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Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended February 28, 2015

 

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
of organization)

 

(I.R.S. Employer Identification No.)

 

26 Summer Street, Bridgewater, Massachusetts 02324

(Address of Principal Executive Offices, Including Zip Code)

 

(508) 819-4200

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. YES x  NO o

 

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 x  NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer x

Non-accelerated filer o (Do not check if a smaller reporting company)

 

 Smaller reporting company o

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o  NO x

 

The number of shares of Common Stock outstanding as of March 31, 2015 was 9,182,762.

 

 

 



Table of Contents

 

CHASE CORPORATION

INDEX TO FORM 10-Q

 

For the Quarter Ended February 28, 2015

 

Part I - FINANCIAL INFORMATION

 

 

 

 

Item 1 — Unaudited Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of February 28, 2015 and August 31, 2014

3

 

 

 

 

Consolidated Statements of Operations for the three and six months ended February 28, 2015 and 2014

4

 

 

 

 

Consolidated Statements of Comprehensive Income for the three and six months ended February 28, 2015 and 2014

5

 

 

 

 

Consolidated Statement of Equity for the six months ended February 28, 2015

6

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended February 28, 2015 and 2014

7

 

 

 

 

Notes to Consolidated Financial Statements

8

 

 

 

Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations

20

 

 

 

Item 3 — Quantitative and Qualitative Disclosures About Market Risk

29

 

 

 

Item 4 — Controls and Procedures

30

 

 

 

Part II — OTHER INFORMATION

 

 

 

 

Item 1 — Legal Proceedings

31

 

 

 

Item 1A — Risk Factors

31

 

 

 

Item 6 — Exhibits

31

 

 

 

SIGNATURES

32

 

2



Table of Contents

 

Part 1 — FINANCIAL INFORMATION

 

Item 1 — Unaudited Financial Statements

 

CHASE CORPORATION

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

February 28,

 

August 31,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash & cash equivalents

 

$

17,406

 

$

53,222

 

Accounts receivable, less allowance for doubtful accounts of $713 and $670

 

35,073

 

35,601

 

Inventories

 

33,376

 

31,539

 

Prepaid expenses and other current assets

 

2,607

 

2,437

 

Due from sale of product line

 

739

 

739

 

Prepaid income taxes

 

 

2,468

 

 

Deferred income taxes

 

2,314

 

2,315

 

Total current assets

 

93,983

 

125,853

 

 

 

 

 

 

 

Property, plant and equipment, net

 

43,183

 

44,085

 

 

 

 

 

 

 

Other Assets:

 

 

 

 

 

Goodwill

 

44,137

 

38,280

 

Intangible assets, less accumulated amortization of $25,077 and $22,941

 

49,137

 

27,215

 

Cash surrender value of life insurance

 

7,256

 

7,249

 

Restricted investments

 

1,377

 

1,256

 

Funded pension plan

 

1,022

 

962

 

Deferred income taxes

 

437

 

470

 

Other assets

 

156

 

175

 

 

 

$

240,688

 

$

245,545

 

LIABILITIES AND EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

13,666

 

$

15,121

 

Accrued payroll and other compensation

 

3,475

 

7,754

 

Accrued expenses

 

4,880

 

4,842

 

Accrued income taxes

 

 

1,030

 

1,377

 

Current portion of long-term debt

 

9,700

 

7,000

 

Total current liabilities

 

 

32,751

 

36,094

 

 

 

 

 

 

 

Long-term debt, less current portion

 

47,600

 

51,800

 

Deferred compensation

 

2,121

 

2,037

 

Accumulated pension obligation

 

10,566

 

10,418

 

Other liabilities

 

106

 

126

 

Deferred income taxes

 

7,578

 

7,580

 

 

 

 

 

 

 

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; 9,153,724 shares at February 28, 2015 and 9,103,292 shares at August 31, 2014 issued and outstanding

 

915

 

910

 

Additional paid-in capital

 

14,233

 

13,620

 

Accumulated other comprehensive loss

 

(6,948

)

(4,250

)

Retained earnings

 

131,766

 

126,272

 

Chase Corporation stockholders’ equity

 

139,966

 

136,552

 

Non-controlling interest

 

 

938

 

Total equity

 

139,966

 

137,490

 

Total liabilities and equity

 

$

240,688

 

$

245,545

 

 

See accompanying notes to the consolidated financial statements

 

