Houston-based KMG Chemicals (KMGB) is a specialty chemical products company serving the semiconductor business and the utility and rail business with its wood preservative products. Each of these market segments for the company has been negatively impacted by the global recession.

The company reported a drop in second-quarter earnings of 43% in spite of a 41% increase in sales. Sales figures are distorted, as the prior period included only one month of operation for Electronic Chemicals, a company acquired by KMG Chemicals in 2008.

The earnings decline was attributable primarily to an increase in the price of raw materials used in the processing of company products.

While prices of these materials were dropping dramatically during the quarter, the inventory on hand carried a much higher price and therefore delivered a lower margin. Those inventories have now moved through the system and are no longer affecting company operating margins.

Sales and earnings are also affected by the slowing of the semiconductor business, which utilizes KMG produced chemicals in the manufacturing of semiconductor wafers. A slowdown in manufacturing results in a lower demand for electricity and creosote treated utility poles and railroad ties.

The company is maintaining a positive outlook for the balance of the year in spite of the global economic conditions. Chief Executive Officer Neal Butler has forecast a 20% growth in revenues for the year and strong earnings in the face of the declines in business for many of KMG’s customers.

KMG Chemicals also has a very strong balance sheet with high liquidity and minimal long term debt. The company’s current ratio is 1.6, and there is less than $50 million of long term debt on the balance sheet.

Company management has done an effective job of controlling costs, allowing KMG to remain profitable despite stresses on sales and margins. The full integration of the Electronic Chemicals component in 2008 should result in improved margins as integration costs are reduced or eliminated.

Stock analysts following the company rate the stock a buy or accumulate. It appears that KMG Chemical is well situated to increase sales and margins as the economy moves out of the current recession.

This article was written by Jamie Dlugosch, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.