for our main Penta product. Penta operating profits declined $2.5 million for the year primarily due to the dramatic cost increase for that one component combined with the 7% decline in annual revenues.
For fiscal 2008, Creosote sales volumes were consistent with fiscal 2007 and revenues increased more than 26.5% to $55.2 million, from $43.6 million in fiscal 2007, due to price increases implemented by KMG in fiscal 2008 offsetting the rising cost of purchased Creosote. The price increases resulted in a $300,000 increase in operating profits for the segment, despite an increase in certain operating expenses. Mr. Butler pointed out, In the fourth quarter, we saw Penta sales recover close to fourth quarter 2007 levels. Based on current market intelligence, we believe that fiscal 2009 sales of Creosote and Penta should approximate those of fiscal 2008. We are however mindful of a possible slowdown in business stemming from cash and credit constraints of our customers, higher energy and raw materials costs, and weakness in general economic conditions throughout North America, all of which could negatively influence utility pole replacement and railroad maintenance programs.
KMGs Electronic Chemicals acquisition from Air Products and Chemicals, Inc. has performed well. The Electronic Chemicals business has grown sales from approximately $91 million during Air Products previous fiscal year, to its current annualized run rate of $105 million under KMGs ownership, representing a more than 15% increase. Electronic Chemicals contributed $2.1 million in operating income in fiscal 2008. The business was operated under a transitional services agreement with the seller through September 2008. Accordingly, 2008 results were adversely impacted by the cost of that agreement with Air Products. The incremental cost of operating under the transitional services was estimated to be $1.2 million for fiscal 2008. Additionally, $670,000 of third-party consulting fees were incurred to integrate the acquired business into KMGs operations and systems.
Discussing expectations for the new fiscal year, Mr. Butler noted, We are looking for top and bottom line growth in our Electronic Chemicals business. Net sales growth in 2009 should reflect an increase in unit volume stemming from new and profitable business with several major global customers, coupled with price increases enacted last spring, which should help boost gross profit margins. These factors, plus the elimination of transitional service fees and integration costs should produce a sizeable improvement in segment operating income. Transitional services fees paid to Air Products continued for the first two months of fiscal 2009, however, before the final integration was achieved. Additionally we will see
approximately $300,000 of third-party consulting fees associated with the integration project in the first quarter of 2009.