3



Table of Contents

 

CHASE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

Three Months Ended February 28,

 

Six Months Ended February 28,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

Sales

 

$

51,380

 

$

50,412

 

$

106,670

 

$

104,067

 

Royalties and commissions

 

924

 

779

 

1,567

 

1,307

 

 

 

52,304

 

51,191

 

108,237

 

105,374

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

Cost of products and services sold

 

34,235

 

33,951

 

68,715

 

69,429

 

Selling, general and administrative expenses

 

11,924

 

9,930

 

22,719

 

20,369

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

6,145

 

7,310

 

16,803

 

15,576

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(270

)

(285

)

(544

)

(588

)

Gain on sale of product line (Note 8)

 

 

 

 

5,706

 

Other (expense) income

 

381

 

(125

)

766

 

(230

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

6,256

 

6,900

 

17,025

 

20,464

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

2,190

 

2,415

 

5,959

 

7,162

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

4,066

 

$

4,485

 

$

11,066

 

$

13,302

 

 

 

 

 

 

 

 

 

 

 

Net loss (gain) attributable to non-controlling interest

 

 

35

 

(95

)

(7

)

 

 

 

 

 

 

 

 

 

 

Net income attributable to Chase Corporation

 

$

4,066

 

$

4,520

 

$

10,971

 

$

13,295

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders, per common and common equivalent share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.45

 

$

0.50

 

$

1.20

 

$

1.46

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.44

 

$

0.48

 

$

1.18

 

$

1.43

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

9,065,511

 

8,942,045

 

9,057,738

 

8,940,075

 

Diluted

 

9,224,985

 

9,166,370

 

9,213,431

 

9,158,527

 

 

 

 

 

 

 

 

 

 

 

Cash dividends paid per share

 

 

 

 

 

$

0.60

 

$

0.45

 

 

See accompanying notes to the consolidated financial statements

 

4



Table of Contents

 

CHASE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

Three Months Ended February 28,

 

Six Months Ended February 28,

 

 

 

2015

 

2014

 

2015

 

2014

 

Net income

 

$

4,066

 

$

4,485

 

$

11,066

 

$

13,302

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

Net unrealized (loss) gain on restricted investments, net of tax

 

(20

)

2

 

(8

)

73

 

Change in funded status of pension plans, net of tax

 

109

 

48

 

219

 

96

 

Foreign currency translation adjustment

 

(818

)

605

 

(2,909

)

2,183

 

Total other comprehensive (loss) income

 

(729

)

655

 

(2,698

)

2,352

 

Comprehensive income

 

3,337

 

5,140

 

8,368

 

15,654

 

 

 

 

 

 

 

 

 

 

 

Comprehensive (income) loss attributable to non-controlling interest

 

 

35

 

(95

)

(7

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income attributable to Chase Corporation

 

$

3,337

 

$

5,175

 

$

8,273

 

$

15,647

 

 

See accompanying notes to the consolidated financial statements

 

5



Table of Contents

 

CHASE CORPORATION

CONSOLIDATED STATEMENT OF EQUITY

SIX MONTHS ENDED FEBRUARY 28, 2015

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

 

 

 

 

Additional

 

Accumulated Other

 

 

 

Chase

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Comprehensive

 

Retained

 

Stockholders’

 

Non-conrolling

 

Total

 

 

 

Shares

 

Amount

 

Capital

 

Income (loss)

 

Earnings

 

Equity

 

Interest

 

Equity

 

Balance at August 31, 2014

 

9,103,292

 

$

910

 

$

13,620

 

$

(4,250

)

$

126,272

 

$

136,552

 

$

938

 

$

137,490

 

Restricted stock grants, net of forfeitures

 

13,785

 

1

 

(1

)

 

 

 

 

 

 

 

 

Amortization of restricted stock grants

 

 

 

 

 

411

 

 

 

 

 

411

 

 

 

411

 

Amortization of stock option grants

 

 

 

 

 

126

 

 

 

 

 

126

 

 

 

126

 

Exercise of stock options

 

115,000

 

12

 

1,755

 

 

 

 

 

1,767

 

 

 

1,767

 

Common stock received for payment of stock option exercises

 

(47,486

)

(5

)

(1,762

)

 

 

 

 

(1,767

)

 

 

(1,767

)

Excess tax benefit (expense) from stock based compensation

 

