It
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 November 30, 2017Ended February 28, 2022
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.) |
295375 University Avenue, Westwood, Massachusetts02090
(Address of Principal Executive Offices, Including ZipOffices) (Zip Code)
(781) (781) 332-0700
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| ||
Title of each class Common stock, $.10 par value | Trading Symbol(s) CCF | Name of each exchange on which registered NYSE American |
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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”,filer,” “accelerated filer”,filer,” “smaller reporting company,”company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| |
Large accelerated filer | Accelerated filer |
Non-accelerated filer | Smaller reporting company ☐ |
Emerging growth company ☐ | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B)13(a) of the SecuritiesExchange Act. ☐◻
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 DecemberMarch 31, 20172022 was 9,374,8409,468,888.
CHASE CORPORATION
For the Quarter Ended November 30, 2017February 28, 2022
Ca | | |
| 3 | |
| | |
Part I - FINANCIAL INFORMATION | | |
| | |
Item 1 – Unaudited Condensed Consolidated Financial Statements | | |
| | |
| 4 | |
| | |
| 5 | |
| | |
| 6 | |
| | |
| 7 | |
| | |
| 9 | |
| | |
Notes to Unaudited Condensed Consolidated Financial Statements | | 10 |
| | |
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations | | 31 |
| | |
Item 3 – Quantitative and Qualitative Disclosures About Market Risk | | 42 |
| | |
| 43 | |
| | |
| | |
| | |
| 44 | |
| | |
| 44 | |
| | |
| 44 | |
| | |
| 45 |
2
Cautionary Note Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward -looking"forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements, including without limitation forward-looking statements made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” involve risks and uncertainties. Any statements contained in this Quarterly Report that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements include, without limitation, statements as to our future operating results; seasonality expectations; plans for the development, utilization or disposal of manufacturing facilities; future economic conditions; our expectations as to legal proceedings; the effect of our market and product development efforts; and expectations or plans relating to the implementation or realization of our strategic goals and future growth, including through potential future acquisitions. Forward-looking statements may also include, among other things, statements relating to future sales, earnings, cash flow, results of operations, use of cash and other measures of financial performance, as well as statements relating to future dividend payments. Other forward-lookingpayments, as well as the expected impact of the coronavirus disease 2019 (COVID-19) pandemic on the Company's businesses. Forward-looking statements may be identified through the use of words such as “believes,” “anticipates,” “may,” “should,” “will,” “plans,” “projects,” “expects,” “expectations,” “estimates,” “predicts,” “targets,” “forecasts,” “strategy,” and other words of similar meaning in connection with the discussion of future operating or financial performance. 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. Because forward-looking statements relate to the future, they are subject to inherent risks, uncertainties and changes in circumstances that are difficult to predict. Accordingly, the Company’s actual results may differ materially from those contemplated by the forward-looking statements. Investors, therefore, are cautioned against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Readers should refer to the discussions under “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 20172021 concerning certain factors that could cause our actual results to differ materially from the results anticipated in such forward-looking statements. These Risk Factors are hereby incorporated by reference into this Quarterly Report.
3
Item 1 — Unaudited Condensed Consolidated Financial Statements
CHASE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
In thousands, except share and per share amounts
|
|
|
|
|
|
|
|
|
| November 30, |
| August 31, |
| ||
|
| 2017 |
| 2017 |
| ||
ASSETS |
|
|
|
|
|
|
|
Current Assets |
|
|
|
|
|
|
|
Cash and cash equivalents |
| $ | 54,262 |
| $ | 47,354 |
|
Accounts receivable, less allowance for doubtful accounts of $333 and $456 |
|
| 34,976 |
|
| 38,051 |
|
Inventory |
|
| 27,331 |
|
| 25,618 |
|
Prepaid expenses and other current assets |
|
| 3,847 |
|
| 3,098 |
|
Due from sale of business |
|
| 400 |
|
| — |
|
Assets held for sale |
|
| 14 |
|
| 14 |
|
Prepaid income taxes |
|
| 641 |
|
| — |
|
Total current assets |
|
| 121,471 |
|
| 114,135 |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, less accumulated depreciation of $45,614 and $44,277 |
|
| 34,430 |
|
| 34,760 |
|
|
|
|
|
|
|
|
|
Other Assets |
|
|
|
|
|
|
|
Goodwill |
|
| 50,911 |
|
| 50,784 |
|
Intangible assets, less accumulated amortization of $44,817 and $42,206 |
|
| 44,607 |
|
| 46,846 |
|
Cash surrender value of life insurance, less current portion |
|
| 4,530 |
|
| 4,530 |
|
Restricted investments |
|
| 1,057 |
|
| 964 |
|
Funded pension plan |
|
| 549 |
|
| 566 |
|
Deferred income taxes |
|
| 1,570 |
|
| 1,614 |
|
Other assets |
|
| 129 |
|
| 539 |
|
Total assets |
| $ | 259,254 |
| $ | 254,738 |
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
Current Liabilities |
|
|
|
|
|
|
|
Accounts payable |
| $ | 13,114 |
| $ | 14,455 |
|
Accrued payroll and other compensation |
|
| 4,404 |
|
| 6,500 |
|
Accrued expenses |
|
| 3,826 |
|
| 4,052 |
|
Dividend payable |
|
| 7,498 |
|
| — |
|
Accrued income taxes |
|
| — |
|
| 2,333 |
|
Total current liabilities |
|
| 28,842 |
|
| 27,340 |
|
|
|
|
|
|
|
|
|
Deferred compensation |
|
| 1,071 |
|
| 979 |
|
Accumulated pension obligation |
|
| 12,368 |
|
| 12,666 |
|
Other liabilities |
|
| 1,612 |
|
| 1,567 |
|
Accrued income taxes |
|
| 1,257 |
|
| 1,257 |
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (Note 10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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; 9,374,840 shares at November 30, 2017 and 9,354,136 shares at August 31, 2017 issued and outstanding |
|
| 937 |
|
| 935 |
|
Additional paid-in capital |
|
| 14,734 |
|
| 14,060 |
|
Accumulated other comprehensive loss |
|
| (11,788) |
|
| (13,469) |
|
Retained earnings |
|
| 210,221 |
|
| 209,403 |
|
Total equity |
|
| 214,104 |
|
| 210,929 |
|
Total liabilities and equity |
| $ | 259,254 |
| $ | 254,738 |
|
| | | | | | | |
| | February 28, | | August 31, | | ||
|
| 2022 |
| 2021 |
| ||
ASSETS | | | | | | | |
Current Assets | | | | | | | |
Cash and cash equivalents | | $ | 116,044 | | $ | 119,429 | |
Accounts receivable, less allowances of $529 and $451 | | | 46,081 | | | 46,212 | |
Inventory | | | 52,996 | | | 41,217 | |
Prepaid expenses and other current assets | | | 4,629 | | | 2,851 | |
Prepaid income taxes and refunds due | | | 3,280 | | | 3,255 | |
Total current assets | | | 223,030 | | | 212,964 | |
| | | | | | | |
Property, plant and equipment, less accumulated depreciation of $51,796 and $50,666 | | | 24,137 | | | 24,267 | |
| | | | | | | |
Other Assets | | | | | | | |
Goodwill | | | 97,131 | | | 97,866 | |
Intangible assets, less accumulated amortization of $97,287 and $91,484 | | | 40,305 | | | 46,954 | |
Cash surrender value of life insurance | | | 4,450 | | | 4,450 | |
Restricted investments | | | 2,323 | | | 2,260 | |
Deferred income taxes | | | 4,879 | | | 5,265 | |
Operating lease right-of-use asset | | | 9,554 | | | 9,312 | |
Other assets | | | 952 | | | 821 | |
Total assets | | $ | 406,761 | | $ | 404,159 | |
| | | | | | | |
LIABILITIES AND EQUITY | | | | | | | |
Current Liabilities | | | | | | | |
Accounts payable | | $ | 17,331 | | $ | 19,575 | |
Accrued payroll and other compensation | | | 4,212 | | | 7,179 | |
Income taxes payable | | | — | | | 761 | |
Accrued expenses | | | 5,250 | | | 5,407 | |
Total current liabilities | | | 26,793 | | | 32,922 | |
| | | | | | | |
Operating lease long-term liabilities | | | 7,493 | | | 7,202 | |
Deferred compensation | | | 2,329 | | | 2,267 | |
Accumulated pension obligation | | | 8,811 | | | 9,416 | |
Other liabilities | | | 2,692 | | | 2,537 | |
Deferred income taxes | | | 3,162 | | | 3,301 | |
Accrued income taxes | | | 2,207 | | | 2,190 | |
| | | | | | | |
Commitments and contingencies (Note 10) | | | | | | | |
| | | | | | | |
Equity | | | | | | | |
First Serial Preferred Stock, $1.00 par value: Authorized 100,000 shares; NaN issued | | | — | | | — | |
Common stock, $.10 par value: Authorized 20,000,000 shares; 9,468,888 shares at February 28, 2022 and 9,447,905 shares at August 31, 2021 issued and outstanding | | | 948 | | | 946 | |
Additional paid-in capital | | | 20,513 | | | 18,959 | |
Accumulated other comprehensive loss | | | (13,209) | | | (11,210) | |
Retained earnings | | | 345,022 | | | 335,629 | |
Total equity | | | 353,274 | | | 344,324 | |
Total liabilities and equity | | $ | 406,761 | | $ | 404,159 | |
| | | | | | | |
See accompanying notes to the unaudited condensed consolidated financial statements
4
CHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
In thousands, except share and per share amounts
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended November 30, |
|
|
| ||||
|
| 2017 |
| 2016 |
|
|
| ||
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
Sales |
| $ | 60,577 |
| $ | 60,269 |
|
|
|
Royalties and commissions |
|
| 1,340 |
|
| 1,088 |
|
|
|
|
|
| 61,917 |
|
| 61,357 |
|
|
|
Costs and Expenses |
|
|
|
|
|
|
|
|
|
Cost of products and services sold |
|
| 36,895 |
|
| 35,289 |
|
|
|
Selling, general and administrative expenses |
|
| 12,059 |
|
| 11,752 |
|
|
|
Acquisition-related costs (Note 14) |
|
| — |
|
| 584 |
|
|
|
Exit costs related to idle facility (Note 15) |
|
| — |
|
| 27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
| 12,963 |
|
| 13,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
| (45) |
|
| (246) |
|
|
|
Gain on sale of real estate (Note 9) |
|
| — |
|
| 792 |
|
|
|
Other income (expense) |
|
| (319) |
|
| 399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
| 12,599 |
|
| 14,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
| 4,284 |
|
| 4,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
| $ | 8,315 |
| $ | 10,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders, per common and common equivalent share (Note 4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 0.89 |
| $ | 1.11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
| $ | 0.88 |
| $ | 1.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding |
|
|
|
|
|
|
|
|
|
Basic |
|
| 9,281,877 |
|
| 9,228,338 |
|
|
|
Diluted |
|
| 9,384,426 |
|
| 9,321,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual cash dividends declared per share |
| $ | 0.80 |
| $ | 0.70 |
|
|
|
| | | | | | | | | | | | | | | |
| | Three Months Ended February 28, | | | Six Months Ended February 28, | | | ||||||||
|
| 2022 |
| 2021 |
| | 2022 |
| 2021 |
| | ||||
| | | | | | | | | | | | | | | |
Revenue | | | | �� | | | | | | | | | | | |
Sales | | $ | 73,182 | | $ | 67,575 | | | $ | 147,374 | | $ | 133,711 | | |
Royalties and commissions | | | 771 | | | 872 | | | | 1,589 | | | 1,912 | | |
| | | 73,953 | | | 68,447 | | | | 148,963 | | | 135,623 | | |
Costs and Expenses | | | | | | | | | | | | | | | |
Cost of products and services sold | | | 46,911 | | | 40,915 | | | | 94,192 | | | 80,520 | | |
Selling, general and administrative expenses | | | 13,125 | | | 12,331 | | | | 26,500 | | | 24,591 | | |
Research and product development costs | | | 1,095 | | | 1,026 | | | | 2,088 | | | 2,077 | | |
Operations optimization costs (Note 15) | | | 589 | | | 98 | | | | 648 | | | 98 | | |
Acquisition-related costs (Note 17) | | | — | | | 128 | | | | — | | | 128 | | |
(Gain) loss on contingent consideration (Note 17) | | | (200) | | | 733 | | | | 275 | | | 733 | | |
| | | | | | | | | | | | | | | |
Operating income | | | 12,433 | | | 13,216 | | | | 25,260 | | | 27,476 | | |
| | | | | | | | | | | | | | | |
Interest expense | | | (86) | | | (67) | | | | (173) | | | (136) | | |
Other income (expense) | | | 20 | | | (284) | | | | 397 | | | (498) | | |
| | | | | | | | | | | | | | | |
Income before income taxes | | | 12,367 | | | 12,865 | | | | 25,484 | | | 26,842 | | |
| | | | | | | | | | | | | | | |
Income taxes (Note 14) | | | 3,241 | | | 3,694 | | | | 6,631 | | | 6,834 | | |
| | | | | | | | | | | | | | | |
Net income | | $ | 9,126 | | $ | 9,171 | | | $ | 18,853 | | $ | 20,008 | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Net income available to common shareholders, per common and common equivalent share (Note 4) | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Basic | | $ | 0.96 | | $ | 0.97 | | | $ | 1.99 | | $ | 2.12 | | |
| | | | | | | | | | | | | | | |
Diluted | | $ | 0.96 | | $ | 0.97 | | | $ | 1.98 | | $ | 2.11 | | |
| | | | | | | | | | | | | | | |
Weighted average shares outstanding | | | | | | | | | | | | | | | ��� |
Basic | | | 9,399,231 | | | 9,381,666 | | | | 9,398,552 | | | 9,378,743 | | |
Diluted | | | 9,436,415 | | | 9,426,626 | | | | 9,437,425 | | | 9,422,651 | | |
| | | | | | | | | | | | | | | |
Annual cash dividends declared per share | | | | | | | | | $ | 1.00 | | $ | 0.80 | | |
See accompanying notes to the unaudited condensed consolidated financial statements
5
CHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
In thousands, except share and per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended November 30, |
|
| ||||
|
|
| 2017 |
| 2016 |
|
| ||
Net income |
|
| $ | 8,315 |
| $ | 10,363 |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
Net unrealized gain (loss) on restricted investments, net of tax |
|
|
| 31 |
|
| 13 |
|
|
Change in funded status of pension plans, net of tax |
|
|
| 80 |
|
| 147 |
|
|
Foreign currency translation adjustment |
|
|
| 1,570 |
|
| (2,098) |
|
|
Total other comprehensive income (loss) |
|
|
| 1,681 |
|
| (1,938) |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
| $ | 9,996 |
| $ | 8,425 |
|
|
| | | | | | | | | | | | | | |
| | Three Months Ended February 28, | | Six Months Ended February 28, | | | ||||||||
|
| 2022 |
| 2021 |
| 2022 | | 2021 | |
| ||||
Net income | | $ | 9,126 |
| $ | 9,171 | | $ | 18,853 | | $ | 20,008 | | |
| | | | | | | | | | | | | | |
Other comprehensive income (loss): | | | | | | | | | | | | | | |
Net unrealized (loss) gain on restricted investments, net of tax | | | (135) | | | 48 | | | (165) | | | 118 | | |
Change in funded status of pension plans, net of tax | | | 112 | | | 125 | | | 224 | | | 247 | | |
Foreign currency translation adjustment | | | 115 | | | 1,796 | | | (2,058) | | | 1,887 | | |
Total other comprehensive income (loss) | | | 92 | | | 1,969 | | | (1,999) | | | 2,252 | | |
| | | | | | | | | | | | | | |
Comprehensive income | | $ | 9,218 | | $ | 11,140 | | $ | 16,854 | | $ | 22,260 | | |
| | | | | | | | | | | | | | |
See accompanying notes to the unaudited condensed consolidated financial statements
6
CHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF EQUITY
THREE MONTHS ENDED NOVEMBER 30, 2017FEBRUARY 28, 2022 AND 2021
(UNAUDITED)
In thousands, except share and per share amounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Additional |
| Accumulated Other |
|
|
|
| Total |
| |||
|
| Common Stock |
| Paid-In |
| Comprehensive |
| Retained |
| Stockholders' |
| |||||||
|
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Earnings |
| Equity |
| |||||
Balance at August 31, 2017 |
| 9,354,136 |
| $ | 935 |
| $ | 14,060 |
| $ | (13,469) |
| $ | 209,403 |
| $ | 210,929 |
|
Restricted stock grants, net of forfeitures |
| 13,121 |
|
| 1 |
|
| (1) |
|
|
|
|
|
|
|
| — |
|
Amortization of restricted stock grants |
|
|
|
|
|
|
| 421 |
|
|
|
|
|
|
|
| 421 |
|
Amortization of stock option grants |
|
|
|
|
|
|
| 112 |
|
|
|
|
|
|
|
| 112 |
|
Exercise of stock options |
| 10,859 |
|
| 1 |
|
| 448 |
|
|
|
|
|
|
|
| 449 |
|
Common stock received for payment of stock option exercises |
| (3,276) |
|
|
|
|
| (306) |
|
|
|
|
|
|
|
| (306) |
|
Cash dividend accrued, $0.80 per share |
|
|
|
|
|
|
|
|
|
|
|
|
| (7,497) |
|
| (7,497) |
|
Change in funded status of pension plan, net of tax $41 |
|
|
|
|
|
|
|
|
|
| 80 |
|
|
|
|
| 80 |
|
Foreign currency translation adjustment |
|
|
|
|
|
|
|
|
|
| 1,570 |
|
|
|
|
| 1,570 |
|
Net unrealized gain on restricted investments, net of tax $15 |
|
|
|
|
|
|
|
|
|
| 31 |
|
|
|
|
| 31 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
| 8,315 |
|
| 8,315 |
|
Balance at November 30, 2017 |
| 9,374,840 |
| $ | 937 |
| $ | 14,734 |
| $ | (11,788) |
| $ | 210,221 |
| $ | 214,104 |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | Additional | | Accumulated Other | | | | | Total | |||
| | Common Stock | | Paid-In | | Comprehensive | | Retained | | Stockholders' | |||||||
|
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Earnings |
| Equity | |||||
Balance at November 30, 2020 | | 9,446,281 | | $ | 945 | | $ | 17,264 | | $ | (12,809) | | $ | 301,546 | | $ | 306,946 |
Restricted stock grants, net of forfeitures | | 3,314 | | | 1 | | | (1) | | | | | | | | | — |
Amortization of restricted stock grants | | | | | | | | 620 | | | | | | | | | 620 |
Amortization of stock option grants | | | | | | | | (23) | | | | | | | | | (23) |
Common stock retained to pay statutory minimum withholding taxes on common stock | | (1,224) | | | — | | | (139) | | | | | | | | | (139) |
Change in funded status of pension plans, net of tax $40 | | | | | | | | | | | 125 | | | | | | 125 |
Foreign currency translation adjustment | | | | | | | | | | | 1,796 | | | | | | 1,796 |
Net unrealized gain (loss) on restricted investments, net of tax $15 | | | | | | | | | | | 48 | | | | | | 48 |
Net income | | | | | | | | | | | | | | 9,171 | | | 9,171 |
Balance at February 28, 2021 | | 9,448,371 | | $ | 946 | | $ | 17,721 | | $ | (10,840) | | $ | 310,717 | | $ | 318,544 |
| | | | | | | | | | | | | | | | | |
Balance at November 30, 2021 | | 9,459,685 | | $ | 947 | | $ | 19,733 | | $ | (13,301) | | $ | 335,896 | | $ | 343,275 |
Restricted stock grants, net of forfeitures | | 9,203 | | | 1 | | | (1) | | | | | | | | | — |
Amortization of restricted stock grants | | | | | | | | 552 | | | | | | | | | 552 |
Amortization of stock option grants | | | | | | | | 229 | | | | | | | | | 229 |
Change in funded status of pension plans, net of tax $37 | | | | | | | | | | | 112 | | | | | | 112 |
Foreign currency translation adjustment | | | | | | | | | | | 115 | | | | | | 115 |
Net unrealized gain (loss) on restricted investments, net of tax ($46) | | | | | | | | | | | (135) | | | | | | (135) |
Net income | | | | | | | | | | | | | | 9,126 | | | 9,126 |
Balance at February 28, 2022 | | 9,468,888 | | $ | 948 | | $ | 20,513 | | $ | (13,209) | | $ | 345,022 | | $ | 353,274 |
| | | | | | | | | | | | | | | | | |
See accompanying notes to the unaudited condensed consolidated financial statements
7
CHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSEQUITY
SIX MONTHS ENDED FEBRUARY 28, 2022 AND 2021
(UNAUDITED)
In thousands, except share and per share amounts
| | | | | | | | | | | | | | | | | |
| | | | | | | Additional | | Accumulated Other | | | | | Total | |||
| | Common Stock | | Paid-In | | Comprehensive | | Retained | | Stockholders' | |||||||
|
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Earnings |
| Equity | |||||
Balance at August 31, 2020 | | 9,439,082 | | $ | 944 | | $ | 16,674 | | $ | (13,092) | | $ | 298,266 | | $ | 302,792 |
Restricted stock grants, net of forfeitures | | 10,693 | | | 2 | | | (2) | | | | | | | | | — |
Amortization of restricted stock grants | | | | | | | | 1,190 | | | | | | | | | 1,190 |
Amortization of stock option grants | | | | | | | | 225 | | | | | | | | | 225 |
Exercise of stock options | | 2,532 | | | — | | | 40 | | | | | | | | | 40 |
Common stock received for payment of stock option exercises | | (386) | | | — | | | (40) | | | | | | | | | (40) |
Common stock retained to pay statutory minimum withholding taxes on common stock | | (3,550) | | | — | | | (366) | | | | | | | | | (366) |
Cash dividend on common stock, $0.80 per share | | | | | | | | | | | | | | (7,557) | | | (7,557) |
Change in funded status of pension plans, net of tax $83 | | | | | | | | | | | 247 | | | | | | 247 |
Foreign currency translation adjustment | | | | | | | | | | | 1,887 | | | | | | 1,887 |
Net unrealized gain (loss) on restricted investments, net of tax $39 | | | | | | | | | | | 118 | | | | | | 118 |
Net income | | | | | | | | | | | | | | 20,008 | | | 20,008 |
Balance at February 28, 2021 | | 9,448,371 | | $ | 946 | | $ | 17,721 | | $ | (10,840) | | $ | 310,717 | | $ | 318,544 |
| | | | | | | | | | | | | | | | | |
Balance at August 31, 2021 | | 9,447,905 | | $ | 946 | | $ | 18,959 | | $ | (11,210) | | $ | 335,629 | | $ | 344,324 |
Restricted stock grants, net of forfeitures | | 20,983 | | | 2 | | | (2) | | | | | | | | | — |
