UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended May 31,November 30, 2016
Commission File Number: 1-9852
CHASE CORPORATION
(Exact name of registrant as specified in its charter)
|
|
|
Massachusetts |
| 11-1797126 |
(State or other jurisdiction of incorporation |
| (I.R.S. Employer Identification No.) |
26 Summer Street, Bridgewater,295 University Avenue, Westwood, Massachusetts 0232402090
(Address of Principal Executive Offices, Including Zip Code)
(508) 819-4200(781) 332-0700
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES ☒ NO ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ☒ NO ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
|
Large accelerated filer ☐ | Accelerated filer ☒ |
Non-accelerated filer ☐ (Do not check if a smaller reporting company) | Smaller reporting company ☐ |
Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES ☐ NO ☒
The number of shares of Common Stock outstanding as of June 30,December 31, 2016 was 9,276,921.9,344,559
CHASE CORPORATION
For the Quarter Ended May 31,November 30, 2016
2
Item 1 — Unaudited Condensed Consolidated Financial StatementsStatements
CHASE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETSSHEETS
(UNAUDITED)
In thousands, except share and per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| May 31, |
| August 31, |
| November 30, |
| August 31, |
| ||||
|
| 2016 |
| 2015 |
| 2016 |
| 2016 |
| ||||
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash & cash equivalents |
| $ | 62,347 |
| $ | 43,819 |
| $ | 49,324 |
| $ | 73,411 |
|
Accounts receivable, less allowance for doubtful accounts of $926 and $705 |
|
| 38,426 |
|
| 39,488 |
| ||||||
Accounts receivable, less allowance for doubtful accounts of $801 and $830 |
| 36,406 |
|
| 34,835 |
| |||||||
Inventories |
|
| 26,605 |
|
| 29,476 |
|
| 28,187 |
|
| 25,814 |
|
Prepaid expenses and other current assets |
|
| 2,812 |
|
| 2,174 |
|
| 3,002 |
|
| 3,728 |
|
Due from sale of business |
|
| 457 |
|
| — |
|
| 229 |
|
| 457 |
|
Assets held for sale |
|
| 604 |
|
| 1,089 |
|
| 686 |
|
| 604 |
|
Deferred income taxes |
|
| 2,255 |
|
| 2,255 |
| ||||||
Total current assets |
|
| 133,506 |
|
| 118,301 |
|
| 117,834 |
|
| 138,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
| 37,028 |
|
| 40,921 |
|
| 35,909 |
|
| 36,742 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill |
|
| 43,899 |
|
| 44,123 |
|
| 50,933 |
|
| 43,576 |
|
Intangible assets, less accumulated amortization of $34,154 and $28,882 |
|
| 38,891 |
|
| 44,852 |
| ||||||
Cash surrender value of life insurance |
|
| 7,135 |
|
| 7,133 |
| ||||||
Intangible assets, less accumulated amortization of $35,112 and $33,352 |
| 53,745 |
|
| 36,580 |
| |||||||
Cash surrender value of life insurance, less current portion |
| 4,530 |
|
| 4,530 |
| |||||||
Restricted investments |
|
| 1,547 |
|
| 1,410 |
|
| 1,707 |
|
| 1,637 |
|
Funded pension plan |
|
| 745 |
|
| 634 |
|
| 383 |
|
| 382 |
|
Deferred income taxes |
|
| 385 |
|
| 390 |
|
| 412 |
|
| 441 |
|
Other assets |
|
| 96 |
|
| 133 |
|
| 37 |
|
| 82 |
|
|
| $ | 263,232 |
| $ | 257,897 |
| $ | 265,490 |
| $ | 262,819 |
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
Current portion of long-term debt |
| $ | 8,400 |
| $ | 8,400 |
| $ | — |
| $ | 43,400 |
|
Accounts payable |
|
| 14,615 |
|
| 15,599 |
|
| 12,793 |
|
| 12,352 |
|
Accrued payroll and other compensation |
|
| 4,493 |
|
| 6,286 |
|
| 3,126 |
|
| 6,553 |
|
Accrued expenses |
|
| 3,900 |
|
| 4,448 |
|
| 3,892 |
|
| 3,892 |
|
Dividend payable |
| 6,532 |
|
| — |
| |||||||
Accrued income taxes |
|
| 2,005 |
|
| 2,783 |
|
| 1,522 |
|
| 2,317 |
|
Total current liabilities |
|
| 33,413 |
|
| 37,516 |
|
| 27,865 |
|
| 68,514 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt, less current portion |
|
| 37,100 |
|
| 43,400 |
|
| 41,300 |
|
| — |
|
Deferred compensation |
|
| 2,304 |
|
| 2,230 |
|
| 1,719 |
|
| 1,649 |
|
Accumulated pension obligation |
|
| 13,150 |
|
| 12,901 |
|
| 15,649 |
|
| 15,563 |
|
Other liabilities |
|
| 373 |
|
| 85 |
|
| 730 |
|
| 328 |
|
Accrued income taxes |
|
| 1,368 |
|
| 1,249 |
|
| 1,229 |
|
| 1,229 |
|
Deferred income taxes |
|
| 6,188 |
|
| 6,174 |
|
| 1,448 |
|
| 1,447 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 10) |
|
|
|
|
|
|
| ||||||
Commitments and Contingencies (Notes 10 and 18) |
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
First Serial Preferred Stock, $1.00 par value: Authorized 100,000 shares; none issued |
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock, $.10 par value: Authorized 20,000,000 shares; 9,267,633 shares at May 31, 2016 and 9,191,958 shares at August 31, 2015 issued and outstanding |
|
| 927 |
|
| 919 |
| ||||||
Common stock, $.10 par value: Authorized 20,000,000 shares; 9,344,559 shares at November 30, 2016 and 9,278,486 shares at August 31, 2016 issued and outstanding |
| 935 |
|
| 928 |
| |||||||
Additional paid-in capital |
|
| 14,989 |
|
| 14,296 |
|
| 14,280 |
|
| 14,719 |
|
Accumulated other comprehensive loss |
|
| (9,646) |
|
| (7,986) |
|
| (17,417) |
|
| (15,479) |
|
Retained earnings |
|
| 163,066 |
|
| 147,113 |
|
| 177,752 |
|
| 173,921 |
|
Total equity |
|
| 169,336 |
|
| 154,342 |
|
| 175,550 |
|
| 174,089 |
|
Total liabilities and equity |
| $ | 263,232 |
| $ | 257,897 |
| $ | 265,490 |
| $ | 262,819 |
|
See accompanying notes to the condensed consolidated financial statements
3
CHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONSOPERATIONS
(UNAUDITED)
In thousands, except share and per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Three Months Ended May 31, |
| Nine Months Ended May 31, |
|
| Three Months Ended November 30, |
| ||||||||||||||||
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
|
|
| 2016 |
| 2015 |
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Sales |
| $ | 63,480 |
| $ | 64,102 |
|
| $ | 173,932 |
| $ | 170,772 |
|
|
| $ | 60,269 |
| $ | 56,746 |
|
| |
Royalties and commissions |
|
| 756 |
|
| 796 |
|
|
| 2,706 |
|
| 2,363 |
|
|
|
| 1,088 |
|
| 732 |
|
| |
|
|
| 64,236 |
|
| 64,898 |
|
|
| 176,638 |
|
| 173,135 |
|
|
|
| 61,357 |
|
| 57,478 |
|
| |
Costs and Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Cost of products and services sold |
|
| 38,542 |
|
| 40,144 |
|
|
| 108,154 |
|
| 108,859 |
|
|
|
| 35,289 |
|
| 34,717 |
|
| |
Selling, general and administrative expenses |
|
| 11,770 |
|
| 12,125 |
|
|
| 33,506 |
|
| 34,260 |
|
|
|
| 11,752 |
|
| 11,510 |
|
| |
Acquisition-related costs (Note 14) |
|
| 584 |
|
| — |
|
| ||||||||||||||||
Exit costs related to idle facility (Note 15) |
|
| 662 |
|
| — |
|
| 871 |
|
| — |
|
|
|
| 27 |
|
| — |
|
|
| |
Write-down of certain assets under construction (Note 8) |
|
| — |
|
| — |
|
| 365 |
|
| — |
|
|
|
| — |
|
| 365 |
|
|
| |
Acquisition-related costs (Note 14) |
|
| — |
|
| — |
|
| — |
|
| 584 |
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Operating income |
|
| 13,262 |
|
| 12,629 |
|
|
| 33,742 |
|
| 29,432 |
|
|
|
| 13,705 |
|
| 10,886 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest expense |
|
| (284) |
|
| (266) |
|
|
| (794) |
|
| (810) |
|
|
|
| (246) |
|
| (250) |
|
| |
Gain on sale of location (Note 9) |
|
| 792 |
|
| — |
|
| ||||||||||||||||
Gain on sale of business (Note 8) |
|
| — |
|
| — |
|
|
| 1,031 |
|
| — |
|
|
|
| — |
|
| 1,031 |
|
| |
Other income (expense) |
|
| (512) |
|
| (500) |
|
|
| 876 |
|
| 266 |
|
|
|
| 399 |
|
| (31) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income before income taxes |
|
| 12,466 |
|
| 11,863 |
|
|
| 34,855 |
|
| 28,888 |
|
|
|
| 14,650 |
|
| 11,636 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income taxes |
|
| 4,935 |
|
| 4,697 |
|
|
| 12,903 |
|
| 10,656 |
|
|
|
| 4,287 |
|
| 4,187 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income |
| $ | 7,531 |
| $ | 7,166 |
|
| $ | 21,952 |
| $ | 18,232 |
|
|
| $ | 10,363 |
| $ | 7,449 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Add: net income attributable to non-controlling interest |
|
| — |
|
| — |
|
|
| — |
|
| (95) |
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Net income attributable to Chase Corporation |
| $ | 7,531 |
| $ | 7,166 |
|
| $ | 21,952 |
| $ | 18,137 |
|
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net income available to common shareholders, per common and common equivalent share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic |
| $ | 0.81 |
| $ | 0.78 |
|
| $ | 2.38 |
| $ | 1.98 |
|
|
| $ | 1.11 |
| $ | 0.81 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted |
| $ | 0.80 |
| $ | 0.77 |
|
| $ | 2.34 |
| $ | 1.95 |
|
|
| $ | 1.10 |
| $ | 0.80 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic |
|
| 9,173,252 |
|
| 9,093,602 |
|
|
| 9,156,805 |
|
| 9,076,386 |
|
|
|
| 9,228,338 |
|
| 9,141,620 |
|
| |
Diluted |
|
| 9,311,798 |
|
| 9,245,953 |
|
|
| 9,287,809 |
|
| 9,216,731 |
|
|
|
| 9,321,002 |
|
| 9,282,670 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
Annual cash dividends declared per share |
|
|
|
|
|
|
| $ | 0.65 |
| $ | 0.60 |
|
| $ | 0.70 |
| $ | 0.65 |
|
|
See accompanying notes to the condensed consolidated financial statements
4
CHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEINCOME
(UNAUDITED)
In thousands, except share and per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Three Months Ended May 31, |
|
| Nine Months Ended May 31, |
|
| Three Months Ended November 30, |
|
| ||||||||||||
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
|
| ||||||
Net income |
| $ | 7,531 |
| $ | 7,166 |
| $ | 21,952 |
| $ | 18,232 |
|
| $ | 10,363 |
| $ | 7,449 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net unrealized gain (loss) on restricted investments, net of tax |
|
| 75 |
|
| 11 |
|
| (24) |
|
| 3 |
| |||||||||
Net unrealized gain on restricted investments, net of tax |
|
| 13 |
|
| 28 |
|
| ||||||||||||||
Change in funded status of pension plans, net of tax |
|
| 94 |
|
| 224 |
|
| 281 |
|
| 443 |
|
|
| 147 |
|
| 94 |
|
| |
Foreign currency translation adjustment |
|
| 2,093 |
|
| (274) |
|
| (1,917) |
|
| (3,183) |
|
|
| (2,098) |
|
| (1,015) |
|
| |
Total other comprehensive income (loss) |
|
| 2,262 |
|
| (39) |
|
| (1,660) |
|
| (2,737) |
| |||||||||
Total other comprehensive (loss) income |
|
| (1,938) |
|
| (893) |
|
| ||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||
Comprehensive income |
|
| 9,793 |
|
| 7,127 |
|
| 20,292 |
|
| 15,495 |
|
| $ | 8,425 |
| $ | 6,556 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Comprehensive income attributable to non-controlling interest |
|
| — |
|
| — |
|
| — |
|
| (95) |
| |||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||
Comprehensive income attributable to Chase Corporation |
| $ | 9,793 |
| $ | 7,127 |
| $ | 20,292 |
| $ | 15,400 |
|
See accompanying notes to the condensed consolidated financial statements
5
CHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF EQUITYEQUITY
NINETHREE MONTHS ENDED MAY 31,NOVEMBER 30, 2016
(UNAUDITED)
In thousands, except share and per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
| Accumulated Other |
|
|
|
| Total |
|
|
|
|
|
|
| Additional |
| Accumulated Other |
|
|
|
| Total |
| ||||||
|
| Common Stock |
| Paid-In |
| Comprehensive |
| Retained |
| Stockholders' |
|
| Common Stock |
| Paid-In |
| Comprehensive |
| Retained |
| Stockholders' |
| ||||||||||||||
|
| Shares |
| Amount |
| Capital |
| Income (loss) |
| Earnings |
| Equity |
|
| Shares |
| Amount |
| Capital |
| Income (loss) |
| Earnings |
| Equity |
| ||||||||||
Balance at August 31, 2015 |
| 9,191,958 |
| $ | 919 |
| $ | 14,296 |
| $ | (7,986) |
| $ | 147,113 |
| $ | 154,342 |
| ||||||||||||||||||
Balance at August 31, 2016 |
| 9,278,486 |
| $ | 928 |
| $ | 14,719 |
| $ | (15,479) |
| $ | 173,921 |
| $ | 174,089 |
| ||||||||||||||||||
Restricted stock grants, net of forfeitures |
| 29,884 |
|
| 3 |
|
| (3) |
|
|
|
|
|
|
|
| - |
|
| 42,160 |
|
| 4 |
|
| (4) |
|
|
|
|
|
|
|
| — |
|
Amortization of restricted stock grants |
|
|
|
|
|
|
| 729 |
|
|
|
|
|
|
|
| 729 |
|
|
|
|
|
|
|
| 410 |
|
|
|
|
|
|
|
| 410 |
|
Amortization of stock option grants |
|
|
|
|
|
|
| 212 |
|
|
|
|
|
|
|
| 212 |
|
|
|
|
|
|
|
| 118 |
|
|
|
|
|
|
|
| 118 |
|
Exercise of stock options |
| 92,826 |
|
| 9 |
|
| 1,432 |
|
|
|
|
|
|
|
| 1,441 |
|
| 49,291 |
|
| 5 |
|
| 874 |
|
|
|
|
|
|
|
| 879 |
|
Common stock received for payment of stock option exercises |
| (24,758) |
|
| (2) |
|
| (1,315) |
|
|
|
|
|
|
|
| (1,317) |
|
| (11,905) |
|
| (1) |
|
| (845) |
|
|
|
|
|
|
|
| (846) |
|
Excess tax benefit from stock based compensation |
|
|
|
|
|
|
| 855 |
|
|
|
|
|
|
|
| 855 |
| ||||||||||||||||||
Common stock retained to pay taxes on common stock |
| (22,277) |
|
| (2) |
|
| (1,217) |
|
|
|
|
|
|
|
| (1,219) |
| ||||||||||||||||||
Cash dividend paid, $0.65 per share |
|
|
|
|
|
|
|
|
|
|
|
|
| (5,999) |
|
| (5,999) |
| ||||||||||||||||||
Change in funded status of pension plan, net of tax $153 |
|
|
|
|
|
|
|
|
|
| 281 |
|
|
|
|
| 281 |
| ||||||||||||||||||
Common stock retained to pay statutory minimum withholding taxes on common stock |
| (13,473) |
|
| (1) |
|
| (992) |
|
|
|
|
|
|
|
| (993) |
| ||||||||||||||||||
Cash dividend accrued, $0.70 per share |
|
|
|
|
|
|
|
|
|
|
|
|
| (6,532) |
|
| (6,532) |
| ||||||||||||||||||
Change in funded status of pension plan, net of tax $78 |
|
|
|
|
|
|
|
|
|
| 147 |
|
|
|
|
| 147 |
| ||||||||||||||||||
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
| (1,917) |
|
|
|
|
| (1,917) |
|
|
|
|
|
|
|
|
|
|
| (2,098) |
|
|
|
|
| (2,098) |
|
Net unrealized gain (loss) on restricted investments, net of tax $13 |
|
|
|
|
|
|
|
|
|
| (24) |
|
|
|
|
| (24) |
| ||||||||||||||||||
Net unrealized gain on restricted investments, net of tax $7 |
|
|
|
|
|
|
|
|
|
| 13 |
|
|
|
|
| 13 |
| ||||||||||||||||||
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
| 21,952 |
|
| 21,952 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 10,363 |
|
| 10,363 |
|
Balance at May 31, 2016 |
| 9,267,633 |
| $ | 927 |
| $ | 14,989 |
| $ | (9,646) |
| $ | 163,066 |
| $ | 169,336 |
| ||||||||||||||||||
Balance at November 30, 2016 |
| 9,344,559 |
| $ | 935 |
| $ | 14,280 |
| $ | (17,417) |
| $ | 177,752 |
| $ | 175,550 |
|
See accompanying notes to the condensed consolidated financial statements
6
CHASE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWSFLOWS
(UNAUDITED)
In thousands, except share and per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
|
| Nine Months Ended May 31, |
|
|
| Three Months Ended November 30, |
|
| ||||||||||
|
| 2016 |
| 2015 |
|
|
|
| 2016 |
| 2015 |
|
| |||||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Net income |
| $ | 21,952 |
| $ | 18,232 |
|
|
| $ | 10,363 |
| $ | 7,449 |
|
| ||
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Gain on sale of location |
|
| (792) |
|
| — |
|
| ||||||||||
Loss on write-down of certain assets under construction |
|
| 365 |
|
| — |
|
|
|
| — |
|
| 365 |
|
| ||
Gain on sale of business |
|
| (1,031) |
|
| — |
|
|
|
| — |
|
| (1,031) |
|
| ||
Depreciation |
|
| 4,282 |
|
| 4,238 |
|
|
|
| 1,335 |
|
| 1,473 |
|
| ||
Amortization |
|
| 5,774 |
|
| 4,940 |
|
|
|
| 2,176 |
|
| 1,916 |
|
| ||
Cost of sale of inventory step-up |
|
| — |
|
| 65 |
|
|
|
| 190 |
|
| — |
|
| ||
Provision for allowance for doubtful accounts |
|
| 235 |
|
| 193 |
|
| ||||||||||
Stock based compensation |
|
| 941 |
|
| 819 |
|
| ||||||||||
(Recovery) provision for allowance for doubtful accounts |
|
| (5) |
|
| 61 |
|
| ||||||||||
Stock-based compensation |
|
| 528 |
|
| 318 |
|
| ||||||||||
Realized gain on restricted investments |
|
| (65) |
|
| (79) |
|
|
|
| (3) |
|
| (2) |
|
| ||
Decrease in cash surrender value life insurance |
|
| 135 |
|
| 135 |
|
|
|
| — |
|
| 45 |
|
| ||
Pension curtailment and settlement loss |
|
| — |
|
| 177 |
|
| ||||||||||
Excess tax expense from stock-based compensation |
|
| (855) |
|
| (730) |
|
| ||||||||||
Deferred taxes |
|
| — |
|
| (149) |
|
|
|
| 10 |
|
| — |
|
| ||
Increase (decrease) from changes in assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Accounts receivable |
|
| 306 |
|
| (1,529) |
|
|
|
| 5 |
|
| 5,008 |
|
| ||
Inventories |
|
| 2,659 |
|
| (1,295) |
|
|
|
| (1,397) |
|
| 36 |
|
| ||
Prepaid expenses & other assets |
|
| (643) |
|
| (143) |
|
|
|
| (535) |
|
| (279) |
|
| ||
Accounts payable |
|
| (1,045) |
|
| 426 |
|
|
|
| (12) |
|
| (2,113) |
|
| ||
Accrued compensation and other expenses |
|
| (1,530) |
|
| (3,414) |
|
|
|
| (2,826) |
|
| (3,793) |
|
| ||
Accrued income taxes |
|
| 287 |
|
| 1,842 |
|
|
|
| (771) |
|
| (445) |
|
| ||
Deferred compensation |
|
| 75 |
|
| 138 |
|
|
|
| 71 |
|
| 73 |
|
| ||
Net cash provided by operating activities |
|
| 31,842 |
|
| 23,866 |
|
|
|
| 8,337 |
|
| 9,081 |
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Purchases of property, plant and equipment |
|
| (1,377) |
|
| (1,954) |
|
|
|
| (652) |
|
| (418) |
|
| ||
Retirements of (cost to acquire) intangible assets |
|
| 13 |
|
| (34) |
|
| ||||||||||
Cost to acquire intangible assets |
|
| (14) |
|
| — |
|
| ||||||||||
Payments for acquisitions |
|
| — |
|
| (33,285) |
|
|
|
| (30,435) |
|
| — |
|
| ||
Proceeds from sale of location |
|
| 1,382 |
|
| — |
|
| ||||||||||
Net proceeds from sale of business |
|
| 1,729 |
|
| 739 |
|
|
|
| 229 |
|
| 1,500 |
|
| ||
Increase in restricted investments |
|
| (109) |
|
| (110) |
|
|
|
| (47) |
|
| (53) |
|
| ||
Proceeds from settlement of life insurance policies |
|
| 1,504 |
|
| — |
|
| ||||||||||
Payments for cash surrender value life insurance |
|
| (137) |
|
| (138) |
|
|
|
| — |
|
| (46) |
|
| ||
Net cash provided by (used in) investing activities |
|
| 119 |
|
| (34,782) |
|
| ||||||||||
Net cash (used in) provided by investing activities |
|
| (28,033) |
|
| 983 |
|
| ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
Borrowings on debt |
|
| — |
|
| 2,000 |
|
| ||||||||||
Payments of principal on debt |
|
| (6,300) |
|
| (7,250) |
|
|
|
| (2,100) |
|
| (2,100) |
|
| ||
Dividend paid |
|
| (5,999) |
|
| (5,477) |
|
| ||||||||||
Proceeds from exercise of common stock options |
|
| 124 |
|
| 392 |
|
|
|
| 33 |
|
| 91 |
|
| ||
Payments of taxes on stock options and restricted stock |
|
| (1,219) |
|
| (1,182) |
|
|
|
| (993) |
|
| — |
|
| ||
Excess tax benefit from stock based compensation |
|
| 855 |
|
| 730 |
|
| ||||||||||
Payment for acquisition of non-controlling interest |
|
| — |
|
| (500) |
|
| ||||||||||
Net cash used in financing activities |
|
| (12,539) |
|
| (11,287) |
|
|
|
| (3,060) |
|
| (2,009) |
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS |
|
| 19,422 |
|
| (22,203) |
|
|
| (22,756) |
|
| 8,055 |
| ||||
Effect of foreign exchange rates on cash |
|
| (894) |
|
| (1,310) |
|
|
| (1,331) |
|
| (420) |
| ||||
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
| 43,819 |
|
| 53,222 |
|
|
| 73,411 |
|
| 43,819 |
| ||||
CASH & CASH EQUIVALENTS, END OF PERIOD |
| $ | 62,347 |
| $ | 29,709 |
|
|
| $ | 49,324 |
| $ | 51,454 |
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Non-cash Investing and Financing Activities |
|
|
|
|
|
|
|
|
|
|
| |||||||
Common stock received for payment of stock option exercises |
| $ | 1,317 |
| $ | 1,767 |
|
| $ | 846 |
| $ | 100 |
|
| |||
Property, plant and equipment additions included in accounts payable |
| $ | 218 |
| $ | 99 |
|
| $ | 47 |
| $ | 12 |
|
| |||
Deferred tax assets and liabilities acquired from non-controlling interest |
| $ | — |
| $ | 248 |
| |||||||||||
Annual cash dividend declared |
| $ | 6,532 |
| $ | 5,999 |
|
|
See accompanying notes to the condensed consolidated financial statements
7
Note 1 -— Basis of PresentationPresentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Therefore, they do not include all information and footnote disclosure necessary for a complete presentation of Chase Corporation’s financial position, results of operations and cash flows, in conformity with generally accepted accounting principles. Chase Corporation (the “Company,” “Chase,” “we,” or “us”) filed audited consolidated financial statements, which included all information and notes necessary for such complete presentation for the three years ended August 31, 2015,2016, in conjunction with its 20152016 Annual Report on Form 10-K. Certain immaterial reclassifications have been made to the prior year amounts to conform to the current year’s presentation.
The results of operations for the interim period ended May 31,November 30, 2016 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended August 31, 2015,2016, which are contained in the Company’s 20152016 Annual Report on Form 10-K.
The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring items) which are, in the opinion of management, necessary for a fair statement of the Company’s financial position as of May 31,November 30, 2016, the results of its operations, comprehensive income and cash flows for the interim periods ended May 31,November 30, 2016 and 2015, and changes in equity for the interim period ended May 31,November 30, 2016.
The financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company uses the US dollar as the reporting currency for financial reporting. The financial position and results of operations of the Company’s UK-based operations are measured using the UK pound sterling as the functional currency. The financial position and results of operations of the Company’s operations based in France are measured using the euro as the functional currency. The financial position and results of the Company’s Spray Products (India) Private Limited business in India are measured using the Indian rupee as the functional currency. The functional currency for all of our other operations is the US dollar. Foreign currency translation gains and losses are determined using current exchange rates for monetary items and historical exchange rates for other balance sheet items, and are recorded as a change in other comprehensive income. Transaction gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of our foreign operationsapplicable operation are included in other income / (expense) on the condensed consolidated statements of operations.operations and were $399, and ($96) for the three-month periods ended November 30, 2016 and 2015, respectively.
On JanuarySeptember 30, 2015,2016, the Company acquired two product lines from Henkel Corporation (the “Seller”certain assets of Resin Designs, LLC (“Resin Designs”), an advanced adhesives and sealants manufacturer, with locations in Woburn, MA and Newark, CA. The business was acquired for a purchase price of $33,285,$30,435, pending any final working capital adjustment and excluding any acquisition-related costs. As part of this transaction, Chase acquired all working capital and fixed assets of the Seller’s microspheres product line, sold under the Dualite® brand, located in Greenville, SC,business, and obtained exclusive distribution rights and intellectual property related to the Seller’s polyurethane dispersions product line, operating in the Elgin, IL location. We refer to these collectively as our specialty chemical intermediates product line. Under the agreement, Chase entered into a ten-year facility operating leasemulti-year leases at both locations. The Company expensed $584 of acquisition-related costs during the Seller’s Greenville, SC location. The Seller will perform certain manufacturing and application services for Chase at the Seller’s Elgin, IL location for three years following thethree-month period ended November 30, 2016 associated with this acquisition. The purchase was funded entirely with available cash on hand. Resin Designs is a formulator of customized adhesive and sealant systems used in high-reliability electronic applications. The acquisition broadens the Company’s adhesives and sealants product offering and manufacturing capabilities, and expands its market reach. The Company is currently in the process of finalizing purchase accounting, and anticipates completion within the first half of fiscal 2017. Since the effective date for thisof the acquisition, the financial results of the specialty chemical intermediates product lineResin Designs’ operations have been included in the Company'sCompany’s financial statements within the Company’selectronic and industrial coatings product line, contained within the Industrial Materials operating segment. Purchase accounting was completed in the quarter ended May 31, 2015 (third quarter of fiscal 2015) with no material adjustments made to the initial amounts recorded at the end of the second quarter of fiscal 2015. See Note 14 to the Condensed Consolidated Financial Statements for additional information on the acquisition of the specialty chemical intermediates product line.assets and operations of Resin Designs.
On October 31, 2014, the Company purchased the 50% non-controlling membership interest of NEPTCO JV LLC (the "JV") owned by its now-former joint venture partner, an otherwise unrelated party. Because of the Company's controlling financial interest, the JV's assets, liabilities and results of operations have been consolidated within the
8
Company's consolidated financial statements since
On June 27, 2012, the date23, 2016, the Company acquired NEPTCO.all the capital stock of Spray Products (India) Private Limited for $1,161, net of cash acquired. This acquired business works closely with our HumiSeal® manufacturing operation in Winnersh, Wokingham, England. The Company continuesacquisition in India enhances the Company’s ability to fully consolidateprovide technical, sales, manufacturing, chemical handling, and packaging services in the assets, liabilities andregion. Since the effective date for this acquisition, the financial results of operationsthe business have been included in the Company's financial statements within the Company’s Industrial Materials operating segment in the electronic and industrial coatings product line. Purchase accounting was completed in the quarter ended August 31, 2016.
In November 2015, the Company sold its RodPack® wind energy business, contained within its structural composites product line, to an otherwise unrelated party (“Buyer”) for proceeds of $2,186. The Company’s structural composites product line is a part of the JV, but no longer records an offsetting amount for a non-controlling interest subsequent to October 31, 2014. The $95 recorded in the condensed consolidated statement of operations as net income attributable to non-controlling interest for the nine month period ended May 31, 2015, represents the now-former joint venture partner’s share of the results of operations of the JV for the period from September 1, 2014 through October 31, 2014.Company’s Industrial Materials operating segment.
Note 2 — Recent Accounting Standards
Recently Issued Accounting Pronouncements
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which will replace most of the existing revenue recognition guidance under US Generally Accepted Accounting Principles (“GAAP”). The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. In March, April and AprilMay 2016, the FASB issued ASU 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” and ASU 2016-10 “Identifying Performance Obligations and Licensing,” bothand ASU 2016-12, “Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients” all of which provide further clarification to be considered when implementing ASU 2014-09. The ASU will be effective for the Company beginning September 1, 2018 (fiscal 2019), including interim periods in its fiscal year 2019, and allows for either retrospective or modified retrospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this ASU on the Company’s consolidated financial position, results of operations and cash flows.
In August 2014, the FASB issued ASU No. 2014-15 “Presentation of Financial Statements: Going Concern (Subtopic 205-40),” which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The guidance applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter (fiscal year 2017 for the Company). The adoption of ASU 2014-15, which occurred in the first quarter of fiscal 2017, did not have a material effect on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which requires that debt issue costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the amount of the debt liability, consistent with debt discounts and premiums. Amortization of such costs is still reported as interest expense. ASU 2015-03 is effective for fiscal years, and interim periods therein, beginning after December 15, 2015 (fiscal year 2017 for the Company), but early adoption is allowed.. In August 2015, the FASB issued ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issue Costs Associated with Line-of-Credit Arrangements." ASU 2015-15 supplements the requirements of ASU 2015-03 by allowing an entity to defer and present debt issue costs related to a line of credit arrangement as an asset and subsequently amortize the deferred costs ratably over the term of the line of credit arrangement. The Company is currently evaluating the impact of the adoption of this accounting standard update on our consolidated financial position, results of operationsASU 2015-03 and cash flows.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” Under this accounting guidance, inventory will be measured at the lower of cost and net realizable value, and other options that currently exist for market value will be eliminated. ASU No. 2015-11 defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. No other changes were made to the current guidance on inventory measurement. This accounting guidance is effective for us2015-15, which occurred in the first quarter of fiscal 2018. Early adoption is permitted. We are currently evaluating2017, did not have a material effect on the impact of the adoption of this accounting standard update on ourCompany’s consolidated financial position, results of operations and cash flows.statements.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes – Balance Sheet Classification of Deferred Taxes.” The purpose of the standard is to simplify the presentation of deferred taxes on a classified balance sheet. Under current GAAP, deferred income tax assets and liabilities are separated into current and noncurrent amounts in the balance sheet. The amendments in ASU 2015-17 require that all deferred tax assets and liabilities be classified as noncurrent in the balance sheet. The ASU will be effective for the Company beginning September 1, 2017 (fiscal 2018),
9
including interim periods in its fiscal year 2018, but with early adoption permitted. The Company does not expect the adoption of ASU 2015-17 to have a material impact on its financial statements or presentation.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Changes were made to align lessor accounting with the lessee accounting model and ASU No. 2014-09, “Revenue from Contracts with Customers.” The new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The ASU will be effective for the Company beginning September 1, 2019 (fiscal 2020). Early application is permitted for all public business entities upon issuance.Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. We are currently evaluating the impact of the application of this accounting standard updateASU on our consolidated financial position, results of operationsstatements and cash flows.disclosures thereto.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation -– Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting.” This ASU provides simplification insimplifies the accounting for share-based payment transactions including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. The required effective date for adoption of this guidance would be our fiscal year beginning September 1, 2017 (fiscal 2018), but with early adoption allowed. WeThe updated standard no longer requires cash flows related to excess tax benefits to be presented as a financing activity separate from other income tax cash flows. The update also allows entities to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments to taxing authorities made on an employee's behalf for withheld shares should be presented as a financing activity on the statement of cash flows, and provides for an accounting policy election to account for forfeitures as they occur.The Company early adopted this standard as of September 1, 2016 and during the first quarter of fiscal 2016 recognized an excess tax benefit from stock-based compensation of $794 within income tax expense on the condensed consolidated statement of operations (adopted prospectively). The adoption did not impact the existing classification of the awards. Excess tax benefits from stock based compensation is now classified in net income in the statement of cash flows instead of being separately stated in financing activities for the three months ended November 30, 2016 (adopted prospectively). Given the Company’s historical practice of including employee withholding taxes paid within financing activities in the statement of cash flows, no prior period reclassifications are required by the clarifications on classification provided by ASU No. 2016-09. Due predominately to the inclusion of the excess tax benefit, the effective tax rate for the first quarter of fiscal 2017 decreased to 29.3%, compared to effective tax rates of 36.0% and 34.5% recognized for the first quarter and whole year periods of fiscal 2016, respectively; further, the Company anticipates the potential for increased periodic volatility in future effective tax rates based on the continued application of the ASU No. 2016-09. Following the adoption of the new standard, the Company has elected to account for forfeitures as they occur.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230).” This ASU provides guidance on the presentation and classification of specific cash flow items to improve consistency within the statement of cash flows. The effective date for adoption of this guidance would be our fiscal year beginning September 1, 2018 (fiscal 2019), with early adoption permitted. The Company is currently evaluating the effect that this guidanceASU No. 2016-15 will have on our consolidatedits financial statements.statements and related disclosures.
10
Note 3 — Inventories
Inventories consist of the following as of May 31,November 30, 2016 and August 31, 2015:2016:
|
|
|
|
|
|
|
| ||||||||
|
|
|
|
|
|
|
|
|
|
| November 30, |
| August 31, | ||
|
| May 31, 2016 |
| August 31, 2015 |
|
|
|
| 2016 |
| 2016 | ||||
Raw materials |
| $ | 13,074 |
| $ | 12,937 |
|
|
|
| $ | 13,343 |
| $ | 12,879 |
Work in process |
|
| 6,249 |
|
| 6,539 |
|
|
|
|
| 7,053 |
|
| 6,019 |
Finished goods |
|
| 7,282 |
|
| 10,000 |
|
|
|
|
| 7,791 |
|
| 6,916 |
Total Inventories |
| $ | 26,605 |
| $ | 29,476 |
|
|
|
| $ | 28,187 |
| $ | 25,814 |
10
Note 4 — Net Income Per Share
The Company has unvested share-based payment awards with a right to receive non-forfeitable dividends which are considered participating securities under ASC Topic 260, “Earnings Per Share.” The Company allocates earnings to participating securities and computes earnings per share using the two class method. The determination of earnings per share under the two class method is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| Three Months Ended May 31, |
|
| Nine Months Ended May 31, |
|
| Three Months Ended November 30, |
| ||||||||||||
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Chase Corporation |
| $ | 7,531 |
| $ | 7,166 |
|
| $ | 21,952 |
| $ | 18,137 |
| |||||||
Net income |
| $ | 10,363 |
| $ | 7,449 |
| ||||||||||||||
Less: Allocated to participating securities |
|
| 69 |
|
| 60 |
|
|
| 197 |
|
| 141 |
|
|
| 113 |
|
| 67 |
|
Net income available to common shareholders |
| $ | 7,462 |
| $ | 7,106 |
|
| $ | 21,755 |
| $ | 17,996 |
|
| $ | 10,250 |
| $ | 7,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
| 9,173,252 |
|
| 9,093,602 |
|
|
| 9,156,805 |
|
| 9,076,386 |
|
|
| 9,228,338 |
|
| 9,141,620 |
|
Net income per share - Basic |
| $ | 0.81 |
| $ | 0.78 |
|
| $ | 2.38 |
| $ | 1.98 |
|
| $ | 1.11 |
| $ | 0.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income attributable to Chase Corporation |
| $ | 7,531 |
| $ | 7,166 |
|
| $ | 21,952 |
| $ | 18,137 |
| |||||||
Net income |
| $ | 10,363 |
| $ | 7,449 |
| ||||||||||||||
Less: Allocated to participating securities |
|
| 69 |
|
| 59 |
|
|
| 197 |
|
| 139 |
|
|
| 113 |
|
| 55 |
|
Net income available to common shareholders |
| $ | 7,462 |
| $ | 7,107 |
|
| $ | 21,755 |
| $ | 17,998 |
|
| $ | 10,250 |
| $ | 7,394 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding |
|
| 9,173,252 |
|
| 9,093,602 |
|
|
| 9,156,805 |
|
| 9,076,386 |
|
|
| 9,228,338 |
|
| 9,141,620 |
|
Additional dilutive common stock equivalents |
|
| 138,546 |
|
| 152,351 |
|
|
| 131,004 |
|
| 140,345 |
|
|
| 92,664 |
|
| 141,050 |
|
Diluted weighted average shares outstanding |
|
| 9,311,798 |
|
| 9,245,953 |
|
|
| 9,287,809 |
|
| 9,216,731 |
|
|
| 9,321,002 |
|
| 9,282,670 |
|
Net income per share - Diluted |
| $ | 0.80 |
| $ | 0.77 |
|
| $ | 2.34 |
| $ | 1.95 |
|
| $ | 1.10 |
| $ | 0.80 |
|
For the three and nine months ended May 31,November 30, 2016 stock options to purchase 0 and 18,860 shares of common stock were outstanding but were not included in the calculation of diluted income per share because their inclusion would be anti-dilutive. For the three and nine months ended May 31, 2015, stock options to purchase 15,16938,591 and 22,75031,485 shares, respectively, of common stock were outstanding but were not included in the calculation of diluted income per share because their inclusion would be anti-dilutive. Included in the calculation of dilutive common stock equivalents are the unvested portion of restricted stock and stock options.
11
Note 5 — Stock-Based Compensation
In August 2014, the Board of Directors of the Company approved the fiscal year 2015 Long Term Incentive Plan (“2015 LTIP”) for the executive officers and other members of management. The 2015 LTIP is an equity-based plan with a grant date of September 1, 2014 and contains a performance and service-based restricted stock grant of 6,993 shares in the aggregate, subject to adjustment, with a vesting date of August 31, 2017. Based on the fiscal year 2015 financial results, 5,685 additional shares of restricted stock (total of 12,678 shares) were earned and granted subsequent to the end of fiscal year 2015 in accordance with the performance measurement criteria. No further performance-based measurements apply to this award. Compensation expense is being recognized on a ratable basis over the vesting period.
In August 2015, the Board of Directors of the Company approved the fiscal year 2016 Long Term Incentive Plan (“2016 LTIP”) for the executive officers and other members of management. The 2016 LTIP is an equity-based plan with a grant date of September 1, 2015 and contains a performance and service-based restricted stock grant of 6,962 shares in the aggregate, subject to adjustment, with a vesting date of August 31, 2018. Based on the fiscal year 2016 financial results, 6,277 additional shares of restricted stock (total of 13,239 shares) were earned and granted subsequent to the end of fiscal year 2016 in accordance with the performance measurement criteria. No further performance-based measurements apply to this award. Compensation expense is being recognized on a ratable basis over the vesting period.
In August 2016, the Board of Directors of the Company approved the fiscal year 2017 Long Term Incentive Plan (“2017 LTIP”) for the executive officers and other members of management. The 2017 LTIP is an equity-based plan with a grant date of September 1, 2016 and contains the following equity components:
Restricted Shares — (a) a performance and service-based restricted stock grant of 6,9625,399 shares in the aggregate, subject to adjustment based on fiscal 20162017 results, with a vesting date of August 31, 2018.2019. Compensation expense is recognized on a ratable basis over the vesting period based on quarterly probability assessments; (b) a time-based restricted stock grant of 7,6835,367 shares in the aggregate, with a vesting date of August 31, 2018.2019. Compensation expense is recognized on a ratable basis over the vesting period.
Stock options — options to purchase 21,27515,028 shares of common stock in the aggregate with an exercise price of $39.50$64.37 per share. The options will vest in three equal annual installments beginning on August 31, 20162017 and ending on August 31, 2018. The2019. Of the options granted, 5,596 options will expire on August 31, 2026, and 9,432 options will expire on September 1, 2025.2026. Compensation expense is recognized over the period of the award consistent with the vesting terms.
DuringIn August 2016, the first quarterBoard of fiscalDirectors of the Company approved equity retention agreements with certain executive officers. The equity-based retention agreements have a grant date of September 1, 2016 an additionaland contain the following equity components: (a) time-based restricted stock grant of 5,000 restricted16,312 shares was issued to a non-executive member of managementin the aggregate, with 7,768 shares having a vesting date of October 20, 2020.August 31, 2019, and 8,544 shares having a vesting date of August 31, 2021; (b) options to purchase 23,563 shares of common stock in the aggregate with an exercise price of $64.37 per share (the options will cliff vest on August 31, 2019 and will expire on August 31, 2026). Compensation expense for both the restricted stock and the stock option components of the equity retention agreements is recognized on a ratable basis over the vesting period.
In FebruaryDuring the first quarter of fiscal 2016, as part of their standard compensation for board service, non-employee members of the Board of Directors received a total grant of 4,554additional grants totaling 8,805 shares of restricted stock ($219 grantshares were issued to non-executive members of management with a vesting date value) for service for the period from Januaryof August 31, 2016 through January 31, 2017. The shares of restricted stock will vest at the conclusion of this service period.2021. Compensation expense is recognized on a ratable basis over the twelve month vesting period.
Note 6 — Segment Data & Foreign Operations
The Company is organized into two operating segments, an Industrial Materials segment and a Construction Materials segment. The segments are distinguished by the nature of the products and how they are delivered to their respective markets.
The Industrial Materials segment includes specified products that are used in, or integrated into, another company’s product, with demand typically dependent upon general economic conditions. Industrial Materials products include insulating and conducting materials for wire and cable manufacturers, moisture protective coatings for electronics, laminated durable papers, laminates for the packaging and industrial laminate markets, pulling and detection tapes used in the installation, measurement and location of fiber optic cables and water and natural gas lines, cover tapes essential to delivering semiconductor components via tape and reel packaging, and composite materials and elements. This segment also includeselements, glass-based
12
strength element products designed to allow fiber optic cables to withstand mechanical and environmental strain and stress, and which we operated as a joint venture prior to October 31, 2014. Further, beginning January 30, 2015, the Industrial Materials segment includes microspheres, sold under the Dualite brand, and
12
polyurethane dispersions, bothof Resin Designs, LLC. Both were obtained through acquisition and included in the Company’s specialty chemical intermediateselectronic and industrial coatings product line.
The Construction Materials segment is principally composed of typically project-oriented product offerings that are primarily sold and used as “Chase” branded products. Construction Materials products include protective coatings for pipeline applications, coating and lining systems for use in liquid storage and containment applications, adhesives and sealants used in architectural and building envelope waterproofing applications, high-performance polymeric asphalt additives, and expansion and control joint systems for use in the transportation and architectural markets. The following tables summarize information about the Company’s reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
| Three Months Ended May 31, |
|
| Nine Months Ended May 31, |
|
|
| Three Months Ended November 30, |
|
|
| |||||||||||||||
|
| 2016 |
|
| 2015 |
|
| 2016 |
|
| 2015 |
|
|
| 2016 |
|
| 2015 |
|
|
| ||||||
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Industrial Materials |
| $ | 47,185 |
|
| $ | 47,288 |
|
| $ | 134,253 |
|
| $ | 130,013 |
|
|
| $ | 49,024 |
|
| $ | 43,299 |
|
|
|
Construction Materials |
|
| 17,051 |
|
|
| 17,610 |
|
|
| 42,385 |
|
|
| 43,122 |
|
|
|
| 12,333 |
|
|
| 14,179 |
|
|
|
Total |
| $ | 64,236 |
|
| $ | 64,898 |
|
| $ | 176,638 |
|
| $ | 173,135 |
|
|
| $ | 61,357 |
|
| $ | 57,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Income before taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Industrial Materials |
| $ | 14,191 |
|
| $ | 13,129 | (b) |
| $ | 40,391 | (c) |
| $ | 35,957 | (b) |
|
| $ | 16,415 | (a) | $ | 12,929 | (c) |
| ||
Construction Materials |
|
| 5,662 |
|
|
| 5,586 |
|
|
| 14,785 |
|
|
| 12,051 |
|
|
|
| 5,150 |
|
|
| 5,455 |
|
| |
Total for reportable segments |
|
| 19,853 |
|
|
| 18,715 |
|
|
| 55,176 |
|
|
| 48,008 |
|
|
|
| 21,565 |
|
|
| 18,384 |
|
|
|
Corporate and common costs |
|
| (7,387) | (a) |
|
| (6,852) |
|
|
| (20,321) | (a) |
|
| (19,120) | (d) |
|
|
| (6,915) | (b) |
| (6,748) |
|
| ||
Total |
| $ | 12,466 |
|
| $ | 11,863 |
|
| $ | 34,855 |
|
| $ | 28,888 |
|
|
| $ | 14,650 |
|
| $ | 11,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Includes the following costs by segment: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Industrial Materials |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
| $ | 213 |
|
| $ | 235 |
|
| $ | 595 |
|
| $ | 690 |
|
|
| $ | 184 |
|
| $ | 187 |
|
|
|
Depreciation |
|
| 1,007 |
|
|
| 959 |
|
|
| 2,952 |
|
|
| 2,912 |
|
|
|
| 1,062 |
|
|
| 991 |
|
|
|
Amortization |
|
| 1,587 |
|
|
| 1,647 |
|
|
| 4,716 |
|
|
| 3,700 |
|
|
|
| 1,862 |
|
|
| 1,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Construction Materials |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest |
| $ | 71 |
|
| $ | 31 |
|
| $ | 199 |
|
| $ | 120 |
|
|
| $ | 62 |
|
| $ | 63 |
|
|
|
Depreciation |
|
| 240 |
|
|
| 326 |
|
|
| 764 |
|
|
| 895 |
|
|
|
| 158 |
|
|
| 264 |
|
|
|
Amortization |
|
| 351 |
|
|
| 409 |
|
|
| 1,058 |
|
|
| 1,240 |
|
|
|
| 314 |
|
|
| 356 |
|
|
|
(a) | Includes |
(b) | Includes |
(c) | Includes both a $1,031 gain on sale of our RodPack |
|
|
The Company’s products are sold worldwide. For the quarters ended May 31, 2016 and 2015, sales from its operations located in the United Kingdom accounted for 12% and 15% of total Company revenue, respectively.In the current fiscal
13
year-to-date period, sales from its operations located in the United Kingdom accounted for 10% of total Company revenue compared to 13% in the same period in fiscal 2015. No other foreign geographic area accounted for more than 10% of consolidated revenue for the three or nine month periods ended May 31, 2016 and 2015.
Total assets for the Company’s reportable segments as of May 31,November 30, 2016 and August 31, 20152016 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| May 31, |
| August 31, |
|
| November 30, |
| August 31, |
| ||||||
|
| 2016 |
| 2015 |
|
| 2016 |
| 2016 |
| ||||||
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Industrial Materials |
| $ | 139,257 |
| $ | 146,870 |
|
|
| $ | 165,172 |
| $ | 136,003 |
|
|
Construction Materials |
|
| 43,060 |
|
| 48,016 |
|
|
|
| 38,095 |
|
| 38,983 |
|
|
Total for reportable segments |
|
| 182,317 |
|
| 194,886 |
|
|
|
| 203,267 |
|
| 174,986 |
|
|
Corporate and common assets |
|
| 80,915 |
|
| 63,011 |
|
|
|
| 62,223 |
|
| 87,833 |
|
|
Total |
| $ | 263,232 |
| $ | 257,897 |
|
|
| $ | 265,490 |
| $ | 262,819 |
|
|
The Company’s products are sold worldwide. Revenue for the three-month periods ended November 30, 2016 and 2015 are attributed to operations located in in the following countries:
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended November 30, |
|
|
| |||||
|
| 2016 |
|
| 2015 |
|
|
| ||
Revenue |
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 51,808 |
|
| $ | 48,412 |
|
|
|
United Kingdom |
|
| 4,759 |
|
|
| 5,165 |
|
|
|
All other foreign (1) |
|
| 4,790 |
|
|
| 3,901 |
|
|
|
Total |
| $ | 61,357 |
|
| $ | 57,478 |
|
|
|
(1) | Inclusive of sales originated from our Paris, France location, royalty revenue attributable to our licensed manufacturer in Asia, and Chase foreign manufacturing operations. |
14
As of May 31,November 30, 2016 and August 31, 2015,2016, the Company had long-lived assets (that provide(defined as tangible assets providing the Company with a future economic benefit beyond the current year or operating period, including buildings, equipment and leasehold improvements) of $3,593 and $3,947, respectively, locatedgoodwill and intangible assets, less accumulated amortization, in the United Kingdom. These balances exclude goodwill and intangibles of $7,215 and $8,266, as of May 31, 2016 and August 31, 2015, respectively, associated with its operations in the United Kingdom.following countries:
|
|
|
|
|
|
|
|
|
|
| November 30, |
| August 31, |
|
| ||
|
| 2016 |
| 2016 |
|
| ||
Long-lived Assets |
|
|
|
|
|
|
|
|
United States |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
| $ | 31,588 |
| $ | 32,176 |
|
|
Goodwill and Intangible assets, less accumulated amortization |
|
| 97,690 |
|
| 72,653 |
|
|
|
|
|
|
|
|
|
|
|
United Kingdom |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
| 2,986 |
|
| 3,214 |
|
|
Goodwill and Intangible assets, less accumulated amortization |
|
| 5,824 |
|
| 6,270 |
|
|
|
|
|
|
|
|
|
|
|
All other foreign |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
| 1,335 |
|
| 1,352 |
|
|
Goodwill and Intangible assets, less accumulated amortization |
|
| 1,164 |
|
| 1,233 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
| $ | 35,909 |
| $ | 36,742 |
|
|
Goodwill and Intangible assets, less accumulated amortization |
| $ | 104,678 |
| $ | 80,156 |
|
|
Note 7 — Goodwill and Other Intangibles
The changes in the carrying value of goodwill are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| Industrial |
| Construction Materials |
| Consolidated |
| |||
Balance at August 31, 2015 |
| $ | 33,390 |
| $ | 10,733 |
| $ | 44,123 |
|
Foreign currency translation adjustment |
|
| (211) |
|
| (13) |
|
| (224) |
|
Balance at May 31, 2016 |
| $ | 33,179 |
| $ | 10,720 |
| $ | 43,899 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Industrial |
| Construction Materials |
| Consolidated |
| |||
Balance at August 31, 2016 |
| $ | 32,880 |
| $ | 10,696 |
| $ | 43,576 |
|
Acquisition of Resin Designs, LLC |
|
| 7,592 |
|
| — |
|
| 7,592 |
|
Foreign currency translation adjustment |
|
| (225) |
|
| (10) |
|
| (235) |
|
Balance at November 30, 2016 |
| $ | 40,247 |
| $ | 10,686 |
| $ | 50,933 |
|
The Company’s goodwill is allocated to each reporting unit based on the nature of the products manufactured by the respective business combinations that originally created the goodwill. The Company has identified teneleven reporting units within its two operating segments that are used to evaluate the possible impairment of goodwill. Goodwill impairment exists when the carrying value of goodwill exceeds its fair value. Assessments of possible impairment of goodwill are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. Additionally, testing for possible impairment of recorded goodwill and certain intangible asset balances is required annually. The amount and timing of any impairment charges based on these assessments require the estimation of future cash flows and the fair market value of the related assets based on management’s best estimates of certain key factors, including future selling prices and volumes; operating, raw material and energy costs; and various other projected operating and economic factors. When testing, fair values of the reporting units and the related implied fair values of their respective goodwill are established using discounted cash flows. The Company evaluates the possible impairment of goodwill annually during the fourth quarter and, whenever events or circumstances indicate the carrying value of goodwill may not be recoverable.
1415
Intangible assets subject to amortization consist of the following as of May 31,November 30, 2016 and August 31, 2015:2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted-Average |
| Gross Carrying |
| Accumulated |
| Net Carrying |
|
| Weighted Average |
| Gross Carrying |
| Accumulated |
| Net Carrying |
| ||||||
|
| Amortization Period |
| Value |
| Amortization |
| Value |
|
| Amortization Period |
| Value |
| Amortization |
| Value |
| ||||||
May 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
November 30, 2016 |
| |||||||||||||||||||||||
Patents and agreements |
| 12.5 | years | $ | 2,531 |
| $ | 2,277 |
| $ | 254 |
|
| 14.5 | years | $ | 1,820 |
| $ | 1,665 |
| $ | 155 |
|
Formulas and technology |
| 8.4 | years |
| 8,359 |
|
| 4,172 |
|
| 4,187 |
|
| 7.9 | years |
| 9,401 |
|
| 4,548 |
|
| 4,853 |
|
Trade names |
| 5.9 | years |
| 7,231 |
|
| 4,762 |
|
| 2,469 |
|
| 6.0 | years |
| 7,847 |
|
| 5,127 |
|
| 2,720 |
|
Customer lists and relationships |
| 9.3 | years |
| 54,924 |
|
| 22,943 |
|
| 31,981 |
|
| 9.6 | years |
| 69,789 |
|
| 23,772 |
|
| 46,017 |
|
|
|
|
| $ | 73,045 |
| $ | 34,154 |
| $ | 38,891 |
|
|
|
| $ | 88,857 |
| $ | 35,112 |
| $ | 53,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
August 31, 2015 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
August 31, 2016 |
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
Patents and agreements |
| 12.5 | years | $ | 2,568 |
| $ | 2,267 |
| $ | 301 |
|
| 14.5 | years | $ | 1,805 |
| $ | 1,663 | �� | $ | 142 |
|
Formulas and technology |
| 8.4 | years |
| 8,415 |
|
| 3,513 |
|
| 4,902 |
|
| 8.4 | years |
| 8,248 |
|
| 4,310 |
|
| 3,938 |
|
Trade names |
| 5.9 | years |
| 7,278 |
|
| 4,088 |
|
| 3,190 |
|
| 5.9 | years |
| 7,137 |
|
| 4,909 |
|
| 2,228 |
|
Customer lists and relationships |
| 9.3 | years |
| 55,473 |
|
| 19,014 |
|
| 36,459 |
|
| 9.4 | years |
| 52,742 |
|
| 22,470 |
|
| 30,272 |
|
|
|
|
| $ | 73,734 |
| $ | 28,882 |
| $ | 44,852 |
|
|
| $ | 69,932 |
| $ | 33,352 |
| $ | 36,580 |
|
Aggregate amortization expense related to intangible assets for the ninethree months ended May 31,November 30, 2016 and 2015 was $5,774$2,176 and $4,940,$1,916, respectively. Estimated amortization expense for the remainder of fiscal year 20162017 and for the next five years is as follows:
|
|
|
|
|
|
|
|
|
Years ending August 31, |
|
|
|
|
|
|
|
|
2016 (remaining 3 months) |
| $ | 1,960 |
| ||||
2017 |
|
| 7,273 |
| ||||
2017 (remaining 9 months) |
| $ | 6,915 |
| ||||
2018 |
|
| 7,069 |
|
|
| 9,122 |
|
2019 |
|
| 6,376 |
|
| 8,429 |
| |
2020 |
|
| 5,508 |
|
| 7,565 |
| |
2021 |
|
| 5,245 |
|
| 7,029 |
| |
2022 |
| 6,159 |
|
Note 8 — Sale of RodPack Business
In November 2015, (the first quarter of fiscal 2016), the Company sold its RodPack wind energy business, contained within its structural composites product line, to an otherwise unrelated party (“Buyer”) for proceeds of $2,186. The Company’s structural composites product line is a part of the Company’s Industrial Materials segment. The Company is not restricted in its use of the net proceeds from the sale. At August 31, 2015, the related RodPack assets were recorded as assets held for sale on the consolidated balance sheet.
The following table summarizes information about the RodPack assets sold as of November 10, 2015 (the date of the sale) and August 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
| |
| November 10, 2015 |
| August 31, 2015 |
| ||
RodPack - Property, plant and equipment | $ | 846 |
| $ | 773 |
|
RodPack - Patents and other intangible assets |
| 309 |
|
| 316 |
|
Total | $ | 1,155 |
| $ | 1,089 |
|
The sale resulted in a pre-tax book gain of $1,031, which was recorded within the condensed consolidated statement of operations as gain on sale of business in the nine month periodquarter ended May 31, 2016.November 30, 2015. The Company received $1,500 of the proceeds in the first quarter of fiscal 2016, and has received two additional payments each for $229 during the quarterquarters ended May 31, 2016 and November 30, 2016. It will receive the
15
Tableremaining instalment payment in the third quarter of Contents
CHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In thousands, except share and per share amounts
remaining balance in two additional installments due at six month intervals,fiscal 2017, and has recorded the balance as a current asset (Due from sale of business) as of May 31,November 30, 2016. The payment of these owed amounts is not subject to any further contingency or deliverable. Further, the Company will provide ongoing development support to the Buyer for which it will receive additional consideration upon the completion of services.
16
The sale of this business prompted the Company to perform a review of other long-lived assets within the structural composites product line, as the sale of the related intangible assets resulted in a limitation of the Company’s capacity to sell certain other goods produced by the product line. This review resulted in the identification of construction in progress assets with a net book value of $365, which the Company fully wrote down. This charge was recorded within the condensed consolidated statement of operations as write-down of certain assets under construction during the first quarter of fiscal 2016.
Note 9 — Joint VentureSale of Paterson, NJ Location
On October 31, 2014,In November 2016, the Company purchasedfinalized the 50% non-controlling membership interestsale of NEPTCO JV LLC (the “JV”) that had been owned by its joint venture partner, an otherwise unrelated party. The purchase considerationPaterson, NJ property for proceeds of $1,382. This transaction resulted in a gain of $792 which was subject to certain contingent adjustments based on certain future events related to the JV. The period during which these future events could occur lapsedrecorded in the third fiscal quarter of 2016 without being triggered. The purchase price was not material to the Company. Because of the Company’s controlling financial interest, the JV’s assets, liabilities, and results of operations have been consolidated within the Company’s consolidated financial statements since June 27, 2012, the date the Company acquired NEPTCO. The Company continues to fully consolidate the assets, liabilities and results of operations of the JV, but no longer records an offsetting amount for a non-controlling interest. The $95 recorded in thecondensed consolidated statement of operations as net income attributable to non-controlling interest fora gain on sale of location during the nine monthsfiscal quarter ended May 31, 2015, represents the now-former joint venture partner’s share of the results of operations of the JV for the period from September 1, 2014 through October 31, 2014.
November 30, 2016. The Company accountedhad previously reclassified the related long-lived assets to assets held for the joint venture partner’s non-controlling interestsale after committing to a plan in the JV under ASC Topic 810 “Consolidations” (“ASC 810”). Based onsecond quarter of fiscal 2016 to actively market the criteria in ASC 810, the Companyproperty. The assets held for sale had determined that the JV qualifiedbeen reported within Corporate and Common assets as a variable interest entity (“VIE”).
Under the JV agreement, which terminated with the Company’s October 2014 acquisition of the 50% outstanding non-controlling membership interest in the JV, the JV had agreed to purchase a minimum of 80% of its total glass fiber requirements from the now-former joint venture partner. Additionally, the JV had agreed to purchase private-label products exclusively from an affiliate of the now-former joint venture partner; however, the JV was not subject to a minimum purchase requirement on private-label products. Purchases from the now-former joint venture partner totaled $332 for the period from September 1, 2014 through OctoberAugust 31, 2014. 2016.
Note 10 — Commitments and Contingencies
The Company is involved from time to time in litigation incidental to the conduct of its business. Although the Company does not expect that the outcome in any of these matters, individually or collectively, will have a material adverse effect on its financial condition, results of operations or cash flows, litigation is inherently unpredictable. Therefore, judgments could be rendered or settlements entered,agreed to, that could adversely affect the Company’s operating results or cash flows in a particular period. The Company routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best forecast of the ultimate loss in situations where the Company assesses the likelihood of loss as probable.
16
Note 11 — Pensions and Other Post-Retirement Benefits
The components of net periodic benefit cost for the three and nine months ended May 31,November 30, 2016 and 2015 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
|
| Three Months Ended May 31, |
| Nine Months Ended May 31, |
|
|
| Three Months Ended November 30, |
|
| ||||||||||||||
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
|
|
| 2016 |
| 2015 |
|
|
| ||||||
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Service cost |
| $ | 74 |
| $ | 91 |
|
| $ | 222 |
| $ | 272 |
|
|
| $ | 72 |
| $ | 74 |
|
|
|
Interest cost |
|
| 182 |
|
| 170 |
|
|
| 546 |
|
| 509 |
|
|
|
| 170 |
|
| 182 |
|
|
|
Expected return on plan assets |
|
| (129) |
|
| (153) |
|
|
| (387) |
|
| (459) |
|
|
|
| (132) |
|
| (129) |
|
|
|
Amortization of prior service cost |
|
| 1 |
|
| 1 |
|
|
| 3 |
|
| 3 |
|
|
|
| 1 |
|
| 1 |
|
|
|
Amortization of accumulated loss |
|
| 143 |
|
| 167 |
|
|
| 429 |
|
| 502 |
|
|
|
| 224 |
|
| 143 |
|
|
|
Settlement loss |
|
| — |
|
| 177 |
|
|
| — |
|
| 177 |
|
| |||||||||
Net periodic benefit cost |
| $ | 271 |
| $ | 453 |
|
| $ | 813 |
| $ | 1,004 |
|
|
| $ | 335 |
| $ | 271 |
|
|
|
When funding is required, the Company’s policy is to contribute amounts that are deductible for federal income tax purposes. As of May 31,November 30, 2016, the Company has made contributions of $233$21 in the current fiscal year to fund its obligations under its pension plans, and plans to make the necessary contributions over the remainder of fiscal 20162017 to ensure the qualified plan continues to be adequately funded given the current market conditions. The Company made contributions of $214$77 in the first ninethree months of the prior year.
17
Note 12 — Fair Value Measurements
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The Company uses a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company utilizes the best available information in measuring fair value. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The financial assets classified as Level 1 and Level 2 as of May 31,November 30, 2016 and August 31, 20152016 represent investments that are restricted for use in a nonqualified retirement savings plan for certain key employees and directors.
The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of May 31,November 30, 2016 and August 31, 2015:2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair value measurement category |
|
|
|
|
|
|
| Fair value measurement category |
| ||||||||||
|
|
|
|
|
|
| Quoted prices |
| Significant other |
| Significant |
|
|
|
|
|
|
| Quoted prices |
| Significant other |
| Significant |
| ||
|
| Fair value |
|
|
|
| in active markets |
| observable inputs |
| unobservable inputs |
|
| Fair value |
|
|
|
| in active markets |
| observable inputs |
| unobservable inputs |
| ||
|
| measurement date |
| Total |
| (Level 1) |
| (Level 2) |
| (Level 3) |
|
| measurement date |
| Total |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted investments |
| May 31, 2016 |
| $ | 1,547 |
| $ | 1,520 |
| 27 |
| — |
|
|
| $ | 1,707 |
| $ | 1,688 |
| 19 |
| — |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Restricted investments |
| August 31, 2015 |
| $ | 1,410 |
| $ | 1,394 |
| 16 |
| — |
|
|
| $ | 1,637 |
| $ | 1,610 |
| 27 |
| — |
|
17
The following table presents the fair value of the Company’s long-term debt (including current portion of long-term debt) as of May 31,November 30, 2016 and August 31, 2015,2016, which is recorded at its carrying value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fair value measurement category |
|
|
|
|
|
|
| Fair value measurement category |
| ||||||||||
|
|
|
|
|
|
| Quoted prices |
| Significant other |
| Significant |
|
|
|
|
|
|
| Quoted prices |
| Significant other |
| Significant |
| ||
|
| Fair value |
|
|
|
| in active markets |
| observable inputs |
| unobservable inputs |
|
| Fair value |
|
|
|
| in active markets |
| observable inputs |
| unobservable inputs |
| ||
|
| measurement date |
| Total |
| (Level 1) |
| (Level 2) |
| (Level 3) |
|
| measurement date |
| Total |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
| May 31, 2016 |
| $ | 45,500 |
| $ | — |
| 45,500 |
| — |
|
|
| $ | 41,300 |
| $ | — |
| 41,300 |
| — |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Long-term debt |
| August 31, 2015 |
| $ | 51,800 |
| $ | — |
| 51,800 |
| — |
|
|
| $ | 43,400 |
| $ | — |
| 43,400 |
| — |
|
The carrying value of the long-term debt approximates its fair value, as the monthly interest rate is set based on the movement of the underlying market rates. In December 2016, subsequent to the first quarter of fiscal 2017, Chase refinanced its term debt, with a new credit agreement. See Note 18 to the condensed consolidated financial statements for additional information on the refinancing of debt in the second quarter of fiscal 2017.
18
Note 13 — Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income (loss), net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Change in Funded |
| Foreign Currency |
|
|
|
|
|
|
|
| Change in Funded |
| Foreign Currency |
|
|
|
| ||||
|
| Restricted |
| Status of |
| Translation |
|
|
|
|
| Restricted |
| Status of |
| Translation |
|
|
|
| ||||||
|
| Investments |
| Pension Plan |
| Adjustment |
| Total |
|
| Investments |
| Pension Plan |
| Adjustment |
| Total |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2015 |
| $ | 47 |
| $ | (5,934) |
| $ | (2,099) |
| $ | (7,986) |
| |||||||||||||
Balance at August 31, 2016 |
| $ | 54 |
| $ | (7,336) |
| $ | (8,197) |
| $ | (15,479) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive gains (losses) before reclassifications (1) |
|
| 18 |
|
| — |
|
| (1,917) |
|
| (1,899) |
|
|
| 14 |
|
| — |
|
| (2,098) |
|
| (2,084) |
|
Reclassifications to net income of previously deferred (gains) losses (2) |
|
| (42) |
|
| 281 |
|
| — |
|
| 239 |
|
|
| (1) |
|
| 147 |
|
| — |
|
| 146 |
|
Other comprehensive income (loss) |
|
| (24) |
|
| 281 |
|
| (1,917) |
|
| (1,660) |
|
|
| 13 |
|
| 147 |
|
| (2,098) |
|
| (1,938) |
|
Balance at May 31, 2016 |
| $ | 23 |
| $ | (5,653) |
| $ | (4,016) |
| $ | (9,646) |
| |||||||||||||
Balance at November 30, 2016 |
| $ | 67 |
| $ | (7,189) |
| $ | (10,295) |
| $ | (17,417) |
|
(1) | Net of tax expense of |
(2) | Net of tax expense of |
18
The following table summarizes the reclassifications from accumulated other comprehensive income (loss) to the unaudited condensed consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| Amount of Gain (Loss) Reclassified from |
|
|
| ||||||||||||||
|
|
|
|
| Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive |
|
|
|
|
|
| Accumulated Other Comprehensive Income |
|
|
| ||||||||||||||||
|
|
|
|
| Income (Loss) into Income |
|
|
|
|
|
| (Loss) into Income |
|
|
| ||||||||||||||||
|
|
|
|
| Three Months Ended May 31, |
|
| Nine Months Ended May 31, |
| Location of Gain (Loss) Reclassified from Accumulated |
|
|
|
| Three Months Ended November 30, |
| Location of Gain (Loss) Reclassified from Accumulated |
| |||||||||||||
|
|
|
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
| Other Comprehensive Income (Loss) into Income |
|
|
|
| 2016 |
| 2015 |
|
| Other Comprehensive Income (Loss) into Income |
| ||||||
Gains on Restricted Investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Realized gain on sale of restricted investments |
|
|
|
| $ | (2) |
| $ | (3) |
|
| $ | (65) |
| $ | (79) |
| Selling, general and administrative expenses |
|
|
|
| $ | (2) |
| $ | (2) |
| Selling, general and administrative expenses |
| |
Tax expense (benefit) |
|
|
|
|
| 1 |
|
| 1 |
|
|
| 23 |
|
| 28 |
|
|
|
|
|
|
| 1 |
|
| 1 |
|
|
| |
Gain net of tax |
|
|
|
| $ | (1) |
| $ | (2) |
| $ | (42) |
| $ | (51) |
|
|
|
|
|
| $ | (1) |
| $ | (1) |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Loss on Funded Pension Plan adjustments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||
Amortization of prior pension service costs and unrecognized losses |
|
|
|
| $ | 6 |
| $ | 5 |
|
| $ | 18 |
| $ | 16 |
| Cost of products and services sold |
|
|
|
| $ | 26 |
| $ | 6 |
| Cost of products and services sold |
| |
Amortization of prior pension service costs and unrecognized losses and settlement losses |
|
|
|
|
| 139 |
| 340 |
|
|
| 416 |
| 666 |
| Selling, general and administrative expenses |
| ||||||||||||||
Amortization of prior pension service costs and unrecognized losses |
|
|
| $ | 199 |
| $ | 139 |
| Selling, general and administrative expenses |
| ||||||||||||||||||||
Tax expense (benefit) |
|
|
|
|
| (51) |
|
| (121) |
|
|
| (153) |
|
| (239) |
|
|
|
|
|
|
| (78) |
|
| (51) |
|
|
| |
Loss net of tax |
|
|
|
| $ | 94 |
| $ | 224 |
| $ | 281 |
| $ | 443 |
|
|
|
|
|
| $ | 147 |
| $ | 94 |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||
Total net loss reclassified for the period |
|
|
|
| $ | 93 |
| $ | 222 |
| $ | 239 |
| $ | 392 |
|
|
|
|
|
| $ | 146 |
| $ | 93 |
|
|
|
19
Note 14 — Acquisitions
Acquisition of Specialty Chemical Intermediates Product LineResin Designs, LLC
On JanuarySeptember 30, 2015,2016, the Company acquired two product lines from Henkel Corporation (the “Seller”certain assets of Resin Designs, LLC (“Resin Designs”), an advanced adhesives and sealants manufacturer, with locations in Woburn, MA and Newark, CA. This business was acquired for a purchase price of $33,285, after$30,435, pending any final working capital adjustmentsadjustment and excluding any acquisition-related costs. As part of this transaction, Chase acquired all working capital and fixed assets of the Seller’s microspheres product line, sold under the Dualite brand, located in Greenville, SC,business, and obtained exclusive distribution rights and intellectual property related to the Seller’s polyurethane dispersions product line, operating in the Elgin, IL location. Under the agreement, Chase entered into multi-year leases at both locations. Resin Designs is a ten year facility operating lease atformulator of customized adhesive and sealant systems used in high-reliability electronic applications. The acquisition broadens the Seller’s Greenville, SC location. The Seller will perform certainCompany’s adhesives and sealants product offering and manufacturing capabilities, and application services for Chase at the Seller’s Elgin, IL location for three years.expands its market reach. The purchase was funded entirely with available cash on hand.
Since the effective date for this acquisition, JanuarySeptember 30, 2015,2016, the financial results of the specialty chemical intermediates product lineacquired business have been included in the Company’s financial statements within the Industrial Materials operating segment.segment, within the electronic and industrial coatings product line. The acquisition was accounted for as a business combination under ASC Topic 805, “Business Combinations.” In accordance with this accounting standard, the Company expensed $584 of acquisition-related costs during the nine monththree-month period ended May 31, 2015November 30, 2016 to acquisition-related costs.
Purchase accounting was completedThe Company is currently in the quarter ended May 31, 2015 (third quarterprocess of finalizing purchase accounting, with regard to a final working capital adjustment and a final allocation of the purchase price to tangible and identifiable intangible assets assumed, and anticipates completion within the first half of fiscal 2015) with no material adjustments made to the initial amounts recorded at the end of the second fiscal quarter.2017. The purchase price has been
19
initially allocated to the acquired tangible and identifiable intangible assets assumed, based on their fair values as of the date of the acquisition:
|
|
|
|
|
Assets & Liabilities |
| Amount |
| |
|
| $ | ||
Inventory | 1,300 | |||
Prepaid expenses and other current assets | 228 |
| ||
Property, plant & equipment |
|
|
| |
Goodwill |
|
|
| |
Intangible assets |
|
| ||
Accounts payable and accrued liabilities | (635) |
| ||
Total purchase price |
| $ |
|
The excess of the purchase price over the net tangible and intangible assets acquired resulted in goodwill of $6,371$7,592 that is largely attributable to the synergies and economies of scale from combining the operations, technologies and technologiesresearch and development capabilities of ChaseResin Designs and the two product lines,Chase, particularly as it pertains to the expansion of the Company's product and service offerings, the established workforce and marketing efforts. This goodwill is deductible for income tax purposes.
All assets, including goodwill, acquired as part of the specialty chemical intermediates product lineResin Designs acquisition are included in the Industrial Materials operating segment. Identifiable intangible assets purchased with this transaction are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible Asset |
| Amount |
| Useful life |
|
| Amount |
| Useful life | |||
Customer relationships |
| $ | 21,300 |
| 8 | years |
| $ | 17,500 |
| 10 | years |
Technology |
|
| 2,700 |
| 7 | years |
|
| 1,200 |
| 4 | years |
Trade name |
|
| 910 |
| 7 | years | ||||||
Backlog |
|
| 330 |
| 2 | months | ||||||
Trade names |
|
| 750 |
| 7 | years | ||||||
Total intangible assets |
| $ | 25,240 |
|
|
|
| $ | 19,450 |
|
|
|
20
Supplemental Pro Forma Data
The following table presents the pro forma results of the Company for the nine month periodthree-month periods ended May 31,November 30, 2016 and 2015 as though the specialty chemical intermediates product lineResin Designs acquisition described above occurred on September 1, 20132015 (the first day of fiscal 2014)2016). The actual revenue and expenses for the specialty chemical intermediates product line acquisitionacquired business are included in the Company’s fiscal 2016 and 20152017 consolidated results beginning on JanuarySeptember 30, 2015 (prior to the start of the quarter ended May 31, 2015).2016. From the date of acquisition (January(September 30, 2015)2016) through May 31, 2015,November 30, 2016, revenue and net gain attributable to Chase Corporationincome (loss) for the specialty chemicals product linesResin Designs operations included in the condensed consolidated statement of operations were $7,236$2,619 and $204,($237), respectively, inclusive of the effects of the $584 in acquisitionacquisition-related costs, $65$190 in sale of inventory step-up cost, and additional amortization expense recognized related to intangible assets recorded as part of the transaction. The pro forma results include adjustments for the estimated amortization of intangibles, acquisition-related costs, sale of inventory step-up cost and the income tax impact of the pro forma adjustments at the statutory rate of 35%.
20
The following pro forma information is not necessarily indicative of the results that would have been achieved if the acquisition had been effective on September 1, 2013.2015.
Acquisition of Spray Products (India) Private Limited On June 23, 2016, the Company acquired all the capital stock of Spray Products (India) Private Limited for $1,161, net of cash acquired. This acquired business works closely with our HumiSeal manufacturing operation in Winnersh, Wokingham, England. The acquisition in India enhances the Company’s ability to provide technical, sales, manufacturing, chemical handling, and packaging services in the region. Since the effective date for this acquisition, the financial results of the business have been included in the Company's financial statements within the Company’s Industrial Materials operating segment in the electronic and industrial coatings product line. Purchase accounting was completed in the quarter ended August 31, 2016.
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
Note 15 –— Exit Costs Related to Idle Facility
In the quarterly and year-to-date periodsperiod ended May 31,November 30, 2016, the Company recognized $662 and $871$27 in expenses to raze its Randolph, MA facility, which has been idle with regard to production for several years. The Company began marketing the site for sale and reclassified the net book value of the facility to assets held for sale during the second quarter of fiscal 2016. These actions were taken as part of the Company’s on-going facility consolidation and rationalization initiative. The Company has updated its initial estimates, and currently anticipates no more than an additional $100 in expenses associated with completing the project, and expects work to be completed during the fourth fiscal quarter,2017, with the sale of the property to follow. The Company recognized $935 in expenses in fiscal 2016 (during the second, third and fourth quarters) bringing the project to near completion. See Note 16 to the condensed consolidated financial statements for additional information on assets held for sale.
21
Note 16 –— Assets Held for Sale
The Company periodically reviews long-lived assets against its plans to retain or ultimately dispose of these assets. If the Company decides to dispose of an asset and commits to a plan to actively market and sell the asset, it will be moved to assets held for sale. The Company analyzes market conditions each reporting period and, if applicable, records additional impairments due to declines in market values of like assets. The fair value of the asset is determined by observable inputs such as appraisals and prices of comparable assets in active markets for assets like the Company's. Gains are not recognized until the assets are sold.
In October 2016, Chase entered into an agreement to sell its former corporate headquarters and executive offices in Bridgewater, MA. This transaction was conditioned upon the execution of a definitive asset purchase and sale agreement. In December 2016, subsequent to the first fiscal quarter, all conditions were met, and the sale was finalized for proceeds of $740, resulting in a gain on sale of $68, which will be recognized in the second quarter of fiscal 2016, the2017. The Company as part of its on-going facility consolidation and rationalization initiative, committed to a plan to actively market for sale its Paterson, NJ property. Chase owns the building and leases the land from the landowner. Currently, the building is being leased to a tenant and the land is being sub-leased. Upon commitment to this plan, the Company reclassified the net book value ofhas determined that the related assets to assetsqualified for held for sale.sale disclosure under ASC Topic 360, “Property, Plant and Equipment” at the end of the first fiscal quarter of 2017. See Note 17 to the condensed consolidated financial statements for additional information on the sale of the Bridgewater, MA location.
Assets held for sale as of May 31,November 30, 2016 and August 31, 20152016 were:
|
|
|
|
|
|
|
| May 31, 2016 |
| August 31, 2015 |
| ||
Paterson, NJ - Building and leasehold improvements | $ | 590 |
| $ | — |
|
Randolph, MA - Property, plant and equipment (a) |
| 14 |
|
| — |
|
RodPack - Property, plant and equipment (b) |
| — |
|
| 773 |
|
RodPack - Patents and other intangible assets (b) |
| — |
|
| 316 |
|
Total | $ | 604 |
| $ | 1,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| November 30, 2016 |
| August 31, 2016 |
| ||
Bridgewater, MA - Building and land | $ | 672 |
| $ | — |
|
Randolph, MA - Property, plant and equipment (a) |
| 14 |
|
| 14 |
|
Paterson, NJ - Building and leasehold improvements (b) |
| — |
|
| 590 |
|
Total | $ | 686 |
| $ | 604 |
|
(a) | See Note 15 to the condensed consolidated financial statements for additional information on Randolph, MA location assets held for sale as of |
(b) | See Note |
Note 17 — Related Party Agreements
Reimbursements Related to Life Insurance Policies
During the fourth quarter of fiscal 2016 and the first quarter of fiscal 2017, the Edward L. Chase Trust (the “Trust”), owners of two insurance policies on the life of Claire E. Chase, reimbursed the Company for premiums paid on the policies in exchange for the Company’s release of any claims on the policies. In August 2016 (the fourth quarter of fiscal 2016), the Company received $1,238 related to the John Hancock (formerly Manufacturers’ Life Insurance Company) policy, the full value of premiums paid to date by the Company. In September 2016 (the first quarter of fiscal 2017), the Company received $1,504 related to the Metropolitan Life Insurance policy, its then cash surrender value, plus an additional prepaid related to the policy. Claire E. Chase is the spouse of a former executive of the Company, Edward L. Chase (deceased), and who in each case are the parents of Peter R. Chase (the Executive Chairman of the Company) and Mary Claire Chase (Director) and the grandparents of Adam P. Chase (the President and CEO of the Company). The Trust is the beneficial owner of more than 5% of the Company’s common stock. Terms and conditions of these transactions were reviewed and approved by the independent members of the Company's Board of Directors in advance.
22
Sale of Bridgewater, MA Location
In October 2016, Chase entered into an agreement to sell its former corporate headquarters and executive offices in Bridgewater, MA. At that time the transaction was conditioned upon the execution of a definitive asset purchase and sale agreement. In December 2016, subsequent to the first fiscal quarter, all conditions were met, and the sale was finalized for proceeds of $740, resulting in a gain on sale of $68, which will be recognized in the second quarter of fiscal 2017. The buyer, Bridgewater State University Foundation, Inc., was deemed a related party because of preexisting professional connections between it and two members of the Company’s Board of Directors, including Peter R. Chase (the Executive Chairman of the Company) and Dana Mohler-Faria (Director). The terms and conditions of the proposed transaction were reviewed and approved by all members of the Company's Board of Directors who were not parties related to the potential buyer, prior to entering into the then conditional agreement in October 2016. They concluded that the sale price was appropriate, after considering a recent market appraisal of the land and building performed by an independent third party valuation firm.
Note 18 — Subsequent Events
Refinancing of Long-Term Debt
On December 15, 2016, the Company entered into an Amended and Restated Credit Agreement (the “New Credit Agreement”). The New Credit Agreement is an all revolving credit facility with a borrowing capacity of $150,000 which can be increased by an additional $50,000 at the request of the Company and the individual or collective option of any of the Lenders (defined below). The New Credit Agreement with Bank of America, acting as administrative agent, and with participation from Citizens Bank and JPMorgan Chase Bank (collectively with Bank of America, the “Lenders”), contains customary affirmative and negative covenants that, among other things, restricts our ability to incur additional indebtedness and requires certain lender approval for acquisitions by the Company and its subsidiaries over a certain size. It also requires us to maintain certain financial ratios on a consolidated basis, including a consolidated net leverage ratio (as defined in the facility) of no more than 3.25 to 1.00, and a consolidated fixed charge coverage ratio (as defined in the facility) of at least 1.25 to 1.00. The New Credit Agreement was entered into both to refinance our previously existing term loan and revolving line of credit and to provide for additional liquidity to finance potential acquisitions, working capital, capital expenditures, and for other general corporate purposes.
The applicable interest rate for the revolver portion of the New Credit Agreement (the “New Revolving Facility”) and any New Term Loan (defined below) is based on the effective London Interbank Offered Rate (LIBOR) plus an additional amount in the range of 1.00% to 1.75%, depending on the consolidated net leverage ratio of Chase and its subsidiaries. The New Credit Agreement has a five-year term with interest payments due at the end of the applicable LIBOR period (but in no event less frequently than the three-month anniversary of the commencement of such LIBOR period) and principal payment due at the expiration of the agreement, December 15, 2021. In addition, the Company may elect a base rate option for all or a portion of the New Revolving Facility, in which case, interest payments shall be due with respect to such portion of the New Revolving Facility on the last business day of each quarter.
Subject to certain conditions set forth in the New Credit Agreement (entered by and among the Company, NEPTCO Incorporated (“NEPTCO”), certain Subsidiaries of the Company and NEPTCO party thereto as Guarantors, and the financial institutions party thereto as Lenders), the Company may elect to convert all or a portion of the outstanding New Revolving Facility into a term loan (each, a “New Term Loan”, and collectively with the New Revolving Facility, the “New Credit Facility”), which shall be payable quarterly in equal installments sufficient to amortize the original principal amount of such New Term Loan on a seven-year amortization schedule. Prepayment is allowed by the New Credit Agreement at any time during the term of the agreement, subject to customary notice requirements.
23
In connection with entry into the New Credit Agreement, Chase applied proceeds to pay off in full the outstanding principal balance of its preexisting term debt held under a previously existing credit agreement, which was entered in conjunction with the Company’s June 27, 2012 acquisition of NEPTCO Holdings, simultaneously terminating both our previously existing term loan agreement and the previously existing revolving line of credit, which was fully available as of December 15, 2016. As the preexisting term loan was refinanced with the New Revolving Facility, for which principal payment is due at the expiration of the agreement, December 15, 2021, we reclassified our preexisting term debt obligation to noncurrent on the condensed consolidated balance sheet as of November 30, 2016.
Sale of Bridgewater, MA Location
In October 2016, Chase entered into an agreement to sell its former corporate headquarters and executive offices in Bridgewater, MA. At that time the transaction was conditioned upon the execution of a definitive asset purchase and sale agreement. In December 2016, subsequent to the first fiscal quarter, all conditions were met, and the sale was finalized for proceeds of $740, resulting in a gain on sale of $68, which will be recognized in the second quarter of fiscal 2017.See Note 17 to the condensed consolidated financial statements for additional information on the sale of the Bridgewater, MA location.
2224
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides an analysis of the Company’s financial condition and results of operations and should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the Company’s Annual Report on Form 10-K filed for the fiscal year ended August 31, 2015.2016.
Overview
The Company attained revenue growth in the first nine months of fiscal 2016 as compared to the same period in the prior fiscal year, but on a quarterly basis, it did not match the top-line results achieved in the third fiscal quarter of the prior year. Despite the third quarter reduction in revenue, Chase realized growth in bothRevenue, operating income and net income for the first quarter of fiscal 2017 all exceeded prior year results, as the current period benefited from both legacy product sales growth and revenue generated by the quarteracquired operations of Resin Designs, LLC (“Resin Designs”). Our electronic and year-to-date periods as compared to the prior year. Thisindustrial coatings, specialty products, cable materials, electronic materials, building envelope and specialty chemical intermediatesproduct lines all saw comparative revenue growth in the first quarter. Overall revenue growth was tempered by a comparative reduction in sales of our bridge and highway, pipeline coatings, coating and lining systems and fiber optic cable components products.The Company’s operating income and net income can be attributed to both an overallfurther benefited from a favorable sales mix and continued trends in commodities markets, with net income also receiving the resultsbenefit of the Company’s ongoing cost controlfirst quarter gain on sale of our Paterson, NJ location.
First quarter Industrial Materials segment revenue drove our company-wide quarter-over-quarter sales increase through both organic and facility rationalization initiatives, which are focused on streamlining processesinorganic growth. With revenue growth in its electronic and reducing operating costs. Our pulling and detection, coating and lining systems, bridge and highway, building envelopeindustrial coatings (which now includes Resin Designs), specialty products, cable materials, electronic materials and specialty chemical intermediates product lines, all sawChase again demonstrated its ability to grow profits through both existing and newly acquired product offerings. However, overall segment revenue growth for both the quarterly and year-to-date periods. However, this growth was more than offset in the quarterly period and partially offset in the year-to-date periodnegatively affected by declines in our pipeline coatings, wire and cable and fiber optic cable components product lines. Our specialty chemical intermediates product line was acquired in the second quarter of the prior year, and this represents the first quarter in which it is fully included in both the current and comparative quarters. Net income attributable to Chase Corporation further benefited in the nine month period ended May 31, 2016 from the sale of our RodPack wind energy businessresults during the first quarter of our fiscal year.
Third quarter revenue from our Industrial Materials segment was relatively stable compared to the prior year period, decreasing less than one percent. Year-to-date revenue exceeded the same period in the prior year, with both current year periods seeing higher demand for our pulling and detection and specialty chemical intermediates product offerings. Sales of our electronic coatings products were up on a year-to-date basis, but down for the quarter as compared to the prior year comparable periods. Reduced demand for wire and cable and fiber optic cable components products fully offset gains for the quarter, and partially offset revenue increases for the year-to-date period.quarter.
Revenue from our Construction Materials segment decreased for both the currentfirst fiscal quarter, and current year-to-date periods, as compared to the same periodsperiod in the prior year. Both the segment’s quarter-over-quarter and year-to-date net sales decreases were driven by reduced demand for ourOur pipeline coatings products.product line had a decrease from the prior year, with Middle East water infrastructure project demand continued for theour Rye, UK facility-produced pipeline coatings products produced at our Rye, UK facility, but as anticipated this demand was at a lower volume than achieved in bothdecreasing slightly over the comparable prior year, periods. Our domestically-produced pipeline coatings products, which sell predominantly into North American oil and gas markets, had a year-to-date increase in sales volume, but was down for the current quarter as compared to the third quarter of the prior year. Given the repair and maintenance focus of many of our domestically-produced pipeline coatings products the product line as a whole has not been as heavily impacted by the dynamicsfalling short of sales volumes obtained in the oilprior year. Decreases in bridge and gas markets into which it sells. Ourhighway products sales, resulting from delayed project work, and coating and lining systems bridge and highway andproduct line sales also both contributed to the overall decrease for the segment. Partially offsetting this decrease was our building envelope product lines allline, which saw sales volume growth in both the quarter-over-quarter and year-over-year periods, partially offsetting the results of our pipeline coatings products.quarter-over-quarter.
Given the seasonality of certain product lines, the upcoming second fiscal quarter has historically generated lower quarterly sales; this is especially true within the Construction Materials segment which isprincipally composed of project-oriented product offerings. During the remainder of fiscal 2016, we2017, the Company will continue to focusremain focused on ourits core strategies:drivers for sustainable growth: organic earnings growth via our core businesses; inorganic growth through the identification, pursuitmarket-driven development, mergers and possible purchase of accretiveacquisitions, and complementary acquisition targets; and cost control, by leveraging existing resources and streamlining processes.operational consolidation.
Our balance sheet remains strong, with cash on hand of $62,347,000$49,324,000 and a current ratio of 4.0. Our4.2 at November 30, 2016. At the end of our first fiscal quarter, our $15,000,000 line of credit iswas fully available, while the outstanding principal balance of our term debt is $45,500,000. The entirewas $41,300,000. In December 2016, subsequent to the first quarter, Chase entered into an Amended and Restated Credit Agreement (the “New Credit Agreement”)and applied proceeds from the New Credit Agreement to pay off in full the outstanding principal balance of ourits preexisting term debt will become current in the fourth fiscal quarter of 2016, with final payment due June 2017 (the fourth quarter of fiscal 2017).debt.
2325
We have two reportable segments as summarized below:
|
|
|
|
|
Segment |
| Product Lines |
| Manufacturing Focus and Products |
Industrial Materials |
| Electronic and Industrial Coatings Specialty Products Pulling and Detection Electronic Materials Structural Composites Fiber Optic Cable Components Specialty Chemical Intermediates |
| Protective coatings and tape products, including insulating and conducting materials for wire and cable manufacturers; moisture protective coatings and customized sealant and adhesive systems for electronics; laminated durable papers, packaging and industrial laminate products; pulling and detection tapes used in the installation, measurement and location of fiber optic cables and water and natural gas lines; cover tapes essential to delivering semiconductor components via tape and reel packaging; composite materials elements; glass-based strength elements designed to allow fiber optic cables to withstand mechanical and environmental strain and stress; Dualite brand microspheres; and polyurethane dispersions. |
Construction Materials |
|
Pipeline Coatings Building Envelope Bridge and Highway |
| Protective coatings and tape products, including coating and lining systems for use in liquid storage and containment applications; protective coatings for pipeline and general construction applications; adhesives and sealants used in architectural and building envelope waterproofing applications; high-performance polymeric asphalt additives; and expansion and control joint systems for use in the transportation and architectural markets. |
|
|
2426
Results of Operations
Revenue and Operating Profit by Segment are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| % of |
|
|
| % of |
|
|
|
| % of |
|
|
| % of |
|
| % of |
|
| % of |
|
| |||||||||
|
| Three Months Ended |
| Total |
| Three Months Ended |
| Total |
|
| Nine Months Ended |
| Total |
| Nine Months Ended |
| Total |
| Three Months Ended |
| Total |
| Three Months Ended |
| Total |
|
| |||||||
|
| May 31, 2016 |
| Revenue |
| May 31, 2015 |
| Revenue |
|
| May 31, 2016 |
| Revenue |
| May 31, 2015 |
| Revenue |
|
| November 30, 2016 |
| Revenue |
| November 30, 2015 |
| Revenue |
|
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Materials |
| $ | 47,185 |
| 73 | % | $ | 47,288 |
| 73 | % |
| $ | 134,253 |
| 76 | % | $ | 130,013 |
| 75 | % |
| $ | 49,024 |
| 80 | % | $ | 43,299 |
| 75 | % |
|
Construction Materials |
|
| 17,051 |
| 27 | % |
| 17,610 |
| 27 | % |
|
| 42,385 |
| 24 | % |
| 43,122 |
| 25 | % |
|
| 12,333 |
| 20 | % |
| 14,179 |
| 25 | % |
|
Total |
| $ | 64,236 |
|
|
| $ | 64,898 |
|
|
|
| $ | 176,638 |
|
|
| $ | 173,135 |
|
|
|
| $ | 61,357 |
|
|
| $ | 57,478 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| % of |
|
|
|
| % of |
|
|
|
| % of |
|
|
|
| % of |
|
| % of |
|
|
| % of |
|
| ||||||
|
| Three Months Ended |
| Segment |
| Three Months Ended |
| Segment |
|
| Nine Months Ended |
| Segment |
| Nine Months Ended |
| Segment |
| Three Months Ended |
| Segment |
| Three Months Ended |
| Segment |
|
| |||||||
|
| May 31, 2016 |
| Revenue |
| May 31, 2015 |
| Revenue |
|
| May 31, 2016 |
| Revenue |
| May 31, 2015 |
| Revenue |
| November 30, 2016 |
| Revenue |
| November 30, 2015 |
| Revenue |
|
| |||||||
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Materials |
| $ | 14,191 |
| 30 | % | $ | 13,129 | (b) | 28 | % |
| $ | 40,391 | (c) | 30 | % | $ | 35,957 | (b) | 28 | % |
| $ | 16,415 | (a) | 33 | % | $ | 12,929 | (c) | 30 | % |
|
Construction Materials |
|
| 5,662 |
| 33 | % |
| 5,586 |
| 32 | % |
|
| 14,785 |
| 35 | % |
| 12,051 |
| 28 | % |
|
| 5,150 |
| 42 | % |
| 5,455 |
| 38 | % |
|
Total for reportable segments |
|
| 19,853 |
| 31 | % |
| 18,715 |
| 29 | % |
|
| 55,176 |
| 31 | % |
| 48,008 |
| 28 | % |
|
| 21,565 |
| 35 | % |
| 18,384 |
| 32 | % |
|
Corporate and Common Costs |
|
| (7,387) | (a) |
|
|
| (6,852) |
|
|
|
|
| (20,321) | (a) |
|
|
| (19,120) | (d) |
|
|
|
| (6,915) | (b) |
|
|
| (6,748) |
|
|
|
|
Total |
| $ | 12,466 |
| 19 | % | $ | 11,863 |
| 18 | % |
| $ | 34,855 |
| 20 | % | $ | 28,888 |
| 17 | % |
| $ | 14,650 |
| 24 | % | $ | 11,636 |
| 20 | % |
|
(a) | Includes |
(b) | Includes |
(c) | Includes both a $1,031 gain on sale of our |
|
|
25
Total Revenue
Total revenue decreased $662,000increased $3,879,000 or 1%7% to $64,236,000$61,357,000 for the quarter ended May 31,November 30, 2016, compared to $64,898,000$57,478,000 in the same quarter of the prior year. Total revenue increased $3,503,000 or 2% to $176,638,000 in the fiscal year-to-date period compared to $173,135,000 in the same period in fiscal 2015.
Revenue in our Industrial Materials segment decreased $103,000increased $5,725,000 or less than one percent13% for the current fiscal quarter and increased $4,240,000 or 3% in the current year-to-date period.quarter. The changes in this segment compared to the prior year periodsperiod were primarily due to the following forfollowing: (a) our electronic and industrial coatings products, which included $2,619,000 or two months of sales related to the currentacquired Resin Designs operations, had a total increase in sales volume of $3,759,000; (b) our specialty products, made up of both laminated durable papers and industrial laminate products, had increased sales volume of $1,223,000 over the prior year period; (c) our cable materials, attained $735,000 in sales volume growth over the first quarter of the prior year, driven by increased sales of communication wire and year-to-date periods, respectively: (a)cable components; (d) our electronic materials products, achieved year-over-year sales volume growth of $296,000; and (e) our specialty chemical intermediates product line, which was acquired in the second quarter of the prior year,continued to experience high demand, had increases ina quarter-over-quarter sales volume increase of $76,000 and $8,292,000; and (b) our pulling and detection products, which continued to garner high demand from the utility and telecommunication industries, and had sales volume increases of $1,055,000 and $2,705,000.$196,000. These increases were fully offsetnegatively affected for the quarter and partially offset for the year-to-date period, by: (a) our wire and cable products, which continued the trendby a quarter-over-quarter reduction of reduced product demand from the energy and mining-related markets and saw decreases of $712,000 and $4,438,000 for the quarter and year-to-date periods, respectively; and (b) quarter-over-quarter and year-to-date reductions of $98,000 and $1,303,000, respectively,$669,000 in sales of our fiber optic cable component products. In addition, while quarter-over-quarter revenue for our electronic coatings products was down $531,000, total year-to-date revenue for the product line was $25,000 over the prior year comparable period, driven by demand from the automotive and appliance industries.
Revenue from our Construction Materials segment decreased $559,000$1,846,000 or 3% and $737,000 or 2%13% in the current quarter and year-to-date periods, respectively.quarter. The decrease in our Construction Materials segment compared to boththe prior year periodsperiod was primarily due to the following: (a) our bridge and highway products sales volume decreased $855,000 in the current period compare to the first quarter of the prior
27
year, resulting from delayed project work in the current year, contrasted against a weather-lengthened construction season experienced in the prior year; (b) the anticipated net decreasesdecrease in our pipeline coatings productsproduct line sales, which totaled $2,405,000 and $4,457,000$778,000 for the quarter-over-quarter and year-to-date periods, respectively. While year-to-date sales of our domestically-produced pipeline products continued to exceed prior year-to-date results, theirperiod, with decreases seen in sales volume for the quarter decreased compared to the third quarter of the prior year. For both the current quarter and current year-to-date periods, Middle East water infrastructure project demand remained a significant sales driver for the pipeline coatings products produced at our Rye, UK facility. However, this demand continued at a lower volumefacility-produced products, sold into the Middle East for water infrastructure projects, and for our domestically-produced products, predominantly sold for use in the current periods, as compared to those obtained in the respective prior year periods. These decreases were partially offset by: (a)oil and gas industries; and (c) our coating and lining systems products, which exceeded prior year quarter and year-to-date results by $1,013,000 and $2,576,000, respectively, withexperienced a period-over-period sales volume increases driven by both non-repeatingreduction of $481,000, resulting from delays in project work and an overall increasing acceptance ofduring the product offeringscurrent quarter. These reductions in architectural and general waterproofing applications; (b) our bridge and highway products, with quarter-over-quarter and year-to-daterevenue were partially offset by a sales volume increasesincrease of $516,000 and $1,074,000, respectively; and (c)$268,000 for our building envelope products, which obtained quarterly and year-to-date sales volume increases of $318,000 and $62,000, respectively.products.
Cost of Products and Services Sold
Cost of products and services sold decreased $1,602,000increased $572,000 or 4%2% to $38,542,000$35,289,000 for the quarter ended May 31,November 30, 2016, compared to $40,144,000 in the prior year quarter. Cost of products and services sold decreased $705,000 or 1% to $108,154,000 in the fiscal year-to-date period compared to $108,859,000$34,717,000 in the same period in fiscal 2015.of the prior year.
The following table summarizes our cost of products and services sold as a percentage of revenue for each of our reporting segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
|
| Three Months Ended May 31, | Nine Months Ended May 31, |
|
|
|
| Three Months Ended November 30, |
| ||||||||||||
Cost of products and services sold |
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
|
|
|
|
| 2016 |
| 2015 |
|
| ||
Industrial Materials |
|
| 62 | % | 62 | % |
| 62 | % | 63 | % |
|
|
|
| 58 | % | 62 | % |
|
|
|
Construction Materials |
|
| 55 | % | 62 | % |
| 59 | % | 64 | % |
|
|
|
| 55 | % | 56 | % |
|
|
|
Total |
|
| 60 | % | 62 | % |
| 61 | % | 63 | % |
|
|
|
| 58 | % | 60 | % |
|
|
|
Cost of products and services sold in our Industrial Materials segment were $29,095,000 and $83,300,000was $28,492,000 in the currentfirst fiscal quarter and year-to-date periods compared to $29,263,000 and $81,391,000$26,831,000 in the comparable periodsperiod in the prior year. Cost of products and services sold in our Construction Materials segment were $9,447,000 and $24,854,000was $6,797,000 for the quarter and year-to-date periods ended May 31,November 30, 2016, compared to $10,881,000 and $27,468,000$7,886,000 in the same periodsperiod of
26
the prior year. As a percentage of revenue, cost of products and services sold remained consistentdecreased for both Industrial Materials and Construction Materials for the quarter-over-quarter period and decreased for the year-to-date period. For Construction Materials, cost of products and services sold as a percentage of revenue decreased for both the quarter and year-to-date periods. These decreases were primarily due to product mix, as we had more-than-proportionately decreased sales volume from our lower margin products. Given the composition of our finished goods and the markets we serve, the pricing of certain commodities (including petroleum-based solvents, films, yarns, and nonwovens, aluminum and copper foils, specialty papers, and various resins, adhesives and inks) can both directly and indirectly affect the purchase price of our raw materials and the demand and sales price for our product offerings. As such, Chase closelydiligently monitors raw material and commodities pricing across all its product lines to preserve margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $355,000increased $242,000 or 3%2% to $11,770,000$11,752,000 for the quarter ended May 31,November 30, 2016 compared to $12,125,000$11,510,000 in the prior year quarter. As a percentage of revenue, selling, general and administrative expenses decreased to 18% in the current fiscal quarter compared to 19% in the prior year period. Selling, general and administrative expenses decreased $754,000 or 2%to $33,506,000 in thefirst fiscal year-to-date period compared to $34,260,000 in the same period in fiscal 2015. As a percentage of revenue, selling, general and administrative expenses decreased to 19% in the current fiscal year-to-date periodquarter compared to 20% in the prior year period. The percentage decreasenominal increase for both the current fiscal quarter and year-to-date period compared to the prior year periods, respectively,period was primarily attributable to: (a) decreasesincreased amortization expense of $260,000, predominantly related to intangible assets acquired in international sales commissionsour September 30, 2016 acquisition of $256,000certain assets of Resin Designs; (b) increase of $210,000 in stock-based compensation expenses; and $907,000 due to a commission structure change which affected sales in certain geographic regions in the current year; (b) decreases(c) increased research and development expense of $188,000 and $216,000 in pension costs,$192,000, principally related to the $177,000 lump sum pension settlement cost recognized in the prior year period third quarter; (c) net decreases of $168,000 and $116,000 in selling expenses; and (d) transitional administrative costs of $100,000 incurred following our purchaseaddition of the specialty chemical intermediates product line (separate from acquisition-related costs) recognizedestablished research and development department of Resin Designs. The Company continues to closely monitor and control expenses, and these increases were partially offset for the quarter by a combined $369,000 reduction in direct selling and commission expenses.
Acquisition-Related Costs
In the third quarterthree months ended November 30, 2016, the Company incurred $584,000 of the prior year, which did not recur in the current year. Selling, general and administrative expenses were further affected by period-over-period changes in amortization expense; these changes predominantlycosts related to our January 30, 2015 acquisition of certain assets of Resin Designs, LLC. This acquisition was accounted for as a business combination in accordance with applicable accounting standards, and as such all related professional service fees (i.e., banking, legal, accounting, actuarial, etc.) were expensed as incurred within the specialty chemical intermediates product line. Amortization expense recorded to selling, general and administrative expense decreased $118,000 and increased $834,000 for the quarter-over-quarter and year-to-date periods, respectively. A focus on cost control continues to be one of our core operating strategies, and this focus will continue throughout the remainder of fiscal 2016 and in future periods.three-month period ended November 30, 2016.
28
Exit Costs Related to Idle Facility
In the quarter and year-to-date period ended May 31,November 30, 2016, the Company recognized $662,000 and $871,000, respectively,$27,000 in demolition costs associated with its site in Randolph, MA, which has been idle with regard to production for several years. The Company began marketing the site for sale during the second fiscal quarter of 2016. The decision to raze the site and market the property comes as part of the Company’s facility consolidation and rationalization initiative, and was done in part to make the property more attractive to a potential buyer. Prior to the current fiscal year, productionProduction previously housed in Randolph, MA had been relocated to the Company’s Oxford, MA and Blawnox, PA locations.locations prior to the commencement of demolition work. The Company has updated its initial estimate and currently anticipates no more than an additional $100,000 in expenses associated with completing the project, and expects work to be completed during the fourth fiscal quarter,2017, with the sale of the property to follow.
27
Write-down of Certain Assets Under Construction
In the first quarter of fiscal 2016, the Company recorded a $365,000 charge related to the full write-down of certain structural composites tangible assets (construction in progress) located in its Granite Falls, NC facility. The first quarter of 2016 sale of our RodPack wind energy business (and related intangible assets), contained within the structural composites product line, placed a limitation on the Company’s ability to sell certain other goods produced byfor the same product line, resulting in our determination to fully write-down certain assets under construction during the quarter.
Acquisition-Related Costs
In the nine months ended May 31, 2015, the Company incurred $584,000 of acquisition costs related to our acquisition of the specialty chemical intermediates product line. This acquisition was accounted for as a business combination in accordance with applicable accounting standards, and as such all related professional service fees (i.e., banking, legal, accounting, actuarial, etc.) were expensed as incurred within the nine month period ended May 31, 2015.
Interest Expense
Interest expense increased $18,000decreased $4,000 or 7%2% to $284,000$246,000 for the quarter ended May 31,November 30, 2016 compared to $266,000$250,000 in the prior year third quarter, primarily due to a floating interest rate increase. Interest expense decreased $16,000 or 2% to $794,000 for the fiscal year-to-date period compared to $810,000 in the same period in fiscal 2015.first quarter. The decrease in interest expense from the prior year-to-date period is a result of a reduction in our overall average debt balance through principal payments made from operating cash flow over the past year.
Gain on Sale of Location
In November 2016, the Company finalized the sale of its Paterson, NJ property for proceeds of $1,382,000. This transaction resulted in a gain of $792,000 which was recorded in the Company’s condensed consolidated statement of operations as a gain on sale of location during the fiscal quarter ended November 30, 2016. The Company had previously reclassified the related long-lived assets to assets held for sale after committing to a plan in February 2016 to actively market the property. The assets held for sale had previously been reported within Corporate and Common assets.
Gain on Sale of Business
In the first quarter of fiscal 2016, the Company sold the RodPack wind energy business formerly contained within its structural composites product line. This transaction resulted in a pre-tax book gain of $1,031,000, which was recorded in the nine monththree-month period ended May 31, 2016.November 30, 2015. The Company will provide ongoing development support to the buyer for which it will receive additional consideration upon the completion of services.
Other Income (Expense)
Other income (expense) was an expenseincome of $512,000$399,000 in the quarter ended May 31,November 30, 2016 compared to an expense of $500,000$31,000 in the same period in the prior year, an increase of $12,000. Other income (expense) was an income of $876,000 for the fiscal year-to-date period compared to an income of $266,000 in the same period in the prior year, an increase of $610,000.$430,000. Other income (expense) primarily includes interest income, rental income and foreign exchange gains (losses) caused by changes in exchange rates on transactions or balances denominated in currencies other than the functional currency of our subsidiaries. ExpenseIncome in the current quarter was primarily the result of sales made from our UK-based operations and denominated in US dollars, while income in the current year-to-date period was primarily the result of sales made from our UK-based operations andbut denominated in both US dollars and euros.
Income Taxes
The effective tax rates for the third quarter and nine month period ended May 31, 2016 were 39.6% and 37.0%, respectively, and were 39.6% and 36.9%, for the quarter and year-to-date period ended May 31, 2015, respectively. The current year third quarter and year-to-date tax rates were affected by an adjustment in our uncertain tax positions. The prior year third quarter and year-to-date tax rates were affected by a domestic production deduction return to provision true-up item related to the sale of our Insulfab product line, which did not repeat in the current year.
dollars.
2829
Non-Controlling Interest
Income Taxes
The income (loss) attributable to non-controlling interest relates to a joint venture we had, prior to our October 2014 acquisition ofeffective tax rates for the 50% outstanding non-controlling membership interest.quarters ended November 30, 2016 and 2015 were 29.3%, and 36.0%, respectively. The joint venture between the Company and its now-former joint venture partner (an otherwise unrelated party)current year effective tax rate was managed and operated on a day-to-day basisaffected by the Company.Company’s adoption of ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting”, during the first fiscal quarter. The $95,000 recordedadoption of ASU No. 2016-09 resulted in recognition of excess tax benefit from stock-based compensation of $794,000 within income tax expense on the condensed consolidated statement of operations as net income attributable to non-controlling interest for the nine month period ended May 31, 2015, representsfirst fiscal quarter of fiscal 2017. The Company anticipates the now-former joint venture partner’s sharepotential for increased periodic volatility in future effective tax rates based on the continued application of the results of operations of the JV for the period from September 1, 2014 through October 31, 2014.ASU No. 2016-09.
Net Income Attributable to Chase Corporation
Net income attributable to Chase Corporation increased $365,000$2,914,000 or 5%39% to $7,531,000$10,363,000 in the quarter ended May 31,November 30, 2016 compared to $7,166,000$7,449,000 in the prior year thirdfirst quarter. The increase in net income in the currentfirst fiscal quarter is primarily due to increased sales, a more favorable sales mix during the quarter, and reduced selling, general and administrative expense for the period.
Net income attributable to Chase Corporation increased $3,815,000 or 21% to $21,952,000 in the nine months ended May 31, 2016 compared to $18,137,000 in the same period in the prior year. The increase in net income in the current nine month period is primarily due to: (a) increased sales volume and an improved sales mix, including increases in revenue and earnings provided by the recently acquired specialty chemical intermediates product line; (b) a gain on the sale of our RodPack wind energy business in November 2015; (c) a period-over-period reduction in selling, generalPaterson, NJ location and administrative expense;the recognition of excess tax benefit related to our early adoption of ASU No. 2016-09. These gains were partially offset by the acquisition-related costs and (d) year-to-date foreign exchange gainsincreased amortization expense recognized in other income (expense).the first fiscal quarter, both of which related to our September 30, 2016 acquisition of certain assets of Resin Designs.
2930
Other Important Performance Measures
We believe that EBITDA, and Adjusted EBITDA and Free Cash Flow are useful performance measures. They are used by our executive management team and Board of Directors to measure operating performance, to allocate resources, to evaluate the effectiveness of our business strategies and to communicate with our Board of Directors and investors concerning our financial performance. The Company believes EBITDA, and Adjusted EBITDA and Free Cash Flow are commonly used by financial analysts and others in the industries in which the Company operates and thus provide useful information to investors. EBITDA, and Adjusted EBITDA and Free Cash Flow are non-GAAP financial measures.
We define EBITDA as follows: net income attributable to Chase Corporation before interest expense from borrowings, income tax expense, depreciation expense from fixed assets, and amortization expense from intangible assets. We define Adjusted EBITDA as EBITDA excluding costs and gains/(gains)/losses related to our acquisitions and divestitures, costs of products sold related to inventory step-up to fair value, settlement gains/(gains)/losses resulting from lump sum distributions to participants from our defined benefit plans, and other significant items. We define Free Cash Flow as Net cash provided by operating activities less purchases of property, plant and equipment.
The use of EBITDA, and Adjusted EBITDA and Free Cash Flow has limitations and these performance measures should not be considered in isolation from, or as an alternative to, US GAAP measures such as net income.income and net cash provided by operating activities. None of these measures should be interpreted as representing the residual cash flow of the Company available for discretionary expenditures or to invest in the growth of our business, since we have certain non-discretionary expenditures that are not deducted from these measures, including scheduled principal and (in the case of Free Cash Flow) interest payments on outstanding debt. Our measurementsmeasurement of EBITDA, and Adjusted EBITDA and Free Cash Flow may not be comparable to similarly titledsimilarly-titled measures used by other companies.
The following table provides a reconciliation of net income, attributable to Chase Corporation, the most directly comparable financial measure presented in accordance with US GAAP, to EBITDA and Adjusted EBITDA for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended May 31, |
|
| Nine Months Ended May 31, |
|
| ||||||||
|
| 2016 |
| 2015 |
|
| 2016 |
| 2015 |
|
| ||||
Net income attributable to Chase Corporation |
| $ | 7,531 |
| $ | 7,166 |
|
| $ | 21,952 |
| $ | 18,137 |
|
|
Interest expense |
|
| 284 |
|
| 266 |
|
|
| 794 |
|
| 810 |
|
|
Income taxes |
|
| 4,935 |
|
| 4,697 |
|
|
| 12,903 |
|
| 10,656 |
|
|
Depreciation expense |
|
| 1,418 |
|
| 1,426 |
|
|
| 4,282 |
|
| 4,238 |
|
|
Amortization expense |
|
| 1,938 |
|
| 2,056 |
|
|
| 5,774 |
|
| 4,940 |
|
|
EBITDA |
| $ | 16,106 |
| $ | 15,611 |
|
| $ | 45,705 |
| $ | 38,781 |
|
|
Exit costs related to idle facility (a) |
|
| 662 |
|
| — |
|
|
| 871 |
|
| — |
|
|
Gain on sale of business (b) |
|
| — |
|
| — |
|
|
| (1,031) |
|
| — |
|
|
Write-down of certain assets under construction (c) |
|
| — |
|
| — |
|
|
| 365 |
|
| — |
|
|
Acquisition-related costs (d) |
|
| — |
|
| — |
|
|
| — |
|
| 584 |
|
|
Cost of sale of inventory step-up (e) |
|
| — |
|
| 16 |
|
|
| — |
|
| 65 |
|
|
Pension settlement costs (f) |
|
| — |
|
| 177 |
|
|
| — |
|
| 177 |
|
|
Adjusted EBITDA |
| $ | 16,768 |
| $ | 15,804 |
|
| $ | 45,910 |
| $ | 39,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended November 30, |
|
|
| ||||
|
| 2016 |
| 2015 |
|
|
| ||
Net income |
| $ | 10,363 |
| $ | 7,449 |
|
|
|
Interest expense |
|
| 246 |
|
| 250 |
|
|
|
Income taxes |
|
| 4,287 |
|
| 4,187 |
|
|
|
Depreciation expense |
|
| 1,335 |
|
| 1,473 |
|
|
|
Amortization expense |
|
| 2,176 |
|
| 1,916 |
|
|
|
EBITDA |
| $ | 18,407 |
| $ | 15,275 |
|
|
|
Acquisition-related costs (a) |
|
| 584 |
|
| — |
|
|
|
Cost of sale of inventory step-up (b) |
|
| 190 |
|
| — |
|
|
|
Gain on sale of location (c) |
|
| (792) |
|
| — |
|
|
|
Exit costs related to idle facility (d) |
|
| 27 |
|
| — |
|
|
|
Gain on sale of business (e) |
|
| — |
|
| (1,031) |
|
|
|
Write-down of certain assets under construction (f) |
|
| — |
|
| 365 |
|
|
|
Adjusted EBITDA |
| $ | 18,416 |
| $ | 14,609 |
|
|
|
(a) | Represents costs related to the September 2016 acquisition of certain assets of Resin Designs, LLC |
(b) | Represents expenses related to inventory step-up in fair value related to the September 2016 acquisition of certain assets of Resin Designs, LLC |
(c) | Represents gain on November 2016 sale of the Company’s Paterson, NJ location |
(d) | Represents Randolph, MA facility exit and demolition costs incurred |
| Represents gain on sale of the RodPack wind energy business contained within the structural composites product line that was completed in November 2015 |
| Represents a write-down of certain structural composites assets under construction based on usage constraints recognized following the sale of the RodPack wind energy business in November 2015 |
|
|
|
|
|
|
3031
The following table provides a reconciliation of net cash provided by operating activities, the most directly comparable financial measure presented in accordance with US GAAP, to Free Cash Flow for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended November 30, |
|
|
| ||||
|
| 2016 |
| 2015 |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
| $ | 8,337 |
| $ | 9,081 |
|
|
|
Purchases of property, plant and equipment |
|
| (652) |
|
| (418) |
|
|
|
Free Cash Flow |
| $ | 7,685 |
| $ | 8,663 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Sources of Capital
Our overall cash and cash equivalents balance increased $18,528,000decreased $24,087,000 to $62,347,000$49,324,000 at May 31,November 30, 2016, from $43,819,000$73,411,000 at August 31, 2015.2016. The increaseddecreased cash balance is primarily attributable to $30,435,000 in cash paid for the September 2016 acquisition of certain assets of Resin Designs, LLC. The overall decrease was positively impacted by: (a) cash from operations andoperations; (b) cash proceeds from the sale of the RodPack wind energy business formerly contained within our structural composites product line.Paterson, NJ location; and (c) cash reimbursement related to a life insurance policy. Of the above noted amounts, $25,004,000$26,379,000 and $18,659,000$27,550,000 were held outside the US by Chase Corporation and our foreign subsidiaries as of May 31,November 30, 2016 and August 31, 2015,2016, respectively. Given our cash position and borrowing capability in the US and the potential for increased investment and acquisitions in foreign jurisdictions, we do not have a history of repatriating a significant portion of our foreign cash. However, we do not currently take the position that undistributed foreign subsidiaries’ earnings are considered to be permanently reinvested. Accordingly, we recognize a deferred tax liability for the estimated future tax effects attributable to temporary differences due to these unremitted earnings. In the event that circumstances should change in the future and we decide to repatriate these foreign amounts to fund US operations, we would pay the applicable US taxes on these repatriated foreign amounts, less any tax credit offsets, to satisfy all previously recorded tax liabilities.
Cash flow provided by operations was $31,842,000$8,337,000 in the first nine monthsquarter of fiscal year 20162017 compared to $23,866,000$9,081,000 in the same period in the prior year. Cash provided by operations during the first nine months of fiscal 2016current period was primarily related to operating income and a reductionincome. Negatively impacting our cash flow from operations were both an increase in our overall inventory balance (a result of the enhanced inventory-management control the Company is exercising through the use of its companywide ERP system, whose roll-out was substantially completed in the prior year). These were offset by a decrease in accounts payableinventories (in part driven by lower purchases on inventory, based on enhanced inventory-management control)related to certain delayed project work) and a decrease in accrued compensation and other expenses (related primarily to the payment of the Company’s annual employee incentive plan in November 2015)2016).
The ratio of current assets to current liabilities was 4.04.2 as of May 31,November 30, 2016 compared to 3.22.0 as of August 31, 2015.2016. The increase in our current ratio at May 31,November 30, 2016 was primarily attributable to an increasethe reclassification of our preexisting term debt to noncurrent at the end of the first quarter, given our entry into the New Credit Agreement (defined below) in December 2016. This was partially offset by a decrease in cash and cash equivalents and decreases in accounts payable and accrued payroll and other compensation, due tofor the paymentacquisition of our annual incentive plan in November 2015.certain assets of Resin Designs, LLC during the first quarter of fiscal 2017.
Cash flow provided byused in investing activities of $119,000$28,033,000 was primarily due to the saleour acquisition of the RodPack wind energy businesscertain assets of Resin Designs, LLC in November 2015, largely offset bySeptember 2016, in addition to cash paid for purchases of machinery and equipment at our manufacturing locations during fiscal 2017.These uses were partially offset by cash received in the first nine monthsquarter from both the sale of fiscal 2016.our Paterson, NJ location and in relation to a life insurance policy.
Cash flow used in financing activities of $12,539,000$3,060,000 was primarily due to scheduled payments made on the bank loans used to finance our June 2012 acquisition of NEPTCO, as well as payment of our annual dividend in December 2015, both of which are described in more detail below.below, as well as cash payments of taxes on stock options and restricted stock.
On October 28, 2015,November 1, 2016, we announced a cash dividend of $0.65$0.70 per share (totaling $5,999,000)$6,532,000). The dividend was paid on December 4, 20157, 2016 to shareholders of record on November 9, 2015.11, 2016.
In June 2012, in connection with our acquisition of NEPTCO, we borrowed $70,000,000 under a five yearfive-year term debt financing arrangement led and arranged by Bank of America, with participation from RBS Citizens (the “Credit“Existing Credit Facility”). The applicable interest rate iswas based on the effective LIBOR plus aan additional amount in the range of 1.75% to 2.25%, depending on our consolidated leverage ratio. At May 31,November 30, 2016, the applicable interest rate was 2.20%
32
2.29% per annum and the outstanding principal amount was $45,500,000. We are$41,300,000. The Existing Credit Facility required to repayrepayment of the principal amount of the term loan in quarterly installments. Installment payments of $1,400,000 began in September 2012 and continued through June 2014, increased to $1,750,000 per quarter thereafter through June 2015, and increased to $2,100,000 per quarter thereafter, and were scheduled to continue at this amount through March 2017. The Existing Credit Facility matureshad a scheduled maturity date of June 27, 2017, prior to our refinancing via entry into an Amended and Restated Credit Agreement (the “New Credit Agreement”) in June 2017, at which time the remaining principal balance will be due. Prepayment of the Credit Facility is allowed at any time.December 2016.
We haveUnder the Existing Credit Facility, Chase had a revolving line of credit with Bank of America (the “Revolver”“Existing Revolver”) totaling $15,000,000, which bearsbore interest at LIBOR plus aan additional amount in the range of 1.75% to 2.25%, depending on our consolidated leverage ratio, or, at our option, at the bank’s base lending rate. As of both May 31,November 30, 2016, and June 30,December 15, 2016 (the date on which the New Credit Agreement was entered into), the entire amount of $15,000,000 was available for use.
31
The Revolver is scheduledJune 27, 2017 prior to mature in June 2017. This Revolver allows for increased flexibility for working capital requirements going forward, and we plan to use this availability to help finance our cash needs, including potential acquisitions, in future periods.refinancing via the New Credit Agreement.
The Existing Credit Facility with Bank of America containscontained customary affirmative and negative covenants that, among other things, restrictrestricted our ability to incur additional indebtedness. It also requiresrequired us to maintain a ratio of consolidated indebtedness to consolidated EBITDA (each as defined in the facility) of no more than 3.00 to 1.00, and to maintain a consolidated fixed charge coverage ratio (as calculated in the facility) of at least 1.25 to 1.00. We were in compliance with our debt covenants as of May 31,November 30, 2016.
The New Credit Agreement is an all revolving credit facility with a borrowing capacity of $150,000,000, which can be increased by an additional $50,000,000 at the request of the Company and the individual or collective option of any of the Lenders (defined below). The New Credit Agreement with Bank of America, and with participation from Citizens Bank and JPMorgan Chase Bank (collectively with Bank of America, the “Lenders”), contains customary affirmative and negative covenants that, among other things, restricts our ability to incur additional indebtedness and requires certain lender approval for acquisitions by the Company and its subsidiaries over a certain size. It also requires us to maintain certain financial ratios on a consolidated basis, including a consolidated net leverage ratio (as defined in the facility) of no more than 3.25 to 1.00, and a consolidated fixed charge coverage ratio (as defined in the facility) of at least 1.25 to 1.00. The New Credit Agreement was entered into both to refinance our previously existing term loan and revolving line of credit and to provide for additional liquidity to finance potential acquisitions, working capital, capital expenditures, and for other general corporate purposes.
Currently, we have several on-going capital projects, as well as our facility consolidation and rationalization initiative, which are important to our long-term strategic goals. Machinery and equipment willmay be added as needed to increase capacity or enhance operating efficiencies in our production facilities.
During the first quarter of fiscal 2016,2017, we have taken action to market forfinalized the sale two non-production properties owned by the Company. Included in this was the razing of our idle facilityPaterson, NJ location, entered into a conditional sales agreement for our former corporate offices in Bridgewater, MA (which subsequently closed in the second fiscal quarter), and entered the final stages of razing our location in Randolph, MA, which is beingin preparation for its eventual sale. All these actions were done inas part to make the location more attractive to a potential buyer. The demolition work is anticipated to be completed in the fourth fiscal quarter, with the sale of the property to follow. Our Paterson, NJ site was reclassified to assets held for sale during the second fiscal quarter,our continued facility rationalization and we are currently working to execute a sales agreement with terms we deem beneficial to the Company.consolidation plan.
We may acquire companies or other assets in future periods which are complementary to our business. We believe that our existing resources, including cash on hand and our Revolver,the New Credit Agreement, together with cash generated from operations and additional bank borrowings, will be sufficient to fund our cash flow requirements through at least the next twelve months. However, there can be no assurancesassurance that additional financing, if needed, will be available on favorable terms, if at all.
To the extent that interest rates increase in future periods, we will assess the impact of these higher interest rates on the financial and cash flow projections of our potential acquisitions.
We have no significant off-balance sheet arrangements.
The June 23, 2016 referendum by British voters to exit the European Union (“Brexit”) adversely impacted global markets, including currencies, and resulted in a decline in the value
33
Contractual Obligations
Please refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended August 31, 20152016 for a complete discussion of our contractual obligations.
Recent Accounting Standards
In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which will replace most of the existing revenue recognition guidance under US Generally Accepted Accounting Principles (“GAAP”). The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. In March, April and AprilMay 2016, the FASB
32
issued ASU 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” and ASU 2016-10 “Identifying Performance Obligations and Licensing,” bothand ASU 2016-12, “Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients” all of which provide further clarification to be considered when implementing ASU 2014-09. The ASU will be effective for the Company beginning September 1, 2018 (fiscal 2019), including interim periods in its fiscal year 2019, and allows for either retrospective or modified retrospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this ASU on the Company’s consolidated financial position, results of operations and cash flows.
In August 2014, the FASB issued ASU No. 2014-15 “Presentation of Financial Statements: Going Concern (Subtopic 205-40),” which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The guidance applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter (fiscal year 2017 for the Company). The adoption of ASU 2014-15, which occurred in the first quarter of fiscal 2017, did not have a material effect on the Company’s consolidated financial statements.
In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which requires that debt issue costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the amount of the debt liability, consistent with debt discounts and premiums. Amortization of such costs is still reported as interest expense. ASU 2015-03 is effective for fiscal years, and interim periods therein, beginning after December 15, 2015 (fiscal year 2017 for the Company), but early adoption is allowed.. In August 2015, the FASB issued ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issue Costs Associated with Line-of-Credit Arrangements." ASU 2015-15 supplements the requirements of ASU 2015-03 by allowing an entity to defer and present debt issue costs related to a line of credit arrangement as an asset and subsequently amortize the deferred costs ratably over the term of the line of credit arrangement. The Company is currently evaluating the impact of the adoption of this accounting standard update on our consolidated financial position, results of operationsASU 2015-03 and cash flows.
In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” Under this accounting guidance, inventory will be measured at the lower of cost and net realizable value and other options that currently exist for market value will be eliminated. ASU No. 2015-11 defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. No other changes were made to the current guidance on inventory measurement. This accounting guidance is effective for us2015-15, which occurred in the first quarter of fiscal 2018. Early adoption is permitted. We are currently evaluating2017, did not have a material effect on the impact of the adoption of this accounting standard update on ourCompany’s consolidated financial statements.
In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes – Balance Sheet Classification of Deferred Taxes.” The purpose of the standard is to simplify the presentation of deferred taxes on a classified balance sheet. Under current GAAP, deferred income tax assets and liabilities are separated into current and noncurrent amounts in the balance sheet. The amendments in ASU 2015-17 require that all deferred tax assets and liabilities be classified as noncurrent in the balance sheet. The ASU will be effective for the Company beginning September 1, 2017 (fiscal 2018), including interim periods in its fiscal year 2018, but with early adoption permitted. The Company does not expect the adoption of ASU 2015-17 to have a material impact on its financial statements or presentation.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Changes were made to align lessor accounting with the lessee accounting model and ASU No. 2014-09, “Revenue from Contracts with Customers.” The new lease guidance simplifies the accounting for sale and leaseback transactions primarily because lessees must recognize lease assets and lease liabilities. The ASU will be effective for the Company beginning September 1, 2019 (fiscal 2020). Early application is permitted for all public business entities upon issuance. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees may not apply a full retrospective transition approach. We are currently evaluating the impact of the application of this accounting standard updateASU on our consolidated financial position, results of operationsstatements and cash flows.disclosures thereto.
34
In March 2016, the FASB issued ASU No. 2016-09, “Compensation -– Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting.” This ASU provides simplification insimplifies the accounting for share-based payment transactions including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. The required effective date for adoption of this guidance would be our fiscal year
33
beginning September 1, 2017 (fiscal 2018), but with early adoption allowed. WeThe updated standard no longer requires cash flows related to excess tax benefits to be presented as a financing activity separate from other income tax cash flows. The update also allows entities to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments to taxing authorities made on an employee's behalf for withheld shares should be presented as a financing activity on the statement of cash flows, and provides for an accounting policy election to account for forfeitures as they occur. The Company early adopted this standard as of September 1, 2016 and during the first quarter of fiscal 2016 recognized an excess tax benefit from stock-based compensation of $794,000 within income tax expense on the condensed consolidated statement of operations (adopted prospectively). The adoption did not impact the existing classification of the awards. Excess tax benefits from stock based compensation is now classified in net income in the statement of cash flows instead of being separately stated in financing activities for the three months ended November 30, 2016 (adopted prospectively). Given the Company’s historical practice of including employee withholding taxes paid within financing activities in the statement of cash flows, no prior period reclassifications are required by the clarifications on classification provided by ASU No. 2016-09. Due predominately to the inclusion of the excess tax benefit, the effective tax rate for the first quarter of fiscal 2017 decreased to 29.3%, compared to effective tax rates of 36.0% and 34.5% recognized for the first quarter and whole year periods of fiscal 2016, respectively; further, the Company anticipates the potential for increased periodic volatility in future effective tax rates based on the continued application of the ASU No. 2016-09. Following the adoption of the new standard, the Company has elected to account for forfeitures as they occur.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230).” This ASU provides guidance on the presentation and classification of specific cash flow items to improve consistency within the statement of cash flows. The effective date for adoption of this guidance would be our fiscal year beginning September 1, 2018 (fiscal 2019), with early adoption permitted. The Company is currently evaluating the effect that this guidanceASU No. 2016-15 will have on our consolidatedits financial statements.statements and related disclosures.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. To apply these principles, we must make estimates and judgments that affect our reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. In many instances, we reasonably could have used different accounting estimates and, in other instances, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates and judgments on historical experience and other assumptions that we believe to be reasonable at the time and under the circumstances, and we evaluate these estimates and judgments on an ongoing basis. We refer to accounting estimates and judgments of this type as critical accounting policies, judgments, and estimates. Management believes there have been no material changes during the ninethree months ended May 31,November 30, 2016 to the critical accounting policies reported in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2015.2016.
3435
Forward Looking Information
The part of this Quarterly Report on Form 10-Q captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains certain forward-looking statements, which involve risks and uncertainties. Forward-looking statements include, without limitation, statements as to our future operating results, seasonality expectations, plans for manufacturing facilities, future economic conditions and expectations or plans relating to the implementation or realization of our strategic goals and future growth. These statements are based on current expectations, estimates and projections about the industries in which we operate, and the beliefs and assumptions made by management. Readers should refer to the discussions under “Forward Looking Information” and “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 20152016 concerning certain factors that could cause our actual results to differ materially from the results anticipated in such forward-looking statements. These discussions and Risk Factors are hereby incorporated by reference into this Quarterly Report.
Item 3 — Quantitative and Qualitative Disclosures about Market RiskRisk
We limit the amount of credit exposure to any one issuer. At May 31,November 30, 2016, other than our restricted investments (which are restricted for use in a nonqualifiednon-qualified retirement savings plan for certain key employees and members of the Board of Directors), all of our funds were either in demand deposit accounts or investment instruments that meet high credit quality standards such as money market funds, government securities, or commercial paper.
Our domestic operations have limited currency exposure since substantially all transactions are denominated in US dollars. However, our European and Asian operations are subject to currency exchange fluctuations. We continue to review our policies and procedures to control this exposure while maintaining the benefit from these operations and sales not denominated in US dollars. The effect of an immediate hypothetical 10% change in the exchange rate between the British pound and the US dollar would not have a material effect on the Company’s overall liquidity. As of May 31,November 30, 2016, the Company had cash balances in the following foreign currencies (with USD equivalents):
|
|
|
|
|
|
|
Currency Code |
| Currency Name |
| USD Equivalent at |
| |
|
| $ |
| |||
|
| $ |
| |||
|
| $ |
| |||
|
| $ | ||||
$ | 117,000 |
|
We will continue to review our current cash balances denominated in foreign currency in light of current tax guidelines, working capital requirements, infrastructure improvements and potential acquisitions.
We recognized a foreign currency translation loss for the ninethree months ended May 31,November 30, 2016 in the amount of $1,917,000$2,098,000 related to our European and Indian operations, which is recorded in other comprehensive income (loss) within our Statement of Equity and Statement of Comprehensive Income. We do not have or utilize any derivative financial instruments.
We pay interest on our outstanding long-term debt at interest rates that fluctuate based upon changes in various base interest rates. The carrying value of our long-term debt, including current portion, was $45,500,000$41,300,000 at May 31,November 30, 2016. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Sources of Capital” and, together with Note 12 — “Fair Value Measurements” and Note 18 – “Subsequent Events” to the Condensed Consolidated Financial Statements for additional information regarding our outstanding long-term debt. An immediate hypothetical 10% change in variable interest rates would not have a material effect on our Consolidated Financial Statements.
3536
Item 4 — Controls and ProceduresProcedures
Evaluation of disclosure controls and procedures
We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
We carry out a variety of ongoing procedures under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.
Changes in internal control over financial reporting
ThereDuring the quarter ended November 30, 2016, the Company began the process of implementing its world-wide ERP computer system, and other applicable shared services, to operations associated with the newly acquired Resin Designs, LLC assets. Otherwise, there have not been any changes in the Company’s internal control over financial reporting during the thirdfirst quarter of fiscal 20162017 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
Part II — OTHER INFORMATIONINFORMATION
Item 1 — Legal ProceedingsProceedings
We are involved from time to time in litigation incidental to the conduct of our business. Although we do not expect that the outcome in any of these matters, individually or collectively, will have a material adverse effect on our financial condition, results of operations or cash flows, litigation is inherently unpredictable. Therefore, judgments could be rendered or settlements entered into,agreed to, that could adversely affect our operating results or cash flows in a particular period. We routinely assess all of our litigation and threatened litigation as to the probability of ultimately incurring a liability, and record our best estimate of the ultimate loss in situations where we assess the likelihood of loss as probable.
Please refer to Item 1A in our Annual Report on Form 10-K for the fiscal year ended August 31, 20152016 for a complete discussion of the risk factors which could materially affect our business, financial condition or future results.
3637
|
|
|
Exhibit |
| Description |
10.1 | Asset Purchase Agreement, dated September 30, 2016, between Chase Corporation and Resin Designs, LLC | |
10.10.1 | Restricted Stock Agreement (equity retention agreement) between Chase Corporation and Adam P. Chase dated September 1, 2016 | |
10.10.2 | Stock Option Agreement (equity retention agreement) between Chase Corporation and Adam P. Chase dated September 1, 2016 | |
10.10.3 | Restricted Stock Agreement (equity retention agreement) between Chase Corporation and Kenneth J. Feroldi dated September 1, 2016 | |
31.1 |
| Certification of principal executive officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
31.2 |
| Certification of principal financial officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
32.1 |
| Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
32.2 |
| Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
101.INS |
| XBRL Instance Document |
101.SCH |
| XBRL Taxonomy Extension Schema Document |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
*Furnished, not filed
3738
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
|
|
| Chase Corporation | |
|
|
|
|
|
|
Dated: | By: | /s/ Adam P. Chase |
|
| Adam P. Chase |
|
| President and Chief Executive Officer |
|
|
|
|
|
|
Dated: | By: | /s/ Kenneth J. Feroldi |
|
| Kenneth J. Feroldi |
|
| Treasurer and Chief Financial Officer |
3839