 

 

 

 

730

 

 

 

 

 

730

 

 

 

730

 

Common stock retained to pay statutory minimum withholding taxes on common stock

 

(30,867

)

(3

)

(1,179

)

 

 

 

 

(1,182

)

 

 

(1,182

)

Annual cash dividend paid, $0.60 per share

 

 

 

 

 

 

 

 

 

(5,477

)

(5,477

)

 

(5,477

)

Purchase of outstanding non-controlling interest

 

 

 

 

 

533

 

 

 

 

 

533

 

(1,033

)

(500

)

Change in funded status of pension plan, net of tax of $118

 

 

 

 

 

 

 

219

 

 

 

219

 

 

 

219

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

(2,909

)

 

 

(2,909

)

 

 

(2,909

)

Net unrealized loss on restricted investments, net of tax of $4

 

 

 

 

 

 

 

(8

)

 

 

(8

)

 

 

(8

)

Net income

 

 

 

 

 

 

 

 

 

10,971

 

10,971

 

95

 

11,066

 

Balance at February 28, 2015

 

9,153,724

 

$

915

 

$

14,233

 

$

(6,948

)

$

131,766

 

$

139,966

 

 

$

139,966

 

 

See accompanying notes to the consolidated financial statements

 

6



Table of Contents

 

CHASE CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

Six Months Ended February 28,

 

 

 

2015

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

11,066

 

$

13,302

 

Adjustments to reconcile net income to net cash provided by operating activities

 

 

 

 

 

Gain on sale of assets

 

 

(4

)

Gain on sale of product line

 

 

(5,706

)

Depreciation

 

2,812

 

2,852

 

Amortization

 

2,884

 

2,386

 

Inventory step-up to fair value

 

49

 

 

Provision (recovery) for allowance for doubtful accounts

 

64

 

(12

)

Stock based compensation

 

537

 

638

 

Realized gain on restricted investments

 

(75

)

(37

)

Decrease in cash surrender value life insurance

 

90

 

60

 

Excess tax benefit from stock based compensation

 

(730

)

(34

)

Increase (decrease) from changes in assets and liabilities, net of effects of acquisitions

 

 

 

 

 

Accounts receivable

 

(144

)

(102

)

Inventories

 

(1,617

)

(3,345

)

Prepaid expenses & other assets

 

(163

)

(678

)

Accounts payable

 

(1,216

)

2,535

 

Accrued compensation and other expenses

 

(3,824

)

(4,355

)

Accrued income taxes

 

(2,029

)

(1,632

)

Deferred compensation

 

85

 

161

 

Net cash provided by operating activities

 

7,789

 

6,029

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Purchases of property, plant and equipment

 

(1,142

)

(2,190

)

Cost to acquire intangible assets

 

(10

)

(77

)

Contingent purchase price paid for acquisition

 

 

(156

)

Payments for acquisitions

 

(33,285

)

 

Proceeds from sale of fixed assets

 

 

14

 

Net proceeds from sale of product line

 

 

9,179

 

Contributions from restricted investments

 

(58

)

(36

)

Payments for cash surrender value life insurance

 

(92

)

(88

)

Net cash provided by (used in) investing activities

 

(34,587

)

6,646

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Borrowings on debt

 

2,000

 

2,104

 

Payments of principal on debt

 

(3,500

)

(4,904

)

Payments of statutory minimum taxes on stock options and restricted stock

 

(1,182

)

 

Dividend paid

 

(5,477

)

(4,093

)

Proceeds from exercise of common stock options

 

 

32

 

Excess tax benefit from stock based compensation

 

730

 

34

 

Payment for acquisition of non-controlling interest

 

(500

)

 

Net cash used in financing activities

 

(7,929

)

(6,827

)

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS

 

(34,727

)

5,848

 

Effect of foreign exchange rates on cash

 

(1,089

)

794

 

CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD

 

53,222

 

29,997

 

 

 

 

 

 

 

CASH & CASH EQUIVALENTS, END OF PERIOD

 

$

17,406

 

$

36,639

 

 

 

 

 

 

 

Non-cash Investing and Financing Activities

 

 

 

 

 

Property, plant & equipment additions included in accounts payable

 

$

23

 

$

195

 

 

See accompanying notes to the consolidated financial statements

 

7



Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Note 1 - Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Therefore, they do not include all information and footnote disclosure necessary for a complete presentation of Chase Corporation’s financial position, results of operations and cash flows, in conformity with generally accepted accounting principles.  Chase Corporation (the “Company,” “Chase,” “we,” or “us”) filed audited consolidated financial statements, which included all information and notes necessary for such complete presentation for the three years ended August 31, 2014 in conjunction with its 2014 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 periods ended February 28, 2015 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, 2014, which are contained in the Company’s 2014 Annual Report on Form 10-K.