Amortization of restricted stock grants | | | | | | | | 1,108 | | | | | | | | | 1,108 |
Amortization of stock option grants | | | | | | | | 448 | | | | | | | | | 448 |
Cash dividend on common stock, $1.00 per share | | | | | | | | | | | | | | (9,460) | | | (9,460) |
Change in funded status of pension plans, net of tax $74 | | | | | | | | | | | 224 | | | | | | 224 |
Foreign currency translation adjustment | | | | | | | | | | | (2,058) | | | | | | (2,058) |
Net unrealized gain (loss) on restricted investments, net of tax ($57) | | | | | | | | | | | (165) | | | | | | (165) |
Net income | | | | | | | | | | | | | | 18,853 | | | 18,853 |
Balance at February 28, 2022 | | 9,468,888 | | $ | 948 | | $ | 20,513 | | $ | (13,209) | | $ | 345,022 | | $ | 353,274 |
| | | | | | | | | | | | | | | | | |
See accompanying notes to the unaudited condensed consolidated financial statements
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended November 30, |
|
| ||||
|
|
| 2017 |
| 2016 |
|
| ||
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Net income |
|
| $ | 8,315 |
| $ | 10,363 |
|
|
Adjustments to reconcile net income to net cash provided by operating activities |
|
|
|
|
|
|
|
|
|
Gain on sale of real estate |
|
|
| — |
|
| (792) |
|
|
Depreciation |
|
|
| 1,254 |
|
| 1,335 |
|
|
Amortization |
|
|
| 2,314 |
|
| 2,176 |
|
|
Cost of sale of inventory step-up |
|
|
| — |
|
| 190 |
|
|
Recovery of allowance for doubtful accounts |
|
|
| (126) |
|
| (5) |
|
|
Stock-based compensation |
|
|
| 533 |
|
| 528 |
|
|
Realized gain on restricted investments |
|
|
| (1) |
|
| (3) |
|
|
Deferred taxes |
|
|
| — |
|
| 10 |
|
|
Increase (decrease) from changes in assets and liabilities |
|
|
|
|
|
|
|
|
|
Accounts receivable |
|
|
| 3,329 |
|
| 5 |
|
|
Inventory |
|
|
| (1,593) |
|
| (1,397) |
|
|
Prepaid expenses and other assets |
|
|
| (725) |
|
| (535) |
|
|
Accounts payable |
|
|
| (1,348) |
|
| (12) |
|
|
Accrued compensation and other expenses |
|
|
| (2,397) |
|
| (2,755) |
|
|
Accrued income taxes |
|
|
| (3,001) |
|
| (771) |
|
|
Net cash provided by operating activities |
|
|
| 6,554 |
|
| 8,337 |
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment |
|
|
| (851) |
|
| (652) |
|
|
Cost to acquire intangible assets |
|
|
| (1) |
|
| (14) |
|
|
Payments for acquisitions |
|
|
| — |
|
| (30,435) |
|
|
Proceeds from sale of real estate |
|
|
| — |
|
| 1,382 |
|
|
Net proceeds from sale of businesses |
|
|
| — |
|
| 229 |
|
|
Increase in restricted investments |
|
|
| (46) |
|
| (47) |
|
|
Proceeds from settlement of life insurance policies |
|
|
| — |
|
| 1,504 |
|
|
Net cash used in investing activities |
|
|
| (898) |
|
| (28,033) |
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
|
Payments of principal on debt |
|
|
| — |
|
| (2,100) |
|
|
Proceeds from exercise of common stock options |
|
|
| 143 |
|
| 33 |
|
|
Payments of taxes on stock options and restricted stock |
|
|
| — |
|
| (993) |
|
|
Net cash provided by (used in) financing activities |
|
|
| 143 |
|
| (3,060) |
|
|
|
|
|
|
|
|
|
|
|
|
INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS |
|
|
| 5,799 |
|
| (22,756) |
|
|
Effect of foreign exchange rates on cash |
|
|
| 1,109 |
|
| (1,331) |
|
|
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
|
|
| 47,354 |
|
| 73,411 |
|
|
CASH AND CASH EQUIVALENTS, END OF PERIOD |
|
| $ | 54,262 |
| $ | 49,324 |
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash Investing and Financing Activities |
|
|
|
|
|
|
|
|
|
Common stock received for payment of stock option exercises |
|
| $ | 306 |
| $ | 846 |
|
|
Property, plant and equipment additions included in accounts payable |
|
| $ | 176 |
| $ | 47 |
|
|
Annual cash dividend declared |
|
| $ | 7,497 |
| $ | 6,532 |
|
|
8
CHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
In thousands
| | | | | | | | | |
| | | Six Months Ended February 28, | | | ||||
|
| | 2022 |
| 2021 |
|
| ||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | |
Net income | | | $ | 18,853 | | $ | 20,008 | | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | |
Loss on contingent consideration | | | | 275 | | | — | | |
Depreciation | | | | 1,776 | | | 1,952 | | |
Amortization | | | | 6,167 | | | 6,190 | | |
Provision for allowance for doubtful accounts | | | | 80 | | | 7 | | |
Stock-based compensation | | | | 1,556 | | | 1,415 | | |
Realized gain on restricted investments | | | | (80) | | | (49) | | |
Deferred taxes | | | | 419 | | | — | | |
Increase (decrease) from changes in assets and liabilities | | | | | | | | | |
Accounts receivable | | | | (197) | | | (4,712) | | |
Inventory | | | | (11,917) | | | 3,344 | | |
Prepaid expenses and other assets | | | | (1,953) | | | (913) | | |
Accounts payable | | | | (2,100) | | | 1,862 | | |
Accrued compensation and other expenses | | | | (3,371) | | | (1,470) | | |
Accrued income taxes | | | | (751) | | | (1,248) | | |
Net cash provided by operating activities | | | | 8,757 | | | 26,386 | | |
| | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | |
Purchases of property, plant and equipment | | | | (1,769) | | | (1,060) | | |
Payments for acquisitions | | | | — | | | (31,238) | | |
Changes in restricted investments | | | | (205) | | | 10 | | |
Net cash used in investing activities | | | | (1,974) | | | (32,288) | | |
| | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | |
Dividend paid | | | | (9,460) | | | (7,557) | | |
Payments of taxes on stock options and restricted stock | | | | — | | | (366) | | |
Net cash used in financing activities | | | | (9,460) | | | (7,923) | | |
| | | | | | | | | |
DECREASE IN CASH & CASH EQUIVALENTS | | | | (2,677) | | | (13,825) | | |
Effect of foreign exchange rates on cash | | | | (708) | | | 986 | | |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | | 119,429 | | | 99,068 | | |
CASH AND CASH EQUIVALENTS, END OF PERIOD | | | $ | 116,044 | | $ | 86,229 | | |
| | | | | | | | | |
Non-cash Investing and Financing Activities | | | | | | | | | |
Common stock received for payment of stock option exercises | | | $ | — | | $ | 40 | | |
Property, plant and equipment additions included in accounts payable | | | $ | 186 | | $ | 220 | | |
See accompanying notes to the unaudited condensed consolidated financial statements
89
CHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In thousands, except share and per share amounts
Note 1 — Basis of Financial Statement PresentationPresentation
Description of Business
Chase Corporation (the “Company,” “Chase,” “we,” or “us”), a global specialty chemicals company founded in 1946, is a leading manufacturer of protective materials for high-reliability applications. Ourapplications across diverse market sectors. The Company’s strategy is to maximize the performance of ourits core businesses and brands while seeking future opportunities through strategic acquisitions. Through investments in facilities, systems and organizational consolidation, the Company seeks to improve performance and gain economies of scale.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“USU.S. GAAP”) 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 disclosures necessary for a complete presentation of Chase Corporation’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The year-end condensed balance sheet was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. Chase Corporation filed audited consolidated financial statements which included all information and notes necessary for such a complete presentation for the three years ended August 31, 2017,2021 in conjunction with its 20172021 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 November 30, 2017February 28, 2022 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, 2017,2021 which are contained in the Company’s 20172021 Annual Report on Form 10-K.
The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring items) that are, in the opinion of management, necessary for a fair statement of the Company’s financial position as of November 30, 2017,February 28, 2022, and the results of its operations, comprehensive income, changes in equity and cash flows for the interim periods ended November 30, 2017February 28, 2022 and 2016, and changes in equity for the interim period ended November 30, 2017.2021.
The financial statements include the accounts of the Company and its wholly-ownedwholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation. The Company uses the U.S. dollar as the reporting currency for financial reporting. The financial position and results of operations of the Company’s U.K.-based operations are measured using the British Pound Sterlingpound 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 HumiSeal India Private Limited business are measured using the Indian rupee as the functional currency. The functional currency for all ourChase Corporation’s other operations is the U.S. 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 each applicable operation are included in other income (expense) on the condensed consolidated statements of operations, and were ($353)$96 and $399$337 for the three-monththree- and six-month periods ended November 30, 2017February 28, 2022, respectively, and 2016,($341) and ($437) for the three- and six-month periods ended February 28, 2021, respectively.
10
Other Business Developments
The Company substantially completed the relocation of its Corporate Headquarters to another location within Westwood, MA during the second quarter of the fiscal year. The move, part of the Company’s ongoing consolidation and optimization initiative, capitalizes on the hybrid work model utilized by many of Chase’s corporate and administrative employees and is expected to provide future operational cost savings. The new facility also consolidates and houses research and development operations previously conducted at the previous Westwood, MA and Woburn, MA locations. Operations optimization costs related to the Westwood move of $141 and $200 were expensed in the second quarter and first half of the fiscal year, respectively. The Company does not anticipate any significant additional operations optimization costs related to the new Corporate Headquarters during the second half of the fiscal year.
During the third quarter of fiscal 2021, Chase announced to the employees at its Woburn, MA location that its adhesives systems operations, part of the Adhesives, Sealants and Additives segment’s electronic and industrial coatings product line, would be consolidating into the Company’s existing O'Hara Township, PA location. This rationalization and consolidation initiative aligns with the second quarter of fiscal 2021 announcement of the Company’s plan to move its sealant systems production from Newark, CA to Hickory, NC, described in more detail below. Chase Corporation obtained both the adhesive and sealants systems as part of its fiscal 2017 acquisition of the operations of Resin Designs. The Company expensed $301 related to the consolidation of the Woburn, MA location during the second quarter of the fiscal year and expects to recognize additional expense during the second half of the fiscal year.
On December 29, 2017, Chase entered an agreement to acquire Stewart Superabsorbents, LLCFebruary 5, 2021, the Company acquired certain assets of Emerging Technologies, Inc. (“SSA, LLC”ETi”), an advanceda superabsorbent polymer (SAP) formulator andpolymers solutions provider, with operations located in Hickory and McLeansville,Greensboro, NC. The transaction closed on December 31, 2017. In the most recently completed fiscal year, SSA, LLC, and its recently acquired ZappaTec business (collectively “Zappa Stewart”), had combined revenue in excess of $24,000. Chase expects this acquisition to be immediately accretive to its earnings. The business was acquired for a purchase price of $71,382, net$9,997 comprising $8,997 paid on February 5, 2021 and an accrual of cash acquired, pending any working capital adjustments and excluding acquisition-related costs. As part of this transaction, Chase acquired all assets of the business, and entered multiyear leases at both locations. The$1,000 to be paid out up to eighteen months after purchase, was funded from a combination of Chase’s existing revolving credit facilityand available cash on hand.Zappa Stewart’s protective materials technology is complementary to Chase’s current specialty chemical offerings. This acquisition is aligned with the Company’s core strategies and extends its reach into growing medical, environmental and
9
consumer applications.The Company is currently in the process of finalizing purchase accounting, and anticipates completion during fiscal 2018. Following the effective date of the acquisition (which occurred subsequent to November 30, 2017), the financial results of Zappa Stewart operations will be included in the Company’s financial statements within the specialty chemical intermediates product line, contained within the Industrial Materials operating segment. See Note 19 to the Condensed Consolidated Financial Statements for additional information on the acquisition of Zappa Stewart.
On April 3, 2017, Chase executed an agreement with an unrelated third party to sell all inventory, machinery and equipment and intangible assets of the Company’s fiber optic cable components product line for proceeds of $3,858, net of transaction costs and following certain working capital adjustments. The resulting pre-tax gain on sale of $2,013 was recognized in the third quarter of fiscal 2017 as gain on sale of businesses within the condensed consolidated statement of operations. Further, the purchaser entered a multiyear lease for a portion of the manufacturing space at the Company’s Granite Falls, NC facility. Chase will provide ongoing manufacturing and administrative support to the purchaser for which the Company will receive additional consideration upon the performance of services.The Company’s fiber optic cable components product line was formerly a part of the Company’s Industrial Materials operating segment.See Note 8 to the condensed consolidated financial statements for additional information on the sale of the fiber optic cable components product line.
On September 30, 2016, the Company acquired 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 $30,270, after final working capital adjustments, and excluding acquisition-related costs. As part of this transaction, Chase acquired substantially all working capital and fixed assets of the business and entered multiyear leasesa multi-year lease at both locations.ETi’s existing location. The Company expensed $584$128 of acquisition-related costs during the second quarter of fiscal 2021 associated with this acquisition. The purchase was funded with available cash on hand. ETi is a solutions provider and formulator of absorbent polymers for use in the packaging, recreational, consumer, and sanitation markets. The acquisition broadens the Company’s superabsorbent polymers product offerings and formulation capabilities while expanding its market reach. The Company finalized purchase accounting during the first quarter of fiscal 2017. The purchase was funded entirely2022, 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.no significant change to amounts initially recorded. Since the effective date of the acquisition, the financial results of Resin Designs’ETi’s acquired operations have been included in the Company’s financial statements within the functional additives product line, contained within the Adhesives, Sealants and Additives operating segment.
During the second quarter of fiscal 2021, Chase began moving the sealant systems operations, part of the Adhesives, Sealants and Additives segment’s electronic and industrial coatings product line, contained withinfrom its Newark, CA location to its Hickory, NC facility. This is in line with the Industrial Materials operating segment. See Note 14Company’s ongoing initiative to consolidate its manufacturing plants and streamline its existing processes. The sealant systems operations and Newark, CA location came to Chase Corporation as part of the fiscal 2017 acquisition of the operations of Resin Designs, and the Company’s lease there terminated in fiscal 2021. The Company recognized $977 in expense related to the move during the entire prior fiscal year ended August 31, 2021 and $147 of expense in the second quarter and first half of fiscal 2022. This project is now substantially completed and any future costs related to this move are not anticipated to be significant to the condensed consolidated financial statementsstatements.
11
On September 1, 2020 (the first day of fiscal 2021), the Company acquired all the capital stock of ABchimie for €18,654 (approximately $22,241 at the time of the transaction) net of cash acquired, subsequent to final working capital adjustment, excluding acquisition-related costs totaling $274 recognized in fiscal 2020 and with a potential earn out based on performance potentially worth an additional information€7,000 (approximately $8,330 at the time of the transaction). ABchimie is a Corbelin, France headquartered solutions provider for the cleaning and protection of electronic assemblies, with further formulation, production, and research and development capabilities. The transaction was funded with cash on hand. Since the effective date of the acquisition, the financial results of the assetsbusiness have been included in the Company's financial statements within the Adhesives, Sealants and operationsAdditives operating segment in the electronic and industrial coatings product line.
Significant Accounting Policies
The Company’s significant accounting policies are detailed in Note 1— “Summary of Resin Designs.Significant Accounting Policies” within Item 8 of the Company’s Annual Report on Form 10-K for the year ended August 31, 2021. See Note 2 of the condensed consolidated financial statementsfor a discussion of the effects of recently issued accounting pronouncements.
1012
Note 2 — Recent Accounting Standards
Recently Issued Accounting Pronouncements
In May 2014,November 2021, the FASBFinancial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance”, which requires entities to make annual disclosures about transactions with Customers,” which will replace most of the existing revenue recognition guidancea government they account for by analogizing to a grant or contribution accounting model under U.S. GAAP.ASC 958-605. The core principle of the ASU is that an entity should recognize revenueeffective for the transferCompany beginning September 1, 2022 (the start of goods or services equalfiscal 2023). ASU 2021-10 has not had, and the Company does not expect it to have in future periods, a material impact on the amount that it expects to be entitled to receive for those goods or services. The ASU requires additional disclosure about the nature, amount, timingCompany’s condensed consolidated financial statements and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. disclosures.
Recently Adopted Accounting Pronouncements
In March, April and May 2016,October 2021, the FASB issued ASU 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”,” which amends the accounting for contract assets and contract liabilities from revenue contracts with customers in a business combination. The amendment requires that an entity acquiring the contract assets and contract liabilities in a business combination be recognized in accordance with ASU 2016-10 “Identifying Performance Obligations and Licensing,” and ASU 2016-12,2014-09, “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 beis 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 expects to utilize the modified retrospective method of adoption. From a timing of revenue recognition standpoint (point in time versus over time), it is anticipated that certain specialized products will be more affected than other products sold. The Company continues to assess the full impact the adoption will have on its consolidated financial statements and disclosures thereto.
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 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 ASU will be effective for the Company beginning September 1, 2019 (fiscal 2020). Early application is permitted. 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 Company is currently evaluating the impact of the application of this ASU on our consolidated financial statements and disclosures thereto.
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 will be our fiscal year beginning September 1, 2018 (fiscal 2019), with early adoption permitted. The Company is currently evaluating the effect that ASU No. 2016-15 will have on its financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The new guidance dictates that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, it should be treated as an acquisition or disposal of an asset. The guidance will be effective for the fiscal year beginning on September 1, 2018 (fiscal 2019), including interim periods within that year, with early adoption permitted.
In March 2017, the FASB issued ASU No. 2017-07, “Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This ASU applies to all employers that offer to their employees defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715, Compensation — Retirement Benefits. The ASU requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The ASU also allows only the service cost component to be eligible for capitalization when applicable (e.g., as a cost of internally
11
manufactured inventory or a self-constructed asset). The required effective date for adoption of this guidance for the Company will be our fiscal year beginning September 1, 2018 (fiscal 2019), including interim periods within that annual period. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company is currently evaluating the effect that ASU No. 2017-07 will have on its financial statements and related disclosures.
In May 2017, the FASB issued ASU No. 2017-09, "Scope of Modification Accounting." This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effectivepublic entities for fiscal years beginning after December 15, 2017 (our fiscal year 2019), including2022, and interim periods within that reporting period.therein. The Company is currently inearly adopted ASU 2021-08 on February 28, 2022 and any impact on the processcondensed consolidated financial statements will be dependent on the magnitude and nature of evaluating the impact of ASU 2017-09 on our financial position and result of operations.future acquired entities.
Note 3 — Inventory
Inventory consisted of the following as of November 30, 2017February 28, 2022 and August 31, 2017:2021:
|
|
|
|
|
|
|
| |||||||
|
|
| November 30, |
| August 31, | |||||||||
|
|
| 2017 |
| 2017 | |||||||||
| | | | | | | | |||||||
| | | February 28, | | August 31, | |||||||||
|
|
| 2022 |
| 2021 | |||||||||
Raw materials |
|
| $ | 12,874 |
| $ | 11,636 | | | $ | 30,957 | | $ | 24,055 |
Work in process |
|
|
| 6,897 |
|
| 6,877 | | | | 7,825 | | | 5,928 |
Finished goods |
|
|
| 7,560 |
|
| 7,105 | | | | 14,214 | | | 11,234 |
Total Inventory |
|
| $ | 27,331 |
| $ | 25,618 | | | $ | 52,996 | | $ | 41,217 |
1213
Note 4 — Net Income Per Share
The Company has unvested share-based payment awards with a right to receive nonforfeitable 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 November 30, |
| ||||||||||||||||||
|
| 2017 |
| 2016 |
| ||||||||||||||||
|
|
|
|
|
|
|
| ||||||||||||||
| | | | | | | | | | | | | | ||||||||
| | Three Months Ended February 28, | | | Six Months Ended February 28, |
| |||||||||||||||
|
| 2022 |
| 2021 |
| | 2022 |
| 2021 |
| |||||||||||
| | | | | | | | | | | | | | | |||||||
Basic Earnings per Share |
|
|
|
|
|
|
| | | | | | | | | | | | | | |
|
|
|
|
|
|
|
| ||||||||||||||
| | | | | | | | | | | | | | | |||||||
Net income |
| $ | 8,315 |
| $ | 10,363 |
|
| $ | 9,126 |
| $ | 9,171 |
| | $ | 18,853 |
| $ | 20,008 | |
Less: Allocated to participating securities |
|
| 79 |
|
| 113 |
| | | 61 | | | 62 | | | | 124 | | | 142 | |
Net income available to common shareholders |
| $ | 8,236 |
| $ | 10,250 |
|
| $ | 9,065 |
| $ | 9,109 |
| | $ | 18,729 |
| $ | 19,866 | |
|
|
|
|
|
|
|
| ||||||||||||||
| | | | | | | | | | | | | | | |||||||
Basic weighted average shares outstanding |
|
| 9,281,877 |
|
| 9,228,338 |
| | | 9,399,231 | | | 9,381,666 | | | | 9,398,552 | | | 9,378,743 | |
Net income per share - Basic |
| $ | 0.89 |
| $ | 1.11 |
|
| $ | 0.96 |
| $ | 0.97 |
| | $ | 1.99 |
| $ | 2.12 | |
|
|
|
|
|
|
|
| ||||||||||||||
| | | | | | | | | | | | | | | |||||||
Diluted Earnings per Share |
|
|
|
|
|
|
| | | | | | | | | | | | | | |
|
|
|
|
|
|
|
| ||||||||||||||
| | | | | | | | | | | | | | | |||||||
Net income |
| $ | 8,315 |
| $ | 10,363 |
|
| $ | 9,126 |
| $ | 9,171 |
| | $ | 18,853 |
| $ | 20,008 | |
Less: Allocated to participating securities |
|
| 79 |
|
| 113 |
| | | 61 | | | 62 | | | | 124 | | | 142 | |
Net income available to common shareholders |
| $ | 8,236 |
| $ | 10,250 |
|
| $ | 9,065 |
| $ | 9,109 |
| | $ | 18,729 |
| $ | 19,866 | |
|
|
|
|
|
|
|
| ||||||||||||||
| | | | | | | | | | | | | | | |||||||
Basic weighted average shares outstanding |
|
| 9,281,877 |
|
| 9,228,338 |
| | | 9,399,231 | | | 9,381,666 | | | | 9,398,552 | | | 9,378,743 | |
Additional dilutive common stock equivalents |
|
| 102,549 |
|
| 92,664 |
| | | 37,184 | | | 44,960 | | | | 38,873 | | | 43,908 | |
Diluted weighted average shares outstanding |
|
| 9,384,426 |
|
| 9,321,002 |
| | | 9,436,415 | | | 9,426,626 | | | | 9,437,425 | | | 9,422,651 | |
Net income per share - Diluted |
| $ | 0.88 |
| $ | 1.10 |
|
| $ | 0.96 |
| $ | 0.97 |
| | $ | 1.98 |
| $ | 2.11 | |
Included in the calculation of dilutive common stock equivalents are the unvested portion of restricted stock and stock options. For the three monthsthree- and six-month periods ended November 30, 2017 and 2016,February 28, 2022, stock options to purchase 9,622100,524 and 38,59186,607 shares of common stock, respectively, were outstanding but were not included in the calculation of diluted income per share because their inclusion would be anti-dilutive. IncludedFor the three- and six-month periods ended February 28, 2021, stock options to purchase 68,815 and 80,045 shares of common stock, respectively, were outstanding but were not included in the calculation of dilutive common stock equivalents are the unvested portion of restricted stock and stock options.diluted income per share because their inclusion would be anti-dilutive.
1314
Note 5 — Stock-Based Compensation
In August 2016,2020, the Board of Directors of the Company approved the fiscal year 20172021 Long Term Incentive Plan (“20172021 LTIP”) for the executive officers and other members of management. The 20172021 LTIP is an equity-based plan with a grant date of September 1, 20162020 and contains (a) a performance and service-based restricted stock grant of 5,3998,717 shares in the aggregate (of which 3,798 included a performance-based vesting component and were subject to adjustment as discussed below), with a vesting date of August 31, 2019. 2023, and (b) options to purchase 14,845 shares of common stock in the aggregate with an exercise price of $97.57 per share, vesting in 3 equal annual installments ending on August 31, 2023.
Based on the fiscal year 2017 financial2021 results, 5,3992,633 additional shares of restricted stock (total of 10,798 shares) were earned and granted subsequent to the end of fiscal year 20172021 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 2017,2021, the Board of Directors of the Company approved the fiscal year 20182022 Long Term Incentive Plan (“20182022 LTIP”) for the executive officers and other members of management. The 20182022 LTIP is an equity-based plan with a grant date of September 1, 20172021 and contains the following equity components:
Restricted Shares — (a) a performance and service-based restricted stock grant of 4,2493,304 shares in the aggregate, subject to adjustment based on fiscal 20182022 results, with a vesting date of August 31, 2020.2024. Compensation expense is recognized on a ratable basis over the vesting period based on quarterly probability assessments; and (b) a time-based restricted stock grant of 3,4736,280 shares in the aggregate, with a vesting date of August 31, 2020.2024. Compensation expense is being recognized on a ratable basis over the vesting period.
Stock optionsOptions — options to purchase 9,62212,942 shares of common stock in the aggregate with an exercise price of $93.50$114.50 per share. The options will vest in three3 equal annual installments beginning on August 31, 20182022 and ending on August 31, 2020. Of the options granted, 4,5912024. The options will expire on August 31, 2027, and 5,031 options will expire on September 1, 2027.ten years after the grant date. Compensation expense is being recognized over the period of the award consistent with the vesting terms.
In the first and second quarter of fiscal 2022, restricted stock in the amount of 437 and 1,129 shares, respectively, related to the second quarter of fiscal 2020 grants were forfeited in conjunction with the termination of employment of non-executive members of management of the Company.
In February 2022, the Board of Directors of the Company approved an equity retention agreements with the Treasurer and Chief Financial Officer. The equity-based retention agreements have a grant date of February 1, 2022 and contain the following equity components: (a) a time-based restricted stock grant of 5,332 shares with a vesting date of January 31, 2025; and (b) options to purchase 14,480 shares of common stock with an exercise price of $94.88 per share. The options will vest on January 31, 2025 and will expire on February 1, 2032. Compensation expense for both the restricted stock and the stock option components of the equity retention agreements is being recognized on a ratable basis over the vesting period.
In February 2022, as part of their standard compensation for board service, non-employee members of the Board received a total grant of 5,000 shares of restricted stock for service for the period from January 31, 2022 through January 31, 2023. The shares of restricted stock will vest at the conclusion of this service period. Compensation expense for restricted stock is being recognized on a ratable basis over the twelve-month vesting period.
15
Note 6 — Segment Data and Foreign Operations
The Company is organized into two3 reportable operating segments, ansegments: Adhesives, Sealants and Additives; Industrial Materials segmentTapes; and a Construction Materials segment.Corrosion Protection and Waterproofing. The segments are distinguished by the nature of the products manufactured and how they are delivered to their respective markets.
The Industrial MaterialsAdhesives, Sealants and Additives segment includes specifiedoffers innovative and specialized product offerings consisting of both end-use products and intermediates that are used in, or integrated into, another company’s product. Demand for the segment’s product offerings is typically dependent upon general economic conditions. The Adhesives, Sealants and Additives segment leverages the core specialty chemical competencies of the Company and serves diverse markets and applications. The segment sells predominantly into the transportation, appliances, medical, general industrial and environmental market verticals. The segment’s products include moisture protective coatings and cleaners, customized sealant and adhesive systems for electronics, polymeric microspheres, polyurethane dispersions and superabsorbent polymers. Beginning September 1, 2020, the Adhesives, Sealants and Additives segment includes the acquired operations of ABchimie, within the electronic and industrial coatings product lineand beginning February 5, 2021, the acquired operations of ETi, within the functional additives product line.
The Industrial Tapes segment features wire and cable materials, specialty tapes and other laminated and coated products. The segment derives its competitive advantage through its proven chemistries, its diverse specialty offerings and the reliability its supply chain offers to end customers. These products are generally used in the assembly of other manufacturers’ products, with demand typically dependent upon general economic conditions. The Industrial Materials productsTapes segment sells mostly to established markets, with some exposure to growth opportunities through further development of existing products. Markets served include wire and cable manufacturing, utilities and telecommunications, and electronics packaging. The segment’s offerings 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, custom manufacturing services, pulling and detection tapes used in the installation, measurement and location of fiber optic cables and water and natural gas lines and cover tapes essential to delivering semiconductor components via tape and reel packaging, composite materials and elements, polymeric microspheres and polyurethane dispersions. Beginning September 30, 2016, the Industrial Materials segment includes the acquired operations of Resin Designs, LLC, which was obtained through acquisition and is included in the Company’s electronic and industrial coatings product line. Prior to the April 3, 2017 sale of the business, the segment’s products also included glass-based strength elements, designed to allow fiber optic cables to withstand mechanical and environmental strain and stress.tape-and-reel packaging.
The Construction MaterialsCorrosion Protection and Waterproofing segment is principally composed of project-oriented product offerings that are primarily sold and used as “Chase” branded products. Construction MaterialsEnd markets include new and existing infrastructure projects on oil, gas, water and wastewater pipelines, highways and bridge decks, water and wastewater containment systems, and commercial and industrial structures. The segment’s products include protective coatings for pipeline applications, coating and lining systems for use inwaterproofing and 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 usewaterproofing applications in the transportation and architectural markets. With sales generally dependent on outdoor project work, the segment experiences highly seasonal sales patterns.
1416
The following tables summarize information about the Company’s reportable segments:
| | | | | | | | | | | | | | | | | |
| | Three Months Ended February 28, | | | Six Months Ended February 28, | | | ||||||||||
|
| 2022 |
| | 2021 | | | 2022 | |
| 2021 |
|
| ||||
Revenue | | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 31,780 | | | $ | 31,575 | | | $ | 62,829 | | | $ | 61,646 | | |
Industrial Tapes | | | 33,330 | | | | 28,345 | | | | 66,091 | | | | 54,836 | | |
Corrosion Protection and Waterproofing | | | 8,843 | | | | 8,527 | | | | 20,043 | | | | 19,141 | | |
Total | | $ | 73,953 | | | $ | 68,447 | | | $ | 148,963 | | | $ | 135,623 | | |
| | | | | | | | | | | | | | | | | |
Income before income taxes | | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 7,802 | (a) | | $ | 10,137 | (c) | | $ | 15,399 | (a) | | $ | 20,116 | (c) | |
Industrial Tapes | | | 10,250 | | | | 8,460 | | | | 19,540 | | | | 16,328 | | |
Corrosion Protection and Waterproofing | | | 2,884 | | | | 2,415 | | | | 7,330 | | | | 6,501 | | |
Total for reportable segments | | | 20,936 | | | | 21,012 | | | | 42,269 | | | | 42,945 | | |
Corporate and common costs | | | (8,569) | (b) | | | (8,147) | (c) | | | (16,785) | (b) | | | (16,103) | (c) | |
Total | | $ | 12,367 | | | $ | 12,865 | | | $ | 25,484 | | | $ | 26,842 | | |
| | | | | | | | | | | | | | | | | |
Includes the following costs by segment: | | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | | | | | | | | | | | | | | | | |
Interest | | $ | 34 | | | $ | 24 | | | $ | 69 | | | $ | 54 | | |
Depreciation | | | 220 | | | | 247 | | | | 463 | | | | 489 | | |
Amortization | | | 2,658 | | | | 2,643 | | | | 5,398 | | | | 5,216 | | |
| | | | | | | | | | | | | | | | | |
Industrial Tapes | | | | | | | | | | | | | | | | | |
Interest | | $ | 34 | | | $ | 15 | | | $ | 69 | | | $ | 42 | | |
Depreciation | | | 411 | | | | 428 | | | | 821 | | | | 893 | | |
Amortization | | | 383 | | | | 387 | | | | 767 | | | | 773 | | |
| | | | | | | | | | | | | | | | | |
Corrosion Protection and Waterproofing | | | | | | | | | | | | | | | | | |
Interest | | $ | 18 | | | $ | 28 | | | $ | 35 | | | $ | 40 | | |
Depreciation | | | 129 | | | | 136 | | | | 247 | | | | 275 | | |
Amortization | | | 1 | | | | 89 | | | | 2 | | | | 201 | | |
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended November 30, |
|
|
| |||||
|
| 2017 |
|
| 2016 |
|
|
| ||
Revenue |
|
|
|
|
|
|
|
|
|
|
Industrial Materials |
| $ | 49,985 |
|
| $ | 49,024 |
|
|
|
Construction Materials |
|
| 11,932 |
|
|
| 12,333 |
|
|
|
Total |
| $ | 61,917 |
|
| $ | 61,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before taxes |
|
|
|
|
|
|
|
|
|
|
Industrial Materials |
| $ | 15,365 |
|
| $ | 16,415 | (a) |
|
|
Construction Materials |
|
| 4,246 |
|
|
| 5,150 |
|
|
|
Total for reportable segments |
|
| 19,611 |
|
|
| 21,565 |
|
|
|
Corporate and common costs |
|
| (7,012) |
|
|
| (6,915) | (b) |
|
|
Total |
| $ | 12,599 |
|
| $ | 14,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Includes the following costs by segment: |
|
|
|
|
|
|
|
|
|
|
Industrial Materials |
|
|
|
|
|
|
|
|
|
|
Interest |
| $ | 36 |
|
| $ | 184 |
|
|
|
Depreciation |
|
| 800 |
|
|
| 1,062 |
|
|
|
Amortization |
|
| 1,987 |
|
|
| 1,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction Materials |
|
|
|
|
|
|
|
|
|
|
Interest |
| $ | 9 |
|
| $ | 62 |
|
|
|
Depreciation |
|
| 190 |
|
|
| 158 |
|
|
|
Amortization |
|
| 327 |
|
|
| 314 |
|
|
|
(a) | Includes |
(b) | Includes $141 of |
|
|
(c) | Includes $733 in loss on the upward adjustment of the performance-based earn out contingent consideration associated with the September 2020 acquisition of ABchimie and |
1517
Total assets for the Company’s reportable segments as of November 30, 2017February 28, 2022 and August 31, 20172021 were:
|
|
|
|
|
|
|
| |||||||||
|
| November 30, |
| August 31, |
| |||||||||||
|
| 2017 |
| 2017 |
| |||||||||||
| | | | | | | | |||||||||
| | February 28, | | August 31, | | | ||||||||||
|
| 2022 |
| 2021 |
| |||||||||||
Total Assets |
|
|
|
|
|
|
| | | | | | | | | |
Industrial Materials |
| $ | 156,903 |
| $ | 156,263 |
|
| ||||||||
Construction Materials |
|
| 34,274 |
|
| 38,162 |
|
| ||||||||
Adhesives, Sealants and Additives | | $ | 159,326 | | $ | 161,968 | | | ||||||||
Industrial Tapes | | | 76,773 | | | 72,301 | | | ||||||||
Corrosion Protection and Waterproofing | | | 30,775 | | | 31,067 | | | ||||||||
Total for reportable segments |
|
| 191,177 |
|
| 194,425 |
|
| | | 266,874 | | | 265,336 | | |
Corporate and common assets |
|
| 68,077 |
|
| 60,313 |
|
| | | 139,887 | | | 138,823 | | |
Total |
| $ | 259,254 |
| $ | 254,738 |
|
| | $ | 406,761 | | $ | 404,159 | | |
The Company’s products are sold worldwide. Revenue for the three-monththree- and six-month periods ended November 30, 2017February 28, 2022 and 2016 are2021 was attributed to operations located in the following countries:
| | | | | | | | | | | | | | | | | |
| | Three Months Ended February 28, | | | Six Months Ended February 28, | | | ||||||||||
| | 2022 |
| | 2021 | | | 2022 | |
| 2021 | | | ||||
Revenue | | | | | | | | | | | | | | | | | |
United States | | $ | 62,816 | | | $ | 55,629 | | | $ | 127,869 | | | $ | 111,371 | | |
United Kingdom | | | 5,927 | | | | 6,997 | | | | 10,521 | | | | 13,024 | | |
All other foreign (1) | | | 5,210 | | | | 5,821 | | | | 10,573 | | | | 11,228 | | |
Total | | $ | 73,953 | | | $ | 68,447 | | | $ | 148,963 | | | $ | 135,623 | | |
| | | | | | | | | | | | | | | | | |
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended November 30, |
|
|
| |||||
|
| 2017 |
|
| 2016 |
|
|
| ||
Revenue |
|
|
|
|
|
|
|
|
|
|
United States |
| $ | 52,477 |
|
| $ | 51,808 |
|
|
|
United Kingdom |
|
| 4,397 |
|
|
| 4,759 |
|
|
|
All other foreign (1) |
|
| 5,043 |
|
|
| 4,790 |
|
|
|
Total |
| $ | 61,917 |
|
| $ | 61,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) | Comprises sales orders originated from |
As of November 30, 2017February 28, 2022 and August 31, 2017,2021 the Company had long-lived assets (defined(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) and goodwill and intangible assets, less accumulated amortization, in the following countries:
|
|
|
|
|
|
|
| |||||||||
|
| November 30, |
| August 31, |
|
| ||||||||||
|
| 2017 |
| 2017 |
|
| ||||||||||
Long-lived Assets |
|
|
|
|
|
|
| |||||||||
| | | | | | | | |||||||||
| | February 28, | | August 31, | | | ||||||||||
| | 2022 |
| 2021 | | | ||||||||||
Long-Lived Assets | | | | | | | | |||||||||
United States |
|
|
|
|
|
|
|
| | | | | | | | |
Property, plant and equipment, net |
| $ | 29,855 |
| $ | 30,253 |
|
| | $ | 21,046 | | $ | 20,990 | | |
Goodwill and Intangible assets, less accumulated amortization |
|
| 88,484 |
|
| 90,673 |
|
| | | 110,305 | | | 115,936 | | |
|
|
|
|
|
|
|
|
| ||||||||
| | | | | | | | | ||||||||
United Kingdom |
|
|
|
|
|
|
|
| | | | | | | | |
Property, plant and equipment, net |
|
| 3,253 |
|
| 3,184 |
|
| | | 2,023 | | | 2,174 | | |
Goodwill and Intangible assets, less accumulated amortization |
|
| 5,770 |
|
| 5,685 |
|
| | | 3,807 | | | 3,905 | | |
|
|
|
|
|
|
|
|
| ||||||||
| | | | | | | | | ||||||||
All other foreign |
|
|
|
|
|
|
|
| | | | | | | | |
Property, plant and equipment, net |
|
| 1,322 |
|
| 1,323 |
|
| | | 1,068 | | | 1,103 | | |
Goodwill and Intangible assets, less accumulated amortization |
|
| 1,264 |
|
| 1,272 |
|
| | | 23,324 | | | 24,979 | | |
|
|
|
|
|
|
|
|
| ||||||||
| | | | | | | | | ||||||||
Total |
|
|
|
|
|
|
|
| | | | | | | | |
Property, plant and equipment, net |
| $ | 34,430 |
| $ | 34,760 |
|
| | $ | 24,137 | | $ | 24,267 | | |
Goodwill and Intangible assets, less accumulated amortization |
| $ | 95,518 |
| $ | 97,630 |
|
| | $ | 137,436 | | $ | 144,820 | | |
1618
Note 7 — Goodwill and Other Intangibles
The changes in the carrying value of goodwill arewere as follows:
|
|
|
|
|
|
|
|
|
|
|
|
| Industrial |
| Construction Materials |
| Consolidated |
| |||
Balance at August 31, 2017 |
| $ | 40,091 |
| $ | 10,693 |
| $ | 50,784 |
|
Foreign currency translation adjustment |
|
| 119 |
|
| 8 |
|
| 127 |
|
Balance at November 30, 2017 |
| $ | 40,210 |
| $ | 10,701 |
| $ | 50,911 |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | |
|
| Adhesives, Sealants and Additives |
| Industrial Tapes |
| Corrosion Protection and Waterproofing |
| Consolidated |
| ||||
Balance at August 31, 2021 | | $ | 65,945 | | $ | 21,215 | | $ | 10,706 | | $ | 97,866 | |
Foreign currency translation adjustment | | | (729) | | | — | | | (6) | | | (735) | |
Balance at February 28, 2022 | | $ | 65,216 | | $ | 21,215 | | $ | 10,700 | | $ | 97,131 | |
| | | | | | | | | | | | | |
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 elevena total of 3 reporting units, withincorresponding to its two3 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.factors, including the anticipated future impact of thecoronavirus disease 2019 (COVID-19) pandemic. 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.
The Company has adopted ASU No. 2017-04 “Intangibles - Goodwill and Other Topics (Topic 350): Simplifying the Test for Goodwill Impairment.” The Company assesses goodwill for impairment by comparing the fair value of the reporting unit to its carrying amount. If the fair value of a reporting unit is less than its carrying value, an impairment loss, limited to the amount of goodwill allocated to that reporting unit, is recorded.
Intangible assets subject to amortization consistconsisted of the following as of November 30, 2017February 28, 2022 and August 31, 2017:2021:
| | | | | | | | | | | | |
| | Weighted Average | | Gross Carrying | | Accumulated | | Net Carrying | | |||
|
| Amortization Period |
| Value |
| Amortization |
| Value |
| |||
February 28, 2022 | | | | | | | | | | | | |
Patents and agreements | | 14.6 | years | $ | 1,760 | | $ | 1,720 | | $ | 40 | |
Formulas and technology | | 7.8 | years | | 10,930 | | | 10,000 | | | 930 | |
Trade names | | 5.9 | years | | 8,804 | | | 8,451 | | | 353 | |
Customer lists and relationships | | 9.1 | years | | 116,098 | | | 77,116 | | | 38,982 | |
| | | | $ | 137,592 | | $ | 97,287 | | $ | 40,305 | |
| | | | | | | | | | | | |
August 31, 2021 | | | | | | | | | | | | |
Patents and agreements | | 14.6 | years | $ | 1,760 | | $ | 1,715 | | $ | 45 | |
Formulas and technology | | 7.9 | years | | 10,987 | | | 9,769 | | | 1,218 | |
Trade names | | 5.9 | years | | 8,836 | | | 8,285 | | | 551 | |
Customer lists and relationships | | 9.2 | years | | 116,855 | | | 71,715 | | | 45,140 | |
| | | | $ | 138,438 | | $ | 91,484 | | $ | 46,954 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Weighted Average |
| Gross Carrying |
| Accumulated |
| Net Carrying |
| |||
|
| Amortization Period |
| Value |
| Amortization |
| Value |
| |||
November 30, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Patents and agreements |
| 14.4 | years | $ | 1,851 |
| $ | 1,673 |
| $ | 178 |
|
Formulas and technology |
| 7.8 | years |
| 9,353 |
|
| 5,721 |
|
| 3,632 |
|
Trade names |
| 6.0 | years |
| 7,738 |
|
| 6,103 |
|
| 1,635 |
|
Customer lists and relationships |
| 9.6 | years |
| 70,482 |
|
| 31,320 |
|
| 39,162 |
|
|
|
|
| $ | 89,424 |
| $ | 44,817 |
| $ | 44,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2017 |
|
|
|
|
|
|
|
|
|
|
|
|
Patents and agreements |
| 14.4 | years | $ | 1,845 |
| $ | 1,671 |
| $ | 174 |
|
Formulas and technology |
| 7.8 | years |
| 9,318 |
|
| 5,387 |
|
| 3,931 |
|
Trade names |
| 6.0 | years |
| 7,709 |
|
| 5,813 |
|
| 1,896 |
|
Customer lists and relationships |
| 9.6 | years |
| 70,180 |
|
| 29,335 |
|
| 40,845 |
|
|
|
|
| $ | 89,052 |
| $ | 42,206 |
| $ | 46,846 |
|
19
Aggregate amortization expense related to intangible assets for the threesix months ended November 30, 2017February 28, 2022 and 20162021 was $2,314$6,167 and $2,176,$6,190 respectively. Estimated amortization expense for the remainder of fiscal year 20182022 and for the next five years is as follows:
|
|
|
|
|
Years ending August 31, |
|
|
|
|
2018 (remaining 9 months) |
| $ | 6,818 |
|
2019 |
|
| 8,462 |
|
2020 |
|
| 7,594 |
|
2021 |
|
| 7,064 |
|
2022 |
|
| 6,171 |
|
2023 |
|
| 2,971 |
|
| | | | |
Years ending August 31, |
| | | |
2022 (remaining 6 months) | | $ | 5,617 |
|
2023 | | | 8,660 | |
2024 | | | 7,453 | |
2025 | | | 5,853 | |
2026 | | | 5,055 | |
2027 | | | 2,508 | |
Note 8 — SaleLeases
The Company accounts for leases in accordance to ASU 2016-02, “Leases (Topic 842).” At the inception of Business
Sale ofFiber Optic Cable Components Product Line
On April 3, 2017, Chase executed an agreement with an unrelated party to sell all inventory, machineryarrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and equipment and intangible assets of the Company’s fiber optic cable components product line for proceeds of $3,858, net of transaction costs and following certain working capital adjustments. Given its low-growth and low-margin prospects, and a customer, supplier and equipment base separate from our other businesses, the fiber optic cable components product line, which was formerly part of the Company’s Industrial Materials segment, was determined to not be part of Chase’s long-term strategy. The divestiture was accounted for underASC Topic 360, “Disclosure - Impairment or Disposal of Long-Lived Assets.”In accordance with this accounting standard, the resulting pre-tax gain on sale of $2,013 was recognizedcircumstances present in the third quarterarrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use (ROU) assets and short-term and long-term lease liabilities, as applicable. The Company does not have any financing leases that are material in nature.
Operating lease liabilities and their corresponding right-of-use assets are initially recorded based on the present value of fiscal 2017as gain on sale of businesses withinlease payments over the condensed consolidated statement of operations. Chase received $3,458, net of transaction costs,expected remaining lease term. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the third quarter of fiscal 2017, withCompany utilizes its incremental borrowing rate to discount lease payments, which reflects the remaining $400 placed in escrow;the portion of the sale price held in escrow was recorded as a non-current asset within other assets as of August 31, 2017 and as a current asset (Due from sale of business) as of November 30, 2017, and is available to resolve any submitted claims or adjustments up to 18 months from the closing date of the sale.
Subsequent to the sale, Chase will provide ongoing manufacturing and administrative support to the purchaser forfixed rate at which the Company will receive additional consideration uponbelieves it could borrow on a collateralized basis the performanceamount of services; this arrangementthe lease payments in the same currency, for a similar term, in a similar economic environment.
The Company has elected not to recognize leases with an original term of one year or less on the balance sheet. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in the Company’s assessment unless there is anticipated to last for multiple years. In the quarter ended November 30, 2017, Chase charged the purchaser $470 for manufacturing services, whichreasonable certainty that the Company recognized as revenue withinwill renew.
The following table presents the Industrial Materials segment,right-of-use asset and $60 for sellingshort-term and administrative expenses, which the Company recognized as an offset to selling, general and administrative expenses. Further, the purchaser entered a multiyearlong-term lease for a portion of the manufacturing space at the Company’s Granite Falls, NC facility. Chase received $33 in rental income during the first quarter of fiscal 2018 related to this lease, which the Company recognized within other income (expense)liabilities amounts recorded on the condensed consolidated statementbalance sheet as of operationsFebruary 28, 2022 and August 31, 2021:
| | | | | | |
| | February 28, | | August 31, | ||
| | 2022 | | 2021 | ||
Assets |
| | |
| | |
Operating lease right-of-use asset | | $ | 9,554 | | $ | 9,312 |
| | | | | | |
Liabilities | | | | | | |
Current (accrued expenses) | | $ | 1,484 | | $ | 1,515 |
Operating lease long-term liabilities | | | 7,493 | | | 7,202 |
Total lease liability | | $ | 8,977 | | $ | 8,717 |
| | | | | | |
20
Lease cost
The components of lease costs for the three and six months ended February 28, 2022 and 2021 are as follows:
| | | | | | | | | | | | | |
| | Three Months Ended February 28, | | | Six Months Ended February 28, | ||||||||
| | 2022 | | 2021 | | | 2022 | | 2021 | ||||
| | | | | | | | | | | | | |
Operating lease cost (a) | | $ | 833 | | $ | 971 | | | $ | 1,661 | | $ | 1,922 |
(a) | Includes short-term leases and variable lease costs (e.g. common area maintenance), which are immaterial. |
Maturity of lease liability
The maturity of the Company's lease liabilities at February 28, 2022 was as follows:
| | | |
| | Future Operating | |
Year ending August 31, |
| Lease Payments | |
2022 (remaining 6 months) | | | 868 |
2023 | | | 1,697 |
2024 | | | 1,622 |
2025 | | | 1,464 |
2026 | | | 1,189 |
2027 and thereafter | | | 3,009 |
Less: Interest | | | (872) |
Present value of lease liabilities | | $ | 8,977 |
The weighted average remaining lease term and discount rates are as follows:
| | | | | | | |
| | February 28, | | August 31, | | ||
| | 2022 | | 2021 | | ||
Lease Term and Discount Rate |
| | |
| | | |
Weighted average remaining lease term (years) | | | | | | | |
Operating leases | | | 6.8 | | | 6.8 | |
Weighted average discount rate (percentage) | | | | | | | |
Operating leases | | | 2.8 | % | | 3.1 | % |
Other Information
Supplemental cash flow information related to leases is as follows:
| | | | | | |
| | Six Months Ended February 28, | ||||
| | 2022 | | 2021 | ||
| | | | | | |
Operating cash outflows from operating leases | | $ | 881 | | $ | 1,328 |
Total cash paid for amounts included in the measurement of lease liabilities | | $ | 881 | | $ | 1,328 |
21
Note 9 — SaleRevenue from Contracts with Customers
The Company accounts for revenue in accordance with ASC 606, “Revenue from Contracts with Customers.” The Company’s revenue is generated from the manufacture of Real Estate
Salespecialty chemical products including coatings, linings, adhesives, sealants, specialty tapes, polymers and laminates. Certain of Paterson, NJ Location
In November 2016,these manufactured products can incorporate customer-owned materials. The Company also recognizes, to a lesser extent, revenue through royalties and commissions from licensed manufacturers and from providing custom manufacturing-related services. The Company’s revenue recognition policies require the Company finalizedto make significant judgments and estimates. In applying the saleCompany’s revenue recognition policy, determinations must be made as to when control of its Paterson, NJ propertyproducts passes to the Company’s customers, which can be either at a point in time or over time based on contractual terms with customers. Revenue is generally recognized at a point in time when control passes upon either shipment to or receipt by the customer of the Company’s products, while revenue is generally recognized over time when control of the Company’s products transfers to customers during the manufacturing process.The Company analyzes several factors, including but not limited to the nature of the products being sold and contractual terms and conditions in contracts with customers, to help the Company make such judgments about revenue recognition.
Contract Balances
The Company’s contract assets primarily relate to unbilled revenue for cash proceedsproducts currently in production at the amountCompany’s facilities and which incorporate customer-owned material. Revenue is recognized in advance of $1,382. This transaction resultedbilling to the customer in a gainthese specific circumstances, whereas billing is typically performed at the time of $792, which was recordedshipment to or receipt by the customer.
Contract assets are included in prepaid expenses and other current assets on the Company’s condensed consolidated statementbalance sheet. The following table presents contract assets by reportable operating segment as of operations as a gain on sale of real estate during the fiscal quarter ended November 30, 2016. February 28, 2022 and August 31, 2021:
| | | | | | |
| | February 28, | | August 31, | ||
|
| 2022 |
| 2021 | ||
Contract Assets | | | | | | |
Adhesives, Sealants and Additives | | $ | 36 | | $ | 21 |
Industrial Tapes | | | 25 | | | 82 |
Corrosion Protection and Waterproofing | | | 27 | | | 25 |
Total | | $ | 88 | | $ | 128 |
The Company had previously reclassifieddid 0t have any contract liabilities as of February 28, 2022 and August 31, 2021.
22
Disaggregated Revenue
The Company disaggregates revenue from customers by geographic region, as it believes this disclosure best depicts how the related long-lived assets to assets held for sale after committing to a plan in the second quarter of fiscal 2016 to actively market the property.
Sale of Former Corporate Headquarters in Bridgewater, MA
In October 2016, Chase entered into an agreement to sell its former corporate headquartersnature, amount, timing and executive offices in Bridgewater, MA. In December 2016, during the second quarter of fiscal 2017, the sale was finalized for gross cash proceeds in the amount of $740, resulting in a gain on sale of $68.See Note 17 to the condensed consolidated financial statements for additional information on the saleuncertainty of the Bridgewater, MA location.Company's revenue and cash flows are affected by economic factors. Disaggregated revenue by geographical region for the three and six months ended February 28, 2022 and 2021 was as follows:
| | | | | | | | | | | | | | |
| | Three Months Ended February 28, 2022 | ||||||||||||
| | Adhesives, Sealants | | Industrial | | | Corrosion Protection | | | Consolidated | ||||
| | and Additives |
| Tapes | | | and Waterproofing | | | Revenue | ||||
Revenue | | | | | | | | | | | | | | |
North America | | $ | 18,882 | | $ | 29,643 | | | $ | 7,827 | | | $ | 56,352 |
Asia\Middle East | | | 7,179 | | | 1,781 | | | | 494 | | | | 9,454 |
Europe | | | 5,575 | | | 1,449 | | | | 450 | | | | 7,474 |
All other foreign | | | 144 | | | 457 | | | | 72 | | | | 673 |
Total Revenue | | $ | 31,780 | | $ | 33,330 | | | $ | 8,843 | | | $ | 73,953 |
| | | | | | | | | | | | | | |
| | Six Months Ended February 28, 2022 | ||||||||||||
| | Adhesives, Sealants | | Industrial | | | Corrosion Protection | | | Consolidated | ||||
| | and Additives |
| Tapes | | | and Waterproofing | | | Revenue | ||||
Revenue | | | | | | | | | | | | | | |
North America | | $ | 38,977 | | $ | 59,277 | | | $ | 17,204 | | | $ | 115,458 |
Asia\Middle East | | | 13,149 | | | 3,579 | | | | 1,384 | | | | 18,112 |
Europe | | | 10,371 | | | 2,361 | | | | 1,365 | | | | 14,097 |
All other foreign | | | 332 | | | 874 | | | | 90 | | | | 1,296 |
Total Revenue | | $ | 62,829 | | $ | 66,091 | | | $ | 20,043 | | | $ | 148,963 |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Three Months Ended February 28, 2021 | ||||||||||||
| | Adhesives, Sealants | | Industrial | | | Corrosion Protection | | | Consolidated | ||||
| | and Additives |
| Tapes | | | and Waterproofing | | | Revenue | ||||
Revenue | | | | | | | | | | | | | | |
North America | | $ | 17,724 | | $ | 24,504 | | | $ | 6,946 | | | $ | 49,174 |
Asia\Middle East | | | 8,599 | | | 2,155 | | | | 1,119 | | | | 11,873 |
Europe | | | 5,124 | | | 1,039 | | | | 430 | | | | 6,593 |
All other foreign | | | 128 | | | 647 | | | | 32 | | | | 807 |
Total Revenue | | $ | 31,575 | | $ | 28,345 | | | $ | 8,527 | | | $ | 68,447 |
| | | | | | | | | | | | | | |
| | Six Months Ended February 28, 2021 | ||||||||||||
| | Adhesives, Sealants | | Industrial | | | Corrosion Protection | | | Consolidated | ||||
| | and Additives |
| Tapes | | | and Waterproofing | | | Revenue | ||||
Revenue | | | | | | | | | | | | | | |
North America | | $ | 36,109 | | $ | 47,809 | | | $ | 15,431 | | | $ | 99,349 |
Asia\Middle East | | | 14,928 | | | 3,836 | | | | 2,569 | | | | 21,333 |
Europe | | | 10,330 | | | 2,052 | | | | 1,077 | | | | 13,459 |
All other foreign | | | 279 | | | 1,139 | | | | 64 | | | | 1,482 |
Total Revenue | | $ | 61,646 | | $ | 54,836 | | | $ | 19,141 | | | $ | 135,623 |
| | | | | | | | | | | | | | |
23
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 agreed to that could adversely affect the Company’s operating results or cash flows in a particular period. The Company routinely assesses all its litigation and threatened litigation as to the probability of ultimately incurring a liability and records its best estimate of the ultimate loss in situations where we assessit assesses the likelihood of loss as probable.
Note 11 — Pensions and Other Postretirement Benefits
The components of net periodic benefit cost for the three and six months ended November 30, 2017February 28, 2022 and 2016 are2021 were as follows:
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
|
| Three Months Ended November 30, |
|
| |||||||||||||||||||
|
|
| 2017 |
| 2016 |
|
| |||||||||||||||||
| | | | | | | | | | | | | | | | |||||||||
| | Three Months Ended February 28, | | | Six Months Ended February 28, | | | |||||||||||||||||
|
| 2022 |
| 2021 |
| | 2022 |
| 2021 |
|
| |||||||||||||
Components of net periodic benefit cost |
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | |
Service cost |
|
| $ | 71 |
| $ | 72 |
|
| | $ | 95 | | $ | 91 | | | $ | 190 | | $ | 183 | | |
Interest cost |
|
|
| 157 |
|
| 170 |
|
| | | 96 | | | 85 | | | | 192 | | | 170 | | |
Expected return on plan assets |
|
|
| (116) |
|
| (132) |
|
| | | (103) | | | (98) | | | | (206) | | | (196) | | |
Amortization of prior service cost |
|
|
| 1 |
|
| 1 |
|
| | | 1 | | | 1 | | | | 2 | | | 2 | | |
Amortization of accumulated loss |
|
|
| 121 |
|
| 224 |
|
| | | 148 | | | 164 | | | | 296 | | | 328 | | |
Net periodic benefit cost |
|
| $ | 234 |
| $ | 335 |
|
| | $ | 237 | | $ | 243 | | | $ | 474 | | $ | 487 | | |
When funding is required, the Company’s policy is to contribute amounts that are deductible for federal income tax purposes. As of November 30, 2017, theThe Company has made contributions of $389$782 in the current fiscal yearsix months ended February 28, 2022 to fund its obligations under its pension plans, and plans to make the necessary contributions over the remainder of fiscal 20182022 to ensure the qualified plans continueplan continues to be adequately funded given the current market conditions.conditions, including conditions related to the coronavirus disease 2019 (COVID-19) pandemic. The Company made contributions of $21$783 in the first threesix months ended February 28, 2021.
24
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 are: 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 November 30, 2017February 28, 2022 and August 31, 20172021 represent investments that are restricted for use in a nonqualified retirement savings planplans 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 November 30, 2017February 28, 2022 and August 31, 2017:2021:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
|
|
|
|
|
|
| Fair value measurement category |
| ||||||||||||||||||||
|
|
|
|
|
|
| Quoted prices |
| Significant other |
| Significant |
| ||||||||||||||||
|
| Fair value |
|
|
|
| in active markets |
| observable inputs |
| unobservable inputs |
| ||||||||||||||||
|
| measurement date |
| Total |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| |||||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||
| | | | | | | Fair value measurement category | | ||||||||||||||||||||
| | | | | | | Quoted prices | | Significant other | | Significant | | ||||||||||||||||
| | Fair value | | | | | in active markets | | observable inputs | | unobservable inputs | | ||||||||||||||||
|
| measurement date |
| Total |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| |||||||||||||||||
Assets: |
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | |
Restricted investments |
| November 30, 2017 |
| $ | 1,057 |
| $ | 1,006 |
| 51 |
| — |
| | February 28, 2022 | | $ | 2,323 | | $ | 2,122 | | $ | 201 | | $ | — | |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||
| | | | | | | | | | | | | | | | |||||||||||||
Restricted investments |
| August 31, 2017 |
| $ | 964 |
| $ | 926 |
| 38 |
| — |
| | August 31, 2021 | | $ | 2,260 | | $ | 2,016 | | $ | 244 | | $ | — | |
19
The following table presents the fair value of the Company’s liabilities that are accounted for at fair value on a recurring basis as of February 28, 2022 and August 31, 2021:
| | | | | | | | | | | | | | | |
| | | | | | | Fair value measurement category | | |||||||
| | | | | | | Quoted prices | | Significant other | | Significant | | |||
| | Fair value | | | | | in active markets | | observable inputs | | unobservable inputs | | |||
|
| measurement date |
| Total |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
Liabilities: | | | | | | | | | | | | | | | |
Long-term debt | | February 28, 2022 | | $ | — | | $ | — | | $ | — | | $ | — | |
Contingent consideration | | February 28, 2022 | | $ | 2,692 | | $ | — | | $ | — | | $ | 2,692 | |
| | | | | | | | | | | | | | | |
Long-term debt | | August 31, 2021 | | $ | — | | $ | — | | $ | — | | $ | — | |
Contingent consideration | | August 31, 2021 | | $ | 2,537 | | $ | — | | $ | — | | $ | 2,537 | |
The long-term debt (including theany current portion of long-term debt) had 0 outstanding balance as of November 30, 2017February 28, 2022 and August 31, 2017, which is recorded at its carrying value:
| |||||||||||||
|
|
| |||||||||||
|
|
|
| ||||||||||
|
|
|
|
| |||||||||
| |||||||||||||
|
|
|
|
|
|
|
| ||||||
|
|
|
|
|
|
|
|
2021. The long-term debt had no outstanding balance at either November 30, 2017 or August 31, 2017. Generally, the carrying value of the long-term debt approximates its fair value, as the interest rate is set based on the movement of the underlying market rates. In December 2016, Chase refinanced its term debt with a new revolving credit agreement. See Note 1816 to the condensed consolidated financial statements for additional information on long-term debt.
In connection with accounting for the ABchimie acquisition on September 1, 2020, the Company recorded a contingent consideration liability included within Other liabilities on the condensed consolidated balance sheet of €780 (approximately $928) on the acquisition date, representing the fair value of contingent consideration payable upon the achievement of a performance-based target. The contingent consideration liability was valued using a Monte Carlo simulation model in an option pricing framework based on key inputs that are not all observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company assesses the fair value of the contingent consideration liability at each reporting period. Any subsequent changes in the estimated fair value of the liability are reflected in Loss (gain) on contingent consideration on the condensed consolidated statement of operations until the liability is settled. As of February 28, 2022, the liability increased to $2,692 predominantly due to changes in non-market data assumptions as well as a shorter period to the payment date.See Note 17 to the condensed consolidated financial statements for additional information on the refinancing.acquisition of ABchimie.
25
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 | | | | | ||
| | Restricted | | Status of | | Translation | | | | | |||
|
| Investments |
| Pension Plans |
| Adjustment |
| Total |
| ||||
Balance at August 31, 2020 | | $ | 269 | | $ | (8,317) | | $ | (5,044) | | $ | (13,092) | |
| | | | | | | | | | | | | |
Other comprehensive gains (losses) before reclassifications (1) | | | 154 | | | — | | | 1,887 | | | 2,041 | |
Reclassifications to net income of previously deferred (gains) losses (2) | | | (36) | | | 247 | | | — | | | 211 | |
Other comprehensive income (loss) | | | 118 | | | 247 | | | 1,887 | | | 2,252 | |
| | | | | | | | | | | | | |
Balance at February 28, 2021 | | $ | 387 | | $ | (8,070) | | $ | (3,157) | | $ | (10,840) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Balance at August 31, 2021 | | $ | 518 | | $ | (7,979) | | $ | (3,749) | | $ | (11,210) | |
| | | | | | | | | | | | | |
Other comprehensive gains (losses) before reclassifications (3) | | | (106) | | | — | | | (2,058) | | | (2,164) | |
Reclassifications to net income of previously deferred (gains) losses (4) | | | (59) | | | 224 | | | — | | | 165 | |
Other comprehensive income (loss) | | | (165) | | | 224 | | | (2,058) | | | (1,999) | |
| | | | | | | | | | | | | |
Balance at February 28, 2022 | | $ | 353 | | $ | (7,755) | | $ | (5,807) | | $ | (13,209) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Change in Funded |
| Foreign Currency |
|
|
|
| ||
|
| Restricted |
| Status of |
| Translation |
|
|
|
| |||
|
| Investments |
| Pension Plan |
| Adjustment |
| Total |
| ||||
Balance at August 31, 2016 |
| $ | 54 |
| $ | (7,336) |
| $ | (8,197) |
| $ | (15,479) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive gains (losses) before reclassifications (1) |
|
| 14 |
|
| — |
|
| (2,098) |
|
| (2,084) |
|
Reclassifications to net income of previously deferred (gains) losses (2) |
|
| (1) |
|
| 147 |
|
| — |
|
| 146 |
|
Other comprehensive income (loss) |
|
| 13 |
|
| 147 |
|
| (2,098) |
|
| (1,938) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2016 |
| $ | 67 |
| $ | (7,189) |
| $ | (10,295) |
| $ | (17,417) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2017 |
| $ | 121 |
| $ | (6,181) |
| $ | (7,409) |
| $ | (13,469) |
|
Other comprehensive gains (losses) before reclassifications (3) |
|
| 31 |
|
| — |
|
| 1,570 |
|
| 1,601 |
|
Reclassifications to net income of previously deferred (gains) losses (4) |
|
| — |
|
| 80 |
|
| — |
|
| 80 |
|
Other comprehensive income (loss) |
|
| 31 |
|
| 80 |
|
| 1,570 |
|
| 1,681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2017 |
| $ | 152 |
| $ | (6,101) |
| $ | (5,839) |
| $ | (11,788) |
|
(1) | Net of tax benefit of $52, $0 and $0, respectively. |
(2) | Net of tax expense of |
| Net of tax expense of |
|
|
(4) | Net of tax expense of |
20
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 |
|
|
| ||||||||||||||||||||||||
|
|
|
| Accumulated Other Comprehensive Income |
|
|
| ||||||||||||||||||||||||
|
|
|
| (Loss) into Income |
|
|
| ||||||||||||||||||||||||
|
|
|
| Three Months Ended November 30, |
| Location of Gain (Loss) Reclassified from Accumulated |
| ||||||||||||||||||||||||
|
|
|
| 2017 |
| 2016 |
|
| Other Comprehensive Income (Loss) into Income |
| |||||||||||||||||||||
| | | | | | | | | | | | | | | | ||||||||||||||||
| | | | | | | | | | | |||||||||||||||||||||
| | | | | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive | | | | |||||||||||||||||||||||
| | | | | Income (Loss) into Income | | | | |||||||||||||||||||||||
| | | | | Three Months Ended February 28, | | | Six Months Ended February 28, | | Location of Gain (Loss) Reclassified from Accumulated | | ||||||||||||||||||||
|
|
|
| | 2022 |
| 2021 |
|
| 2022 |
| 2021 | | Other Comprehensive Income (Loss) into Income |
| ||||||||||||||||
Gains on Restricted Investments: |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | |||||
Realized gain on sale of restricted investments |
|
|
| $ | (1) |
| $ | (2) |
| Selling, general and administrative expenses |
| ||||||||||||||||||||
Realized loss (gain) on sale of restricted investments | | | | | $ | (73) | | $ | (44) | | | $ | (80) | | $ | (49) | | Selling, general and administrative expenses | | ||||||||||||
Tax expense (benefit) |
|
|
|
| 1 |
|
| 1 |
|
|
| | | | | | 19 | | | 12 | | | | 21 | | | 13 | | | | |
Gain net of tax |
|
|
| $ | — |
| $ | (1) |
|
|
| | | | | $ | (54) | | $ | (32) | | $ | (59) | | $ | (36) | | | | ||
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
| | | | | | | | | | | | | | | | ||||||||||||||||
Loss on Funded Pension Plan adjustments: |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | ||||||
Amortization of prior pension service costs and unrecognized losses |
|
|
| $ | 28 |
| $ | 26 |
| Cost of products and services sold |
| ||||||||||||||||||||
Amortization of prior pension service costs and unrecognized losses |
|
|
| $ | 94 |
| $ | 199 |
| Selling, general and administrative expenses |
| | | | | | 149 | | 165 | | | | 298 | | 330 | | Other income (expense) | | |||
Tax expense (benefit) |
|
|
|
| (42) |
|
| (78) |
|
|
| | | | | | (37) | | | (40) | | | | (74) | | | (83) | | | | |
Loss net of tax |
|
|
| $ | 80 |
| $ | 147 |
|
|
| | | | | $ | 112 | | $ | 125 | | $ | 224 | | $ | 247 | | | | ||
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | |||||||||||||
Total net loss reclassified for the period |
|
|
| $ | 80 |
| $ | 146 |
|
|
| | | | | $ | 58 | | $ | 93 | | $ | 165 | | $ | 211 | | | |
26
Note 14 — AcquisitionsIncome Taxes
AcquisitionFor the three and six months ended February 28, 2022, the Company’s recognized effective tax rate was 26.2% and 26.0%, respectively. For the three and six months ended February 28, 2021, the Company’s recognized and effective tax rate was 28.7% and 25.5%, respectively.
The Company has applied the U.S. statutory Federal rate of 21%, enacted as part of the Tax Cuts and Jobs Act (the “Tax Act”) in December 2017, for both the second quarter and year-to-date fiscal periods ended February 28, 2022 and 2021.
In addition, the Company also recognizes an additional component of total Federal tax expense, the tax on Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Act, which became applicable to the Company in fiscal 2019. The Company elected to account for GILTI as a period cost, and therefore included GILTI expense in the effective tax rate calculation. This provision did not have a material effect on the effective tax rate for the second quarter and year-to-date fiscal periods ended February 28, 2022 and 2021. Additionally, the Company concluded that the Base Erosion and Anti Abuse Tax (“BEAT”) provision of the Tax Act, which also became applicable to the Company in fiscal 2019, had no effect on its effective tax rate for the second quarter and year-to-date fiscal periods ended February 28, 2022 and 2021.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, included a technical correction to the Tax Act which will allow accelerated deductions for qualified improvement property. The Company has evaluated the impact of the CARES Act, and at present does not expect that the qualified improvement property correction or other provisions of the CARES Act will result in a material tax benefit in future periods. The CARES Act had no material effect on the effective tax rate for the second quarter and year-to-date fiscal periods ended February 28, 2022 and 2021.
In July 2020, the United States Internal Revenue Service (“IRS”) released final regulations (TD 9901) that ease documentation standards and provide greater flexibility for taxpayers claiming the deduction for Foreign-Derived Intangible Income (“FDII”). During the second quarter and year-to-date fiscal periods ended February 28, 2022, FDII had a favorable impact on the Company’s effective tax rate.
0Note 15 — Operations Optimization Costs
Relocation of Chase Corporate Headquarters
The Company substantially completed the relocation of its Corporate Headquarters to another location within Westwood, MA during the second quarter of the fiscal year. The move, part of the Company’s ongoing consolidation and optimization initiative, capitalizes on the hybrid work model utilized by many of Chase’s corporate and administrative employees and is expected to provide future operational cost savings. The new facility also consolidates and houses research and development operations previously conducted at the previous Westwood, MA and Woburn, MA locations. Operations optimization expenses related to the Westwood move of $141 and $200 were expensed in the second quarter and first half of the fiscal year, respectively. The Company does not anticipate any significant additional operations optimization costs related to the new Corporate Headquarters during the remaining second half of the fiscal year.
Relocation of Adhesives Systems Manufacturing to O'Hara Township, PA
During the third quarter of fiscal 2021, Chase announced to the employees at its Woburn, MA location that its adhesives systems operations, part of the Adhesives, Sealants and Additives segment’s electronic and industrial coatings product line, would be consolidating into the Company’s existing O'Hara Township, PA location. This rationalization and consolidation initiative aligns with the second quarter of fiscal 2021 announcement of the Company’s plan to move its sealant systems production from Newark, CA to Hickory, NC, described in more detail below. Chase Corporation obtained both the adhesive and sealants systems as part of its fiscal 2017 acquisition of the operations of Resin Designs. The Company expensed $301 related to the consolidation of the Woburn, MA location during the second quarter of the fiscal year and expects to recognize additional expense during the second half of the fiscal year.
27
Relocation of Sealants Systems Manufacturing to Hickory, NC
During the second quarter of fiscal 2021, Chase began moving the sealant systems operations, part of the Adhesives, Sealants and Additives segment’s electronic and industrial coatings product line, from its Newark, CA location to its Hickory, NC facility. This is in line with the Company’s ongoing initiative to consolidate its manufacturing plants and streamline its existing processes. The sealant systems operations and Newark, CA location came to Chase Corporation as part of the fiscal 2017 acquisition of the operations of Resin Designs, LLCand the Company’s lease there terminated in fiscal 2021. The Company recognized $977 of expense related to the move during the entire prior fiscal year ended August 31, 2021 and $147 of expense in the second quarter and first half of fiscal 2022. This project is now substantially completed and any future costs related to this move are not anticipated to be significant to the condensed consolidated financial statements.
28
Note 16 — Long-Term Debt
On September 30, 2016,July 27, 2021 (the fourth quarter of fiscal 2021), the Company entered into the Second Amended and Restated Credit Agreement (the “New Credit Agreement”) by and among the Company and NEPTCO Incorporated (“NEPTCO”), each as borrowers, the guarantor subsidiaries party thereto, the financial institutions party thereto as Lenders, and Bank of America, N.A., as administrative agent, with participation from Wells Fargo Bank, N.A., PNC Bank, N.A. and JPMorgan Chase Bank, N.A. The New Credit Agreement was entered into to amend, restate and extend the Company’s preexisting Amended and Restated Credit Agreement (the “Prior Credit Agreement”), which previously had a maturity date of December 15, 2021 and is discussed in more detail below, and to provide for additional liquidity to finance acquisitions, working capital and capital expenditures, and for other general corporate purposes. Under the New Credit Agreement, Chase obtained an increased revolving credit loan (the “New Revolving Facility”), with borrowing capabilities not to exceed $200,000 at any time, with the ability to request an increase in this amount by an additional $100,000 at the individual or collective option of any of the Lenders. The applicable interest rate for the New Revolving Facility and New Term Loan (defined below) is based on the effective London Interbank Offered Rate (LIBOR) plus a range of 1.00% to 1.75%, depending on the consolidated net leverage ratio of Chase and its subsidiaries. At February 28, 2022, there was 0 outstanding principal balance, and as such, 0 applicable interest rate.
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, July 27, 2026. The New Credit Agreement contains provisions that may replace LIBOR as the benchmark index under certain circumstances. 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, the Company may elect to convert all or a portion of the outstanding New Revolving Facility into a new term loan twice during the term of the New Revolving Facility (each, a “New Term Loan”, and collectively with the New Revolving Facility, the “New Credit Facility”), which New Term Loan shall be payable quarterly in equal installments sufficient to amortize the original principal amount of such Term Loan on a ten year amortization schedule.
The outstanding balance on the New Credit Facility is guaranteed by all of Chase’s direct and indirect domestic subsidiaries, which collectively had a carrying value of approximately $291,810 at February 28, 2022. The New Credit Facility is subject to restrictive covenants under the New Credit Agreement, and financial covenants that require Chase and its subsidiaries to maintain certain financial ratios on a consolidated basis, including a consolidated net leverage ratio of 3.25 to 1.00 and a consolidated interest coverage ratio of 3.50 to 1.00 (both defined in the New Credit Agreement). Chase Corporation was in compliance with the debt covenants as of February 28, 2022. The New Credit Agreement also places certain Lender-approval requirements as to the size of permitted acquisitions which may be entered into by the Company and its subsidiaries, and allows for a temporary step-up in the allowed consolidated leverage ratio for the four fiscal quarters ending after certain designated acquisitions. Prepayment is allowed by the New Credit Agreement at any time during the term of the agreement, subject to customary notice requirements and the payment of customary LIBOR breakage fees.
The Prior Credit Agreement was an all-revolving credit facility with a borrowing capacity of $150,000, which could be increased by an additional $50,000 at the request of the Company and the individual or collective option of any of the lenders, and with an interest rate based on the effective LIBOR plus an additional amount in the range of 1.00% to 1.75%, depending on our consolidated net leverage ratio or, at the Company’s option, at the bank’s base lending rate. It was substantially available at July 27, 2021, the time of its amendment and restatement.
29
Note 17 – Acquisitions
Acquisition of Emerging Technologies, Inc.
On February 5, 2021, the Company acquired certain assets of Resin Designs, LLCEmerging Technologies, Inc. (“Resin Designs”ETi”), an advanced adhesives and sealants manufacturer, with locationsa superabsorbent polymers solutions provider, located in Woburn, MA and Newark, CA. ThisGreensboro, NC. The business was acquired for a purchase price of $30,270,$9,997, comprising $8,997 paid on February 5, 2021 and an accrual of $1,000 to be paid out up to eighteen months after the purchase, subsequent to final working capital adjustments, and excluding acquisition-related costs. As part of this transaction, Chase acquired substantially all working capital and fixed assets of the business and entered into multiyear leasesa multi-year lease at both locations. Resin DesignsETi’s existing location. The Company expensed $128 of acquisition-related costs during the three-month period ended February 28, 2021 associated with this acquisition. The purchase was funded with available cash on hand. ETi is a solutions provider and formulator of customized adhesiveabsorbent polymers for use in the packaging, recreational, consumer, and sealant systems used in high-reliability electronic applications.sanitation markets. The acquisition broadens the Company’s adhesivessuperabsorbent polymers product offerings and sealants product offering and manufacturingformulation capabilities and expandswhile expanding its market reach. The Company finalized purchase was funded entirelyaccounting during the first quarter of fiscal 2022, with available cash on hand.
no significant change to amounts initially recorded. Since the effective date for thisof the acquisition, September 30, 2016, the financial results of theETi’s acquired businessoperations have been included in the Company’s financial statements within the Industrial Materials operating segment,functional additives product line, contained within the electronicAdhesives, Sealants and industrial coatings product line.Additives operating segment. The ETi acquisition was accounted for asdoes not represent a significant business combination under ASC Topic 805, “Business Combinations.” In accordance with this accounting standard, the Company expensed $584 of acquisition-related costs during the first fiscal quarter of 2017 to acquisition-related costs.so pro forma financial information is not provided.
21
The purchase price has been 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 |
| |
Accounts receivable |
| $ | 1,877 |
|
Inventory |
|
| 1,300 |
|
Prepaid expenses and other current assets |
|
| 63 |
|
Property, plant & equipment |
|
| 623 |
|
Goodwill |
|
| 7,592 |
|
Intangible assets |
|
| 19,450 |
|
Accounts payable and accrued liabilities |
|
| (635) |
|
Total purchase price |
| $ | 30,270 |
|
The excess of the purchase price over the net tangible and intangible assets acquired resulted in goodwill of $7,592$2,451 that is largely attributable to the synergies and economies of scale from combining the operations, technologies and research and development capabilities of Resin DesignsETi and Chase, particularly as it pertainsthey pertain 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 partAcquisition of the Resin Designs acquisition are included in the Industrial Materials operating segment. Identifiable intangible assets purchased with this transaction are as follows:ABchimie
|
|
|
|
|
|
|
Intangible Asset |
| Amount |
| Useful life | ||
Customer relationships |
| $ | 17,500 |
| 10 | years |
Technology |
|
| 1,200 |
| 4 | years |
Trade names |
|
| 750 |
| 7 | years |
Total intangible assets |
| $ | 19,450 |
|
|
|
Supplemental Pro Forma Data
The following table presents the pro forma results of the Company for the three-month period ended November 30, 2016 as though the Resin Designs acquisition described above occurred onOn September 1, 2015 (the first2020 (first day of fiscal 2016)2021), the Company acquired all the capital stock of ABchimie for €18,654 (approximately $22,241 at the time of the transaction) net of cash acquired, subject to final working capital adjustments, excluding acquisition-related costs totaling $274 recognized in fiscal 2020 and with a performance-based earn out (measured over four years post-acquisition) potentially worth an additional €7,000 (approximately $8,330 at the time of the transaction). The actual revenue and expenses forCompany had $2,692 accrued at February 28, 2022 within Other liabilities on the acquired business are includedcondensed consolidated balance sheet related to its estimate of the current fair value of the earn out. Following its initial recording at the acquisition date, changes in the Company’s consolidated results beginningperformance-based earn out accrual have been recorded within (Gain) loss on September 30, 2016. For the three months ended November 30, 2017, revenue and net income for the Resin Designs operations includedcontingent consideration in the condensed consolidated statement of operations (including a $200 gain in the second quarter and $275 year-to-date net loss adjustment in fiscal 2022).
ABchimie is a Corbelin, France headquartered solutions provider for the cleaning and protection of electronic assemblies, with further formulation, production, and research and development capabilities. The transaction was funded with available cash on hand. The financial results of the business are included in the Company's financial statements within the Adhesives, Sealants and Additives operating segment in the electronic and industrial coatings product line. The Company finalized purchase accounting during the fourth quarter of fiscal 2021, with no significant change to amounts initially recorded.
The excess of the purchase price over the net tangible and intangible assets acquired resulted in goodwill of $13,055 that is largely attributable to the synergies and economies of scale from combining the operations, technologies and research and development capabilities of ABchimie and Chase, particularly as they pertain to the expansion of the Company's product and service offerings, the established workforce and marketing efforts. A portion of this goodwill is deductible in the U.S. for calculation of GILTI period costs but is nondeductible for French income tax purposes.
30
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. It should be read in conjunction with the Condensed Consolidated Financial Statements. Notes thereto are 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, 2021.
Overview
General
The Company’s revenue grew in the second fiscal quarter and six months ended February 28, 2022, with all three of its reportable operating segments surpassing sales achieved in the prior year quarter and year-to-date period. In spite of the second quarter’s traditional unfavorable seasonal impact on sales of the Company’s high margin Corrosion Protection and Waterproofing segment products and the continuation of the challenging operating environment detailed below, the Company was able to maintain a 37% gross margin for both the second quarter of fiscal 2022 and the first half of the fiscal year.
Despite healthy sales growth in both the second quarter and fiscal year-to-date period, the Company had a less favorable relative gross margin and higher operating expenses, as compared to the prior year periods, resulting in lower company-wide operating income. Chase’s relative gross margin in the quarter and first half of the fiscal year were $3,738negatively impacted by both: a.) increased input costs caused by continued global raw material inflationary pressures, increased logistics costs and $348,a more competitive labor market; and b.) a less favorable sales mix, with sales increases in its lower margin Industrial Tapes segment outpacing revenue gains seen in its higher margin Adhesive, Sealants and Additives and Corrosion Protection and Waterproofing segments. Further, the Adhesives, Sealants and Additives segment also experienced a less favorable sales mix within the segment itself—with historically less favorable margin products constituting a comparatively larger part of total segment sales in the quarter-to-date and year-to-date periods.
The Company has implemented and continues to implement customer price adjustments and continues to work with our customers and suppliers in an effort to counteract margin compression. However, given the delay experienced due to notification period requirements with certain customers and the continuation of upward inflationary pressures on input costs, the current period and year-to-date results reflect a lag in the realization of the full benefits of these efforts.
31
Revenue by Segment
Chase Corporation has three reportable operating segments as summarized below:
| | | | |
Segment | Product Lines | Manufacturing Focus and Products | ||
Adhesives, Sealants and Additives | | Electronic and Industrial Coatings | | Protective coatings, including moisture protective coatings and cleaning chemistries, and customized sealant and adhesive systems for electronics; polyurethane dispersions, polymeric microspheres and superabsorbent polymers. |
Industrial Tapes | | Cable Materials Specialty Products Pulling and Detection Electronic Materials | | Protective tape and coating products and services, including insulating and conducting materials for wire and cable manufacturers; laminated durable papers, packaging and industrial laminate products and custom manufacturing services; 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. |
Corrosion Protection and Waterproofing | | Coating and Lining Systems 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. |
Revenue for our Adhesives, Sealants and Additives segment increased for the second quarter and year-to-date period against the comparable prior year periods with increased demand for our North American-focused functional additives product line, including inorganic growth from our Emerging Technologies, Inc. (“ETi”) business acquired in the last month of the second quarter of fiscal 2021. Partially offsetting this increase in revenue was a quarter-to-quarter and year-to-date reduction in sales volume from our worldwide-focused electronic and industrial coatings product line due to reduced demand most acutely seen with sales within the automotive industry for the second quarter and first half of the fiscal year.
Revenue for our Industrial Tapes segment surpassed the COVID-19 impacted second quarter and year-to-date prior year sales with continued increased demand for our North American-focused cable materials, pulling and detection and specialty products product lines. Tempering this overall increase in revenue were quarter-to-quarter and year-to-date reductions in sales volume from our Asia-focused electronic materials product line.
Revenue for our Corrosion Protection and Waterproofing segment surpassed the prior year quarter and year-to-date period with increased demand for our coating and lining systems and building envelope product lines. Partially offsetting these increases in revenue were second quarter and year-to-date reductions in net sales volume from our pipeline coatings and highly seasonal bridge and highway product lines.
32
Balance Sheet and Cash Flow
Chase Corporation’s balance sheet remained strong as of February 28, 2022, with cash on hand of $116,044,000, and a current ratio of 8.3. The Company’s cash position remained healthy, as did cash flow from operations. Chase continued its strategic inventory build during the second quarter, undertaken to help ensure its ability to satisfy our customers’ demands and to address its elevated backlog caused in part by supply chain challenges. In addition, during the second fiscal quarter Chase Corporation paid out its largest ever annual cash dividend of $9,460,000 on December 9, 2021.
The Company held no outstanding balance on its $200,000,000 revolving credit facility as of February 28, 2022. The revolving credit facility, which was amended and restated in July 2021 (fourth quarter of fiscal 2021) to increase its capacity from $150,000,000 to $200,000,000, allows for the Company to pay down debt with excess cash, while retaining access to immediate liquidity to fund future accretive activities, including mergers and acquisitions, as they are identified. The new facility also gives Chase the ability to request an increase in this amount by an additional $100,000,000 ($300,000,000 in total borrowing capacity) at the individual or collective option of any of the lenders. The facility matures in July 2026.
33
Results of Operations
Revenue and Income before Income Taxes by Segment were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | |
| | |
| % of |
| |
| % of |
| | |
| % of |
| |
| % of |
| ||||
| | Three Months Ended | | Total | | Three Months Ended | | Total | | | Six Months Ended | | Total | | Six Months Ended | | Total |
| ||||
|
| February 28, 2022 |
| Revenue |
| February 28, 2021 |
| Revenue |
| | February 28, 2022 |
| Revenue |
| February 28, 2021 |
| Revenue | | ||||
| | | | | | | | | | | | | | | | | | | | | | |
Revenue | | | | | | | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 31,780 | | 43 | % | $ | 31,575 | | 46 | % | | $ | 62,829 | | 42 | % | $ | 61,646 | | 45 | % |
Industrial Tapes | | | 33,330 | | 45 | % | | 28,345 | | 41 | % | | | 66,091 | | 44 | % | | 54,836 | | 40 | % |
Corrosion Protection and Waterproofing | |
| 8,843 | | 12 | % |
| 8,527 | | 12 | % | |
| 20,043 | | 13 | % |
| 19,141 | | 14 | % |
Total | | $ | 73,953 | | | | $ | 68,447 | | | | | $ | 148,963 | | | | $ | 135,623 | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | % of | |
| | | % of | | |
| | % of | | | | | % of | | ||
| | Three Months Ended | | Segment | | Three Months Ended | | Segment | | | Six Months Ended | | Segment | | Six Months Ended | | Segment | | ||||
| | February 28, 2022 | | Revenue | | February 28, 2021 | | Revenue | | | February 28, 2022 | | Revenue | | February 28, 2021 | | Revenue | | ||||
Income before income taxes | | | | | | | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 7,802 | (a) | 25 | % | $ | 10,137 | (c) | 32 | % | | $ | 15,399 | (a) | 25 | % | $ | 20,116 | (c) | 33 | % |
Industrial Tapes | | | 10,250 | | 31 | % | | 8,460 | | 30 | % | | | 19,540 | | 30 | % | | 16,328 | | 30 | % |
Corrosion Protection and Waterproofing | |
| 2,884 | | 33 | % |
| 2,415 | | 28 | % | |
| 7,330 | | 37 | % |
| 6,501 | | 34 | % |
Total for reportable segments | |
| 20,936 | | 28 | % |
| 21,012 | | 31 | % | |
| 42,269 | | 28 | % |
| 42,945 | | 32 | % |
Corporate and Common Costs | |
| (8,569) | (b) | | |
| (8,147) | (c) | | | |
| (16,785) | (b) | | |
| (16,103) | (c) | | |
Total | | $ | 12,367 | | 17 | % | $ | 12,865 | | 19 | % | | $ | 25,484 | | 17 | % | $ | 26,842 | | 20 | % |
| | | | | | | | | | | | | | | | | | | | | | |
Note: Some percentage of total revenue amounts may not sum to 100% due to rounding.
(a) | Includes a $200 gain in the second quarter and a $275 year-to-date loss on the adjustment of the performance-based earn-out contingent consideration associated with the September 2020 acquisition of ABchimie and $301 in operation optimization costs related to the move from Woburn, MA to O’Hara Township, PA and $147 of operations optimization costs related to the move from Newark, CA to Hickory, NC |
(b) | Includes $141 of operations optimization costs in the second quarter and $200 year-to-date related to the Company’s move to the new Corporate Headquarters to another location in Westwood, MA substantially completed in the second quarter of the fiscal year |
(c) | Includes $733 in loss on the upward adjustment of the performance-based earn out contingent consideration associated with the September 2020 acquisition of ABchimie and $98 operations optimization in exit costs related to the movement of the sealants system business out of the Newark, CA location and into the Hickory, NC location during the second quarter of fiscal 2021. Also includes $128 in acquisition-related expense attributable to the February 2021 acquisition of the operations of ETi |
34
Total Revenue
Total revenue increased $5,506,000 or 8% to $73,953,000 for the quarter ended February 28, 2022, compared to $68,447,000 in the same quarter of the prior year. Total revenue increased $13,340,000 or 10% to $148,963,000 in the fiscal year-to-date period compared to $135,623,000 in the same period in fiscal 2021.
Revenue in the Company’s Adhesives, Sealants and Additives segment increased $205,000 or 1% and $1,183,000 or 2% in the current quarter and year-to-date period, respectively. Positively impacting sales for both the current quarter and year-to-date period were demand-driven sales increases of $2,145,000 and $4,388,000, respectively, by our North American-focused functional additives product line, which includes the inorganic growth attributable to ETi in the current quarter and year-to-date period. Negatively impacting the segment’s sales was a decrease in revenue in the current quarter and year-to-date period from our worldwide-focused electronic and industrial coatings line totaling $1,940,000 and $3,205,000, respectively, with logistics and raw material supply constraints affecting demand in automotive verticals.
Compared to the prior year quarter and year-to-date period, revenue in the Company’s Industrial Tapes segment increased $4,985,000 or 18% and $11,255,000 or 21%, respectively. Positively impacting sales for both the current quarter and year-to-date period were volume and price-driven sales increases of $5,443,000 and $11,283,000, respectively, due to its wire and cable, pulling and detection, and specialty products product lines over the COVID-19 impacted prior year periods. Negatively impacting the segment’s sales was a decrease in revenue from our electronic materials product line totaling $458,000 and $28,000 for the second quarter and year-to-date period, respectively, due to decreased demand in the Asian end-market.
Revenue in the Company’s Corrosion Protection and Waterproofing segment increased $316,000 or 4% and $902,000 or 5% in the current quarter and year-to-date period, respectively. Positively impacting sales for the segment were its coatings and lining systems and building envelope product lines’ combined $684,000 and $1,372,000 current quarter and year-to-date period increases, respectively. Negatively impacting the segment’s sales was a decrease in revenue from its pipeline coatings and bridge and highway product lines, totaling a combined $368,000 and $470,000 for the current quarter and year-to-date period, respectively. The pro forma results include adjustmentspipeline coatings product line saw a net decrease for the estimated amortizationcurrent quarter and year-to-date period, with COVID-19 overhang delays in products sold into Middle East and Asian markets outpacing North American sales gains in oil and gas pipeline repair and construction markets. Because its sales are heavily dependent on infrastructure-related project and maintenance work in North America, the Company’s Corrosion Protection and Waterproofing segment customarily experiences a seasonal downturn in the winter months, our second fiscal quarter (with this trend repeating itself for fiscal 2022).
35
Cost of Products and Services Sold
Cost of products and services sold increased $5,996,000 or 15% to $46,911,000 for the quarter ended February 28, 2022, compared to $40,915,000 in the prior year quarter. Cost of products and services sold increased $13,672,000 or 17% to $94,192,000 in the first six months of fiscal 2022, compared to $80,520,000 in the comparative year-to-date period.
The following table summarizes the cost of products and services sold as a percentage of revenue for each of Chase Corporation’s reportable operating segments:
| | | | | | | | | | | | | |
| | | Three Months Ended February 28, | Six Months Ended February 28, | | | | ||||||
Cost of products and services sold | |
| 2022 |
| 2021 |
| | 2022 |
| 2021 | | |
|
Adhesives, Sealants and Additives | | | 62 | % | 54 | % | | 62 | % | 55 | % | | |
Industrial Tapes | | | 65 | | 66 | | | 67 | | 65 | | | |
Corrosion Protection and Waterproofing | | | 60 | | 61 | | | 57 | | 58 | | | |
Total Company | | | 63 | % | 60 | % | | 63 | % | 59 | % | | |
Cost of products and services sold in the Adhesives, Sealants, and Additives segment was $19,838,000 and $38,755,000 in the current quarter and year-to-date period compared to $16,998,000 and $33,611,000 in the comparable periods in the prior year. Cost of products and services sold in the Industrial Tapes segment was $21,790,000 and $44,009,000 in the current quarter and year-to-date period compared to $18,693,000 and $35,810,000 in the comparable periods in the prior year. Cost of products sold in the Corrosion Protection and Waterproofing segment was $5,283,000 and $11,428,000 in the current quarter and year-to-date period compared to $5,224,000 and $11,099,000 in the comparable periods in the prior year.
As a percentage of revenue, cost of products and services sold increased for the Adhesives, Sealants and Additives segment in the current quarter and year-to-date period. As a percentage of revenue, cost of products and services sold decreased for the Industrial Tapes segment for the current quarter and increased in the year-to-date period. As a percentage of revenue, cost of products and services sold decreased for the Corrosion Protection and Waterproofing segment in the current quarter and year-to-date period. The decrease in the relative gross margin for the Adhesives, Sealants and Additives and Industrial Tapes segments in the year-to-date period (and for the second quarter period for Adhesives, Sealants and Additives) was due tocontinued global raw material inflationary pressures, increased logistics and freight costs saleand a more competitive labor market. Additionally, the Company’s overall relative margin was affected by a less favorable sales mix with sales increases in our lower margin Industrial Tapes segment outpacing revenue gains seen in our Adhesive, Sealants and Additives and Corrosion Protection and Waterproofing segments. The Adhesives, Sealants and Additives segment also experienced a less favorable sales mix within the segment itself, with historically less favorable margin products constituting a comparatively larger part of inventory step-up costtotal segment sales. The Company has implemented and continues to implement customer price adjustments and continues to work with our customers and suppliers in an effort to counteract margin compression but with a lag reflected in current quarter and year-to-date period results.
With the composition of the Company’s finished goods and the income tax impactmarkets it serves, the costs of certain commodities (including petroleum-based solvents, films, yarns, polymers and nonwovens, aluminum and copper foils, specialty papers, and various resins, adhesives and inks) directly and indirectly affect both the purchase price of the pro forma adjustmentsraw materials and market demand for its product offerings. In an effort to preserve margins, the Company diligently monitors raw materials and commodities pricing across all its product lines.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $794,000 or 6% to $13,125,000 for the quarter ended February 28, 2022 compared to $12,331,000 in the prior year quarter. Selling, general and administrative expenses increased $1,909,000 or 8% to $26,500,000 in the fiscal year-to-date period compared to $24,591,000 in the same period in fiscal 2021. Selling, general and administrative expenses increased in the second quarter and year-to-date fiscal 2022 period. The increase was attributed to selling and sales activity costs as compared to the COVID-19 impacted comparable prior
36
year quarter and year-to-date period. As a percentage of revenue, selling, general and administrative expenses represented 18% for both the current quarter and fiscal year-to-date period for both fiscal 2022 and 2021.
Research and Product Development Costs
Research and product development costs increased $69,000 or 7% percent to $1,095,000 during the second quarter of fiscal 2022, compared to $1,026,000 in fiscal 2021. Research and product development costs increased $11,000 or less than one percent to $2,088,000 during the first six months of fiscal 2022, compared to $2,077,000 in the same period of fiscal 2021. Research and development stayed relatively consistent from fiscal 2021 to 2022 as the Company continued focused development work on strategic product lines.
Operations Optimization Costs
The Company substantially completed the relocation of its Corporate Headquarters to another location within Westwood, MA during the second quarter of the fiscal year. The move, part of the Company’s ongoing consolidation and optimization initiative, capitalizes on the hybrid work model utilized by many of Chase’s corporate and administrative employees and is expected to provide future operational cost savings. The facility will consolidate and house research and development operations previously conducted at the statutory rateprevious Westwood, MA and Woburn, MA locations. Operations optimization costs related to the Westwood move of 35%. The following pro forma information is not necessarily indicative$141,000 and $200,000 were expensed in the second quarter and first half of the resultsfiscal year, respectively. The Company does not anticipate any significant additional operations optimization costs related to the new Corporate Headquarters during the second half of the fiscal year.
During the third quarter of fiscal 2021, Chase announced to the employees at its Woburn, MA location that its adhesives systems operations, part of the Adhesives, Sealants and Additives segment’s electronic and industrial coatings product line, would have been achieved ifbe consolidating into the Company’s existing O'Hara Township, PA location. This rationalization and consolidation initiative aligns with the second quarter of fiscal 2021 announcement of the Company’s plan to move its sealant systems production from Newark, CA to Hickory, NC, described in more detail below. Chase Corporation obtained both the adhesive and sealants systems as part of its fiscal 2017 acquisition had been effective on September 1, 2015.of the operations of Resin Designs. The Company expensed $301,000, related to the consolidation of the Woburn, MA location during the second quarter of the fiscal year and expects to recognize additional expense during the second half of fiscal year.
|
|
|
| Three Months Ended November 30, | |
| 2016 | |
Revenue | $ | 62,942 |
Net income |
| 11,034 |
|
|
|
Net income available to common shareholders, per common and common equivalent share |
|
|
Basic earnings per share | $ | 1.18 |
Diluted earnings per share | $ | 1.17 |
22
Note 15 — Exit Costs Relatedfiscal 2021, Chase began moving the sealant systems operations, part of the Adhesives, Sealants and Additives segment’s electronic and industrial coatings product line, from its Newark, CA location to Idle Facility
Inits Hickory, NC facility. This is in line with the three-month period ended November 30, 2016,Company’s ongoing initiative to consolidate its manufacturing plants and streamline its existing processes. The sealant systems operations and Newark, CA location came to Chase Corporation as part of the fiscal 2017 acquisition of the operations of Resin Designs, and the Company’s lease there terminated in fiscal 2021. The Company recognized $27$977,000 in expensesexpense related to raze and exit its Randolph, MA facility,the move during the entire prior fiscal year ended August 31, 2021, of which had been idle regarding production for several years; no expense$98,000 was recognized in the first half of the year. The Company recognized $147,000 in expense during both the second quarter and first half of fiscal 2022. This project is now substantially completed and any future costs related to this move are not anticipated to be significant to the Condensed Consolidated Financial Statements.
37
(Gain) loss on Contingent Consideration
As a component of the September 1, 2020 acquisition of ABchimie, the Company incurred a performance-based earn out liability potentially worth an additional €7,000,000 (approximately $8,330,000 at the time of the transaction) in consideration. Following its initial recording of an accrual for $928,000 at the acquisition date, $1,664,000 in expense related to adjustments to the performance-based earn out accrual was recorded during fiscal year ended August 31, 2021 (with $733,000 of expense recognized in the second quarter and first half of fiscal 2021). The Company recognized a loss of $475,000 and a gain of $200,000 (net $275,000 year-to date) in the first and second quarters of fiscal 2022, respectively, related to the performance-based contingent consideration.
Interest Expense
Interest expense increased $19,000 or 28% to $86,000 for the quarter ended November 30, 2017. TheFebruary 28, 2022, compared to $67,000 in the prior year comparable period. Interest expense increased $37,000 or 27% for the first six months of fiscal 2022, compared to $136,000 in the prior comparable period. As the Company began marketinghad no outstanding balance on its revolving debt facility for both periods, interest expense has remained relatively low.
Other Income (Expense)
Other income (expense) was income of $20,000 in the site for sale and reclassifiedquarter ended February 28, 2022, compared to an expense of $284,000 in the net book valuesame period in the prior year, a difference of $304,000. Other income (expense) was income of $397,000 in the first six months of the facilityfiscal year compared to assets heldan expense of $498,000 in the comparable period, a difference of $895,000. Other income (expense) primarily includes 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, non-service cost components of periodic pension expense (including pension-related settlement costs due to the timing of lump-sum distributions), interest income, rental income and other non-trade/non-royalty/non-commission receipts. The change in total other income (expense) in fiscal 2022 compared to fiscal 2021 for saleboth the quarter-to-date and year-to-date periods was largely due to the recognition of net foreign exchange gains in fiscal 2022 as compared to a net losses in fiscal 2021.
Income Taxes
For the three and six months ended February 28, 2022, the Company’s recognized effective tax rate was 26.2% and 26.0%, respectively. For the three and six months ended February 28, 2021, the Company’s recognized and effective tax rate was 28.7% and 25.5%, respectively.
For fiscal 2022 and 2021, the Company is utilizing the 21% Federal tax rate enacted by the Tax Cuts and Jobs Act (the “Tax Act”) passed in December 2017. Please see Note 14 — “Income Taxes” to the Condensed Consolidated Financial Statements for further discussion of the effects of the Tax Act.
Net Income
Net income decreased $45,000 or less than 1% to $9,126,000 in the quarter ended February 28, 2022 compared to $9,171,000 in the comparable prior year second quarter. Net income decreased $1,155,000 or 6% to $18,853,000 in the six month year-to-date period ended February 28, 2022 compared to $20,008,000 in the comparable six month year-to-date prior period. The decrease in net income in the second quarter and year-to-date period was primarily due to a.) increased input costs caused by continued global raw material inflationary pressures, increased logistics costs and a more competitive labor market; and b.) a less favorable sales mix, with sales increases in its lower margin Industrial Tapes segment outpacing revenue gains seen in its higher margin Adhesive, Sealants and Additives and Corrosion Protection and Waterproofing segments.
38
Liquidity and Sources of Capital
The Company’s overall cash and cash equivalents balance decreased $3,385,000 to $116,044,000 at February 28, 2022, from $119,429,000 at August 31, 2021. The decreased cash balance is primarily attributable to the payment of the $9,460,000 annual dividend in the second quarter of fiscal 2016,2022 and recognizedthe strategic inventory build that was going over the first half of fiscal 2022. The net decrease in cash was offset by cash flow from operations. Of the above-noted amounts, $28,509,000 and $26,309,000 were held outside the United States by Chase Corporation and its foreign subsidiaries as of February 28, 2022 and August 31, 2021, respectively. Given the Company’s cash position and borrowing capability in the United States and the potential for increased investment and acquisitions in foreign jurisdictions (as evidenced by the fiscal 2021 acquisition of ABchimie), prior to the second quarter of fiscal 2018 the Company did not have a totalhistory of $70 and $935 in expenses associated withrepatriating a significant portion of its foreign cash. With the project during fiscal 2017 and 2016, respectively. These actions were taken as partpassage of the Company’s on-going facility consolidationTax Cuts and rationalization initiative. The Company substantially completed the demolition of the structureJobs Act (the “Tax Act”) in the fourthsecond fiscal quarter of 2016, and completed other environmental aspects2018, significant changes in the Internal Revenue Code were enacted, changing the U.S. taxable nature of previously unrepatriated foreign earnings. Following the passage of the project during fiscal 2017. The sale of the property is anticipated to follow in a subsequent period, and any future expenses related to the project are anticipated to not be material. See Note 16 to the condensed consolidated financial statements for additional information on assets held for sale.
Note 16 — Assets Held for Sale
The Company periodically reviews long-lived assets against its plans to retain or ultimately dispose of these assets. IfTax Act, the Company decides to dispose of an assetrepatriated $10,499,000 in U.K. foreign earnings in fiscal 2018 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$17,230,000 in fiscal 2019. No additional impairments due to declinesamounts were repatriated 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.
Assets held for sale as of November 30, 2017 and August 31, 2017 were:
|
|
|
|
|
|
|
| November 30, 2017 |
| August 31, 2017 |
| ||
Randolph, MA - Property (1) | $ | 14 |
| $ | 14 |
|
Total | $ | 14 |
| $ | 14 |
|
|
|
Note 17 — Related Party Agreements
Reimbursements Related to Life Insurance Policies
During the fourth quarter of fiscal 2016year 2020, 2021 and the first quarterhalf of fiscal 2017,2022. Please see Note 14 — “Income Taxes” to the Edward L. Chase Trust (the “Trust”), ownersCondensed Consolidated Financial Statements for further discussion of two insurance policiesthe effects of the Tax Act.
Cash flow provided by operations was $8,757,000 in the first six months of fiscal year 2022 compared to $26,386,000 in the same period of the comparable year. Cash provided by operations during the current period was primarily related to operating income. Negatively impacting the cash flow from operations in the current period was our continued strategic inventory build, undertaken to help ensure our ability to satisfy our customers’ demands and to address our elevated backlog caused in part by macroeconomic supply chain challenges.
The ratio of current assets to current liabilities was 8.3 as of February 28, 2022 compared to 6.5 as of August 31, 2021, primarily due to decreases in accounts payable and accrued payroll and other compensation balances.
Cash flow used in investing activities of $1,974,000 was largely due to the cash spent on capital purchases of machinery and equipment in the lifefirst six months of Claire E. Chase, reimbursed the Company for premiumsfiscal 2022.
Cash flows used in financing activities of $9,460,000 was due to a cash dividend of $1.00 per share. The dividend was paid on the policies in exchange for the Company’s releaseDecember 9, 2021 to shareholders of any claimsrecord on the policies. In August 2016November 30, 2021.
On July 27, 2021 (the fourth quarter of fiscal 2016)2021), the Company received $1,238 related toentered into 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 premium 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.
Sale of Former Corporate Headquarters in Bridgewater, MA
In October 2016, Chase entered an agreement to sell its former corporate headquarters and executive offices in Bridgewater, MA. In December 2016, the sale was finalized for gross proceeds of $740, resulting in a gain on sale of $68, which was recognized in the second quarter of fiscal 2017. The buyer, Bridgewater State University Foundation, Inc., was deemed a related party because of previously existing professional connections between it and two members of
23
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 the October 2016 agreement. 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 — Long-Term Debt
On December 15, 2016, the Company entered anSecond Amended and Restated Credit Agreement (the “New Credit Agreement”) withby and among the Company and NEPTCO Incorporated (“NEPTCO”), each of the borrowers, the subsidiary guarantors party thereto, the financial institutions party thereto as Lenders, and Bank of America, actingN.A., as administrative agent, and with participation from CitizensWells Fargo Bank, N.A., PNC Bank, N.A. and JPMorgan Chase Bank, (collectively with Bank of America, the “Lenders”).N.A. The New Credit Agreement is initially an all-revolvingwas entered into to amend, restate and extend the Company’s preexisting credit facility, which had a maturity date of December 15, 2021, and to provide for additional liquidity to finance acquisitions, working capital and capital expenditures, and for other general corporate purposes. Under the New Credit Agreement, Chase obtained an increased revolving credit loan (the “New Revolving Facility”), with a borrowing capacity of $150,000, which can be increasedcapabilities not to exceed $200,000,000 at any time, with the ability to request an increase in this amount by an additional $50,000$100,000,000 at the request of the Company and the individual or collective option of any of the Lenders. The New Credit Agreement contains customary affirmative and negative covenants that, among other things, restrict our ability to incur additional indebtedness and require 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. We were in compliance with our debt covenants as of November 30, 2017. The New Credit Agreement is guaranteed by all of Chase’s direct and indirect domestic subsidiaries, including NEPTCO, which had a carrying value of $162,794 at November 30, 2017. The New Credit Agreement was entered 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”)Facility and any New Term Loan (defined below) is based on the effective London Interbank Offered Rate (LIBOR) plus an additional amount in thea range of 1.00% to 1.75%, depending on the consolidated net leverage ratio of Chase and its subsidiaries. At November 30, 2017,February 28, 2022, there was no outstanding principal balance, and as such, no applicable interest rate. 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.July 27, 2026. The New Credit Agreement contains provisions that may replace LIBOR as the benchmark index under certain circumstances. 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, the Company may elect to convert all or a portion of the outstanding New Revolving Facility into a new term loan twice during the term of the New Revolving Facility (each, a “New Term Loan”, and collectively with the New Revolving Facility, the “New Credit Facility”), which New Term Loan shall be payable
39
quarterly in equal installments sufficient to amortize the original principal amount of such New Term Loan on a seventen year amortization schedule; provided, however,schedule. The outstanding balance on the New Credit Facility is guaranteed by all of Chase’s direct and indirect domestic subsidiaries. The New Credit Facility is subject to restrictive covenants under the New Credit Agreement, and financial covenants that require Chase and its subsidiaries to maintain certain financial ratios on a consolidated basis, including a consolidated net leverage ratio of 3.25 to 1.00 and a consolidated interest coverage ratio of 3.50 to 1.00 (both defined in the final principal repayment installment shall be repaid on December 15, 2021 andNew Credit Agreement). Chase Corporation was in any event shall be in an amount equalcompliance with the debt covenants as of February 28, 2022. The New Credit Agreement also places certain Lender-approval requirements as to the aggregate principal amountsize of all Term Loans outstanding on such date.permitted acquisitions which may be entered into by the Company and its subsidiaries, and allows for a temporary step-up in the allowed consolidated leverage ratio for the four fiscal quarters ending after certain designated acquisitions. Prepayment is allowed by the New Credit Agreement at any time during the term of the agreement, subject to customary notice requirements.
In connection with entry into the New Credit Agreement, Chase applied proceeds to refinance in full the outstanding principal balance of its preexisting term debt, simultaneously terminating both our previously existing term loan agreementrequirements and the previously existing revolving linepayment of credit, which was fully available as of December 15, 2016.customary LIBOR breakage fees.
In December 2017, the Company utilized $65,000 of the New Credit Agreement to finance a portion of the acquisition cost of Stewart Superabsorbents, LLC. See Note 19 to the condensed consolidated financial statements for additional information on this acquisition completed during the second fiscal quarter.
24
Note 19 — Subsequent Events
Acquisition of Zappa Stewart
On December 29, 2017, Chase entered an agreement to acquire Stewart Superabsorbents, LLC (“SSA, LLC”), an advanced superabsorbent polymer (SAP) formulator and solutions provider, with operations located in Hickory and McLeansville, NC. The transaction closed on December 31, 2017. In the most recently completed fiscal year, SSA, LLC, and its recently acquired ZappaTec business (collectively “Zappa Stewart”), had combined revenue in excess of $24,000. Chase expects this acquisition to be immediately accretive to its earnings. The business was acquired for a purchase price of $71,382, net of cash acquired, pending any working capital adjustments and excluding acquisition-related costs. Chase acquired all equity of the business, and entered multiyear leases at both locations. The purchase was funded from a combination of Chase’s existing revolving credit facility and available cash on hand. Zappa Stewart’s protective materials technology is complementary to Chase’s current specialty chemical offerings. This acquisition is in line with our core strategies and extends our reach into growing medical and consumer applications.
Tax Cuts and Jobs Act of 2017
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (H.R. 1) (the "Act"). The Act includes a number of changes in existing U.S. tax law impacting the Company's income taxes including, among other things, permanent reduction in the U.S. corporate income tax rate from 35% to 21%, repeal of Section 199 domestic manufacturing deduction, and deemed repatriation on U.S. shareholders’ pro rata share of certain non-U.S. subsidiaries’ earnings not previously taxed by the United States of America.
The Company is currently reviewing the components of the Act and evaluating its impact, which could be material on the Company’s fiscal year 2018 consolidated financial statements and related disclosures, including a one-time, non-cash expense related to a decrease in the value of the Company’s net deferred tax assets. At this time, the Company’s revaluation of its deferred tax assets has not been estimated, and the Company is unable to make a final determination of the effect on quarterly and annual earnings for the period ending August 31, 2018. The Company does not assert permanent reinvestment of its undistributed non-U.S. subsidiaries' earnings and has previously recognized a deferred tax liability for the estimated future tax effects attributable to temporary differences due to these undistributed earnings.
25
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, 2017.
Overview
In the three-month period ended November 30, 2017, the Company had favorable comparative results to the prior year in revenue, however a less favorable sales mix and certain other unfavorable items (explained below) resulted in lower operating income and net income. Our Industrial Materials segment obtained higher sales volume for the quarter, while our Construction Materials segment’s sales decreased from the comparable period. The current quarter saw reduced margins and earnings, driven by sales mix and increasing raw material prices and a comparatively higher income tax rate. Additionally, we experienced a swing in the effects of foreign currency transactions, moving from a gain in the prior year, to a loss in the first quarter of fiscal 2018.
First quarter revenue from our Industrial Materials segment surpassed the prior year with high demand for our electronic and industrial coatings, pulling and detection, structural composites, specialty products and specialty chemical intermediates product lines. Offsetting these increases in revenue were quarter-over-quarter reductions in sales volume from our fiber optic cable components and cable materials product lines. Our fiber optic cable components product line, which was divested in the third quarter of the prior year, did not record any revenue in the current year.
Revenue for our Construction Materials segment decreased for the first quarter as compared to the same period in the prior year. Our pipeline coatings products experienced the largest net sales volume decrease. Middle East water infrastructure projects continued, but at significantly reduced comparative levels, resulting in reduced demand for our Rye, U.K. facility-produced pipeline coatings products. Our domestically-produced pipeline coatings products, which sell into North American oil and gas markets, and are primarily for repairs and maintenance, fared better, seeing a quarter-over-quarter increase from the prior year. Our building envelope and coating and lining systems product lines both saw quarter-over-quarter decreases in sales volume. Partially offsetting these losses, bridge and highway products finished ahead of the prior year for the first quarter.
During the remainder of the fiscal year, the Company plans to successfully address both foreseen and unforeseen challenges through disciplined operational and financial management. The upcoming second fiscal quarter has historically generated lower quarterly revenue for many of our product lines, especially within the Construction Materials segment due to the effects of winter weather across much of North America. We plan to integrate the operations of Zappa Stewart, which was acquired in the second fiscal quarter of 2018, onto our worldwide ERP computer system. Through employing both market and product development efforts and pursuing opportunities realizable through mergers, acquisitions and divestitures, we will continue the strategic management of our portfolio of product offerings.
Our balance sheet remains strong, with cash on hand of $54,262,000 and a current ratio of 4.2 at November 30, 2017. At the end of our first fiscal quarter, there was no outstanding principal balance under our credit facility. Subsequent to the first quarter, the Company utilized $65,000,000 of the credit facility to finance a portion of the acquisition of Zappa Stewart.
26
We have two reportable segments as summarized below:
|
|
| ||
|
|
| ||
|
|
|
|
|
27
Results of Operations
Revenue and Operating Profit by Segment are as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| % of |
|
|
| % of |
|
| ||
|
| Three Months Ended |
| Total |
| Three Months Ended |
| Total |
|
| ||
|
| November 30, 2017 |
| Revenue |
| November 30, 2016 |
| Revenue |
|
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Materials |
| $ | 49,985 |
| 81 | % | $ | 49,024 |
| 80 | % |
|
Construction Materials |
|
| 11,932 |
| 19 | % |
| 12,333 |
| 20 | % |
|
Total |
| $ | 61,917 |
|
|
| $ | 61,357 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| % of |
|
|
|
| % of |
|
| |
|
| Three Months Ended |
| Segment |
| Three Months Ended |
| Segment |
|
| ||
|
| November 30, 2017 |
| Revenue |
| November 30, 2016 |
| Revenue |
|
| ||
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Materials |
| $ | 15,365 |
| 31 | % | $ | 16,415 | (a) | 33 | % |
|
Construction Materials |
|
| 4,246 |
| 36 | % |
| 5,150 |
| 42 | % |
|
Total for reportable segments |
|
| 19,611 |
| 32 | % |
| 21,565 |
| 35 | % |
|
Corporate and Common Costs |
|
| (7,012) |
|
|
|
| (6,915) | (b) |
|
|
|
Total |
| $ | 12,599 |
| 20 | % | $ | 14,650 |
| 24 | % |
|
|
|
|
|
Total Revenue
Total revenue increased $560,000 or 1% to $61,917,000 for the quarter ended November 30, 2017, compared to $61,357,000 in the same quarter of the prior year.
Revenue in our Industrial Materials segment increased $961,000 or 2% in the current quarter. The increase in this segment as compared to the prior year period was primarily due to: (a) our electronic and industrial coatings product line, which included three full months of the acquired Resin Designs operations, and had a total increase of $2,458,000, reflecting increased sales volume from the automotive and appliance manufacturing industries, along with an increased royalty revenue received from our licensed manufacturer in Asia; (b) sales volume increase of $1,294,000 from our pulling and detection products, on increased demand from customers in the utility and telecommunication industries following a severe hurricane season which affected Texas and the U.S. southeast; (c) increased sales into the wind energy market of $791,000 from our structural composite products; (d) revenue increase of $604,000 for our specialty products, which, subsequent to the sale of our fiber optic cable components business on April 3, 2017, includes revenue from the manufacturing services provided by the Company to the purchaser of thefiber optic cable components product line; and (e) our specialty chemicals intermediates product line, which had a sales volume increase of $20,000. These net increases were partially offset in the current quarter by: (a) a $2,291,000 reduction in sales volume for our cable materials products, with the largest decreases in communication cable components as the industry experiences consolidation and product design changes; and (b) a sales volume decrease of $1,915,000 from the prior year in our fiber optic cable components product line, which was divested in fiscal 2017, and had no revenue recorded in the current year. Our electronic materials products sales stayed constant with the prior year.
Compared to the prior year first quarter, revenue from our Construction Materials segment decreased $401,000 or 3%. The largest decrease in our Construction Materials segment compared to the prior year period was due to a net decrease in sales of our pipeline coatings products of $645,000. While project work in the Middle East has continued, delays and sluggishness in the region have continued to reduce demand for water and wastewater pipeline coatings products produced at our Rye, U.K. facility. Conversely, sales for our domestically produced pipeline products increased compared to the first quarter of the prior year, but not enough to offset the international decline.Further decreases in this segment as compared to the prior year period were primarily due to the following for the current quarter: (a) our building
28
envelope product line had sales volume decrease by $565,000, as it experienced commercial roofing project delays and consolidation within the industry; and (b) sales volume from our coating and lining systems decreased $86,000. Positively impacting the change in segment revenue for the quarter were sales of our bridge and highway products, which increased by $895,000 and are being utilized in multiple projects domestically, especially in the New York metropolitan area, as well as expanding internationally.
Cost of Products and Services Sold
Cost of products and services sold increased $1,606,000 or 5% to $36,895,000 for the quarter ended November 30, 2017, compared to $35,289,000 in the prior year quarter.
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 November 30, |
|
| ||||
Cost of products and services sold |
|
| 2017 |
| 2016 |
|
|
|
|
Industrial Materials |
|
| 61 | % | 58 | % |
|
|
|
Construction Materials |
|
| 54 | % | 55 | % |
|
|
|
Total |
|
| 60 | % | 58 | % |
|
|
|
Cost of products and services sold in our Industrial Materials segment was $30,465,000 in the current quarter compared to $28,492,000 in the comparable period in the prior year. Cost of products and services sold in our Construction Materials segment was $6,430,000 for the quarter ended November 30, 2017, compared to $6,797,000 in the same period of the prior year. As a percentage of revenue, cost of products and services sold increased for our Industrial Materials segment and decreased for our Construction Materials segment. The increase for our Industrial Materials segment was primarily due to product mix, as our lower margin products within our product lines constituted a comparatively higher portion of total sales, as well as raw material costs on increasing commodity prices. For the Construction Materials segment in the first quarter of 2018, the decrease was primarily due to product mix, as our lower margin products constituted a comparatively lower portion of total sales. Chase’s products are manufactured largely with commodity items (including petroleum-based solvents, films, yarns, and nonwovens, aluminum and copper foils, specialty papers, and various resins, adhesives and inks). Price changes in these commodities can both directly and indirectly affect the purchase price of our raw materials and market demand for our product offerings. The Company diligently monitors raw material and commodities pricing across all its product lines in effort to preserve margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $307,000 or 3% to $12,059,000 for the quarter ended November 30, 2017 compared to $11,752,000 in the prior year quarter. As a percentage of revenue, selling, general and administrative expenses stayed consistent at 19% in both periods. The nominal increase for the current fiscal quarter compared to the prior year period, was largely attributable to: (a) increased selling and sales commission expense of $209,000 because of Resin Designs operating for an additional month in the current year and targeted spending increases in certain other product lines; and (b) increased amortization expense of $138,000 primarily related to intangible assets acquired in our September 30, 2016 acquisition of certain assets of Resin Designs.
Exit Costs Related to Idle Facility
In the three-month period ended November 30, 2016, the Company recognized $27,000 in expenses to raze and exit its Randolph, MA facility, which had been idle regarding production for several years; no expense was recognized in the quarter ended November 30, 2017. The Company began marketing the site for sale and reclassified the net book value of the facility to assets held for sale in the second quarter of fiscal 2016, and recognized a total of $70,000 and $935,000 in expenses associated with the project during fiscal 2017 and 2016, respectively. 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. Production previously housed in Randolph, MA had been relocated to the Company’s Oxford, MA and Blawnox, PA locations prior to the commencement of demolition work.
29
The Company has updated its initial estimate and currently anticipates any future expenses associated with completing the project will not be material, with the sale of the property to follow.
Acquisition-Related Costs
In the first quarter of fiscal 2017, the Company incurred $584,000 of costs related to our acquisition of certain assets of Resin Designs, LLC. This acquisition was accounted for as a business combination in accordance with applicable accounting standards, and all related professional service fees (including banking, legal, accounting and actuarial fees) were expensed as incurred within the first fiscal quarter of 2017.
Interest Expense
Interest expense decreased $201,000 or 82% to $45,000 for the quarter ended November 30, 2017 compared to $246,000 in the prior year first quarter. The decrease in interest expense from the prior period is a result of a reduction in our overall average debt balance through principal payments prior to the Company’s refinancing in December 2016, and following the refinancing, elective payments made with cash generated from operations. Interest expense in the first fiscal quarter of 2018 related primarily to commitment fees.
Gain on Sale of Real Estate
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 real estate during the first fiscal quarter of 2017. 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.
Other Income (Expense)
Other income (expense) was an expense of $319,000 in the quarter ended November 30, 2017 compared to an income of $399,000 in the same period in the prior year, a difference of $718,000. Other income (expense) primarily includes interest income, rental income, 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 and other non-trade/non-royalty- and non-commission receipts. Other income (expense) in the current quarter was largely net foreign exchange losses resulting from sales made from our U.K.-based operations and denominated in U.S. dollars.
Income Taxes
Our effective tax rates were 34.0% for the first quarter of fiscal 2018 and 29.3% for the prior year’s first quarter. Both the current year and prior year effective tax rates were calculated following the Company’s adoption of ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting”, during the first quarter of fiscal 2017. During the quarter ended November 30, 2016, the Company recognized an excess tax benefit from stock-based compensation of $794,000, within income tax expense on the condensed consolidated statements of operations (adopted prospectively); but given the nature of equity activity in the current quarter, no benefit was recognized in the quarter ended November 30, 2017. The Company anticipates the potential for increased periodic volatility in future effective tax rates based on the continued application of ASU No. 2016-09.
The passage of the Tax Cuts and Jobs Act of 2017 during our second fiscal quarter is expected to affect the Company’s future results and financial position in multiple ways. For fiscal 2018, the Company anticipates incorporating a blended U.S. effective tax rate, which will likely cause our overall effective tax rate to be lower than the 34.0% recognized in the first quarter. The new corporate tax rate in the Internal Revenue Code (the “Code”) will also require us to revalue our U.S. net deferred tax asset positions also at a presumably lower rate, which will result in a charge taken to earnings in the period in which this impact occurs. We will continue to evaluate and quantify further the effects that the revised Code will have on our operations, including the phasing out of the domestic production deduction and the new rules and rates related to the repatriation of foreign cash.
30
Net Income
Net income decreased $2,048,000 or 20% to $8,315,000 in the quarter ended November 30, 2017 compared to $10,363,000 in the prior year first quarter. The decrease in net income in the first fiscal quarter was primarily due to decreased gross margins, the foreign transaction losses and no recognition of excess tax benefit from stock-based compensation.
31
Other Important Performance Measures
We believe that EBITDA, Adjusted EBITDA and Free Cash Flow are useful performance measures. They are used by our executive management team 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, 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, Adjusted EBITDA and Free Cash Flow are non-GAAP financial measures.
We define EBITDA as net income 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) losses related to our acquisitions and divestitures, costs of products sold related to inventory step-up to fair value, settlement (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, Adjusted EBITDA and Free Cash Flow has limitations and these performance measures should not be considered in isolation from, or as an alternative to, U.S. GAAP measures such as net 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 measurement of EBITDA, Adjusted EBITDA and Free Cash Flow may not be comparable to similarly-titled measures used by other companies.
The following table provides a reconciliation of net income, the most directly comparable financial measure presented in accordance with U.S. GAAP, to EBITDA and Adjusted EBITDA for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended November 30, |
|
| ||||
|
|
| 2017 |
| 2016 |
|
| ||
Net income |
|
| $ | 8,315 |
| $ | 10,363 |
|
|
Interest expense |
|
|
| 45 |
|
| 246 |
|
|
Income taxes |
|
|
| 4,284 |
|
| 4,287 |
|
|
Depreciation expense |
|
|
| 1,254 |
|
| 1,335 |
|
|
Amortization expense |
|
|
| 2,314 |
|
| 2,176 |
|
|
EBITDA |
|
| $ | 16,212 |
| $ | 18,407 |
|
|
Exit costs related to idle facility (a) |
|
|
| — |
|
| 27 |
|
|
Gain on sale of real estate (b) |
|
|
| — |
|
| (792) |
|
|
Cost of sale of inventory step-up (c) |
|
|
| — |
|
| 190 |
|
|
Acquisition-related costs (d) |
|
|
| — |
|
| 584 |
|
|
Adjusted EBITDA |
|
| $ | 16,212 |
| $ | 18,416 |
|
|
|
|
|
|
|
|
|
|
32
The following table provides a reconciliation of net cash provided by operating activities, the most directly comparable financial measure presented in accordance with U.S. GAAP, to Free Cash Flow for the periods presented (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| Three Months Ended November 30, |
|
| ||||
|
|
| 2017 |
| 2016 |
|
| ||
Net cash provided by operating activities |
|
| $ | 6,554 |
| $ | 8,337 |
|
|
Purchases of property, plant and equipment |
|
|
| (851) |
|
| (652) |
|
|
Free Cash Flow |
|
| $ | 5,703 |
| $ | 7,685 |
|
|
|
|
|
|
|
|
|
|
|
|
Liquidity and Sources of Capital
Our overall cash and cash equivalents balance increased $6,908,000 to $54,262,000 at November 30, 2017, from $47,354,000 at August 31, 2017. The increased cash balance is primarily attributable to the $6,554,000 in cash from operations, partially offset by cash paid for the purchases of machinery and equipment. Of the above-noted amounts, $34,220,000 and $31,756,000 were held outside the United States by Chase Corporation and our foreign subsidiaries as of November 30, 2017 and August 31, 2017 respectively. Given our cash position and borrowing capability in the United States 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 permanently reinvested. Accordingly, we recognize a deferred tax liability for the estimated future tax effects attributable to temporary differences due to these unremitted earnings. Should circumstances change in the future and we decide to repatriate these foreign amounts to fund U.S. operations, we would pay the applicable U.S. taxes on these repatriated foreign amounts, less any tax credit offsets, to satisfy all previously recorded tax liabilities.
Cash flow provided by operations was $6,554,000 in the first three months of fiscal year 2018 compared to $8,337,000 in the same period in the prior year. Cash provided by operations during the current period was primarily related to operating income and a decrease in accounts receivable that was driven primarily by lower sales in the first quarter of fiscal 2018 as compared to the fourth quarter of fiscal 2017. Negatively impacting our cash flow from operations were both a reversal from accrued to prepaid income taxes based on timing of payments, and a decrease in accrued compensation and other expenses related primarily to the payment of the annual employee incentive plan in November 2017.
The ratio of current assets to current liabilities was consistent at 4.2 at both November 30, 2017 and August 31, 2017. The ratio stayed consistent based primarily on the offsetting effects of (a) cash and cash equivalents and dividends payable increasing, (b) accounts receivable and accrued payroll and other compensation decreasing, and (c) accrued taxes payable reversing to a prepaid position.
Cash flow used in investing activities of $898,000 was primarily due to our purchases of machinery and equipment at our manufacturing locations during fiscal 2018.
Cash flow provided by financing activities of $143,000 was due to proceeds from exercise of common stock options.
On October 30, 2017, we announced a cash dividend of $0.80 per share (totaling $7,497,000). The dividend was paid on December 6, 2017 (subsequent to the first quarter of 2018) to shareholders of record on November 9, 2017.
In June 2012, in connection with our acquisition of NEPTCO, we borrowed $70,000,000 under a five-year term debt financing arrangement led and arranged by Bank of America, with participation from RBS Citizens (the “2012 CreditFacility”). The applicable interest rate was based on the effective LIBOR plus an additional amount in the range of 1.75% to 2.25%, depending on our consolidated leverage ratio. The 2012 Credit Facility required repayment 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
33
to $2,100,000 per quarter thereafter, and were scheduled to continue at this amount through March 2017. The 2012 Credit Facility had a scheduled maturity date of June 27, 2017, prior to the refinancing described below.
Under the 2012 Credit Facility, Chase also had a revolving line of credit with Bank of America (the “2012 Revolver”) totaling $15,000,000, which bore interest at LIBOR plus an 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 December 15, 2016 (the date on which the New Credit Agreement described below was entered into), the entire amount of $15,000,000 was available for use. The 2012 Revolver had a scheduled maturity date of June 27, 2017, prior to its refinancing.
The 2012 Credit Facility with Bank of America contained customary affirmative and negative covenants that, among other things, restricted our ability to incur additional indebtedness. It also required 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 of the 2012 Credit Facility as of November 30, 2016 (the last measurement date for the 2012 Credit Facility).
On December 15, 2016, we entered an Amended and Restated Credit Agreement (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”). The New Credit Agreement is initially 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. The New Credit Agreement contains customary affirmative and negative covenants that, among other things, restrict our ability to incur additional indebtedness and require certain lender approval for acquisitions by us and our 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. We were in compliance with our debt covenants as of November 30, 2017. The applicable interest rate for the New Credit Agreement is based on the effective LIBOR plus an additional amount in the range of 1.00% to 1.75%, depending on our consolidated net leverage ratioor, at our option, at the bank’s base lending rate. At November 30, 2017, there was no outstanding principal balance, and as such no applicable interest rate. The New Credit Agreement was used to refinance our previously existing term loan and revolving line of credit. It also provides for additional liquidity to finance potential acquisitions, working capital, capital expenditures, and other general corporate purposes.
We have several on-goingongoing capital projects, as well as ourits facility rationalization and consolidation initiative, which are important to ourits long-term strategic goals. Machinery and equipment may be added as needed to increase capacity or enhance operating efficiencies in ourthe Company’s production facilities.
We may acquire companies or other assets in future periods which are complementary to our business. We believeThe acquisition of ABchimie included a potential earnout based on performance of up to an additional €7,000,000 (approximately $8,330,000 at the time of the transaction), which the Company expects to pay with cash on hand if the applicable conditions are met. The acquisition of ETi includes a $1,000,000 withholding, which is payable by the Company within eighteen months of the acquisition. The Company believes that ourits existing resources, including cash on hand and the New Amended and Restated Credit Agreement, together with cash generated from operations and additional bank borrowings, will be sufficient to fund ourits cash flow requirements through at least the next twelve months. However, there can be no assurance 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 significantmaterial off-balance sheet arrangements.
40
Contractual Obligations
Please refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in ourthe Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 20172021 for a complete discussion of ourits contractual obligations.
34
Recent Accounting Standards
Please see Note 2— “Recent Accounting Standards” to the Condensed Consolidated Financial Statements for a discussion of the effects of recently issued and recently adopted accounting pronouncements.
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 threesix months ended November 30, 2017February 28, 2022 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, 2017.2021.
3541
Item 3 — Quantitative and Qualitative Disclosures about Market Risk
We limitChase Corporation limits the amount of credit exposure to any one issuer. At November 30, 2017,February 28, 2022, other than ourthe Company’s restricted investments (which are restricted for use in non-qualified retirement savings plans for certain key employees and members of the Board of Directors), all of ourits 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 domesticChase Corporation’s U.S. operations have limited currency exposure since substantially all transactions are denominated in U.S. dollars. However, ourthe Company’s European and Asian operations are subject to currency exchange fluctuations. We continueThe Company continues to review ourits policies and procedures to control this exposure while maintaining the benefit from these operations and sales not denominated in U.S. dollars. The effect of an immediate hypothetical 10% change in the exchange rate between the British Poundpound and the U.S. dollar would not have a material direct effect on the Company’s overall liquidity. As of November 30, 2017,February 28, 2022, the Company had cash balances in the following foreign currencies (with USD equivalents)equivalents, dollars in thousands):
|
|
|
|
|
|
| ||||||
| | | | | | | ||||||
Currency Code |
| Currency Name |
| USD Equivalent at November 30, 2017 |
|
| Currency Name |
| USD Equivalent at February 28, 2022 |
| ||
GBP |
| British Pound |
| $ | 22,884,000 |
|
| British Pound | | $ | 15,887 | |
EUR |
| Euro |
| $ | 3,733,000 |
|
| Euro | | $ | 6,259 | |
CAD |
| Canadian Dollar | | $ | 2,363 | | ||||||
CNY |
| Chinese Yuan |
| $ | 334,000 |
|
| Chinese Yuan | | $ | 483 | |
INR |
| Indian Rupee |
| $ | 124,000 |
|
| Indian Rupee | | $ | 213 | |
CAD |
| Canadian Dollar |
| $ | 99,000 |
| ||||||
|
|
|
|
|
|
| ||||||
| | | | | | |
WeThe Company will continue to review ourits current cash balances denominated in foreign currency considering current tax guidelines, (includingincluding the impact of the recently enacted revisionsTax Act to the Code),U.S. Internal Revenue Code, working capital requirements, infrastructure improvements and potential acquisitions.
WeThe Company recognized a foreign currency translation gainloss for the threesix months ended November 30, 2017February 28, 2022 in the amount of $1,570,000$2,058,000 related to ourChase Corporation’s European and Indian operations, which is recorded in other comprehensive income (loss) within ourits Statement of Equity and Statement of Comprehensive Income. We doThe Company does not have or utilize any derivative financial instruments.
We payThe Company pays interest on ourits outstanding long-term debt at interest rates that fluctuate based upon changes in various base interest rates. The carrying valueThere was no outstanding balance of our long-term debt was $0 at November 30, 2017.on February 28, 2022. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Sources of Capital,” together with Note 12 — “Fair Value Measurements” and Note 1816 — “Long-Term Debt” to the Condensed Consolidated Financial Statements for additional information regarding ourthe Company’s outstanding long-term debt. AnThe effect of an immediate hypothetical 10% change in variable interest rates would not have a material effect on our Condensed Consolidated Financial Statements.
3642
Item 4 — Controls and Procedures
Evaluation of disclosure controls and procedures
We maintainThe Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in ourChase Corporation’s 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 ourits management, including ourits 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 carryThe Company carries out a variety of ongoing procedures under the supervision and with the participation of ourits management, including ourits Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of ourits disclosure controls and procedures. Based on the foregoing, ourthe Company’s Chief Executive Officer and Chief Financial Officer concluded that ourits 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 February 28, 2022, the Company continued the process of refining financial reporting controls on the operations associated with Emerging Technologies, Inc. (ETi), acquired in February 2021.
Other than the foregoing, there have not been any changes in the Company’s internal control over financial reporting during the first quarter of fiscal 2018ended February 28, 2022 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
43
Part II — OTHER INFORMATIONINFORMATION
Item 1 — Legal Proceedings
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 agreed to, that could adversely affect the Company’s operating results or cash flows in a particular period. The Company routinely assesses all its litigation and threatened litigation as to the probability of ultimately incurring a liability and records its best estimate of the ultimate loss in situations where we assessit assesses 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, 20172021 for a complete discussion of the risk factors which could materially affect our business, financial condition or future results.
37
| ||
Exhibit | | Description |
| |
|
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
| |
|
| | Cover Page Interactive Data File (formatted as Inline XBRL |
|
| |
|
| |
|
| |
|
|
*Furnished, not filed
**Identifies management plan or compensatory plan or arrangement.
3844
SIGNATURES
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/ | |
| |
| |
| | Treasurer and Chief Financial Officer |
3945