 

The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring items) which are, in the opinion of management, necessary for a fair statement of the Company’s financial position as of February 28, 2015, the results of operations, comprehensive income and cash flows for the interim periods ended February 28, 2015 and 2014, and changes in equity for the interim period ended February 28, 2015.

 

The financial statements include the accounts of the Company and its wholly-owned subsidiaries.  All intercompany transactions and balances have been eliminated in consolidation.  The Company uses the US dollar as the reporting currency for financial reporting.  The financial position and results of operations of the Company’s UK-based operations are measured using the UK pound sterling as the functional currency and the financial position and results of operations of the Company’s operations based in France are measured using the euro as the functional currency.  Foreign currency translation gains and losses are determined using current exchange rates for monetary items and historical exchange rates for other balance sheet items and are recorded as a change in other comprehensive income.  Transaction gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of our foreign operations are included in Other (expense) / income on the consolidated statements of operations.

 

On January 30, 2015, the Company acquired two product lines from Henkel Corporation (the “Seller”). The product lines were acquired for a purchase price of $33,285, after initial working capital adjustments, subject to the finalization of purchase accounting, and excluding any acquisition related costs.  As part of this transaction, Chase acquired the Seller’s microspheres product line, sold under the Dualite® brand, located in Greenville, SC, as well as obtained exclusive distribution rights and intellectual property related to the Seller’s polyurethane dispersions product line, operating in the Elgin, IL location. We refer to these collectively as the specialty chemical product lines. Under the agreement, Chase entered into a ten-year facility operating lease at the Seller’s Greenville, SC location, and the Seller will perform certain manufacturing and application services for Chase for the next three years. The purchase was funded entirely with available cash on hand. Since the effective date for this acquisition, the financial results of the specialty chemical product lines have been included in the Company’s financial statements within the Company’s Industrial Materials operating segment.

 

8



Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

On October 31, 2014, the Company purchased the 50% non-controlling membership interest of NEPTCO JV LLC (the “JV”) owned by its now-former joint venture partner, an otherwise unrelated party. Because of the Company’s controlling financial interest, the JV’s assets, liabilities and results of operations have been consolidated within the Company’s consolidated financial statements since June 27, 2012, the date the Company acquired NEPTCO. The Company will continue to fully consolidate the assets, liabilities and results of operations of the JV, but will no longer record an offsetting amount for a non-controlling interest subsequent to October 31, 2014. The ($95) recorded in the Consolidated Statement of Operations as Net (gain) loss attributable to non-controlling interest for the six months ended February 28, 2015, represents the now-former joint venture partner’s share of the results of operations of the JV for the period from September 1, 2014 through October 31, 2014.

 

Note 2 — Recent Accounting Policies

 

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, which will replace most of the existing revenue recognition guidance under U.S. Generally Accepted Accounting Principles. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The ASU will be effective for the Company beginning September 1, 2017 (fiscal 2018), including interim periods in its fiscal year 2018, and allows for both retrospective and prospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this ASU on the Company’s consolidated financial position, results of operations or cash flows.

 

In February 2015, the FASB issued ASU No. 2015-2, “Consolidation (Topic 820): Amendments to the Consolidation Analysis.” ASU 2015-2 provides a revised consolidation model for all reporting entities to use in evaluating whether they should consolidate certain legal entities. All legal entities will be subject to reevaluation under this revised consolidation model. The revised consolidation model, among other things, (i) modifies the evaluation of whether limited partnerships and similar legal entities are VIEs or voting interest entities, (ii) eliminates the presumption that a general partner should consolidate a limited partnership, and (iii) modifies the consolidation analysis of reporting entities that are involved with VIEs through fee arrangements and related party relationships. ASU 2015-2 is effective for fiscal years, and interim reporting periods within those fiscal years, beginning after September 1, 2016 (fiscal 2017). We are still evaluating what impact, if any, this ASU on the Company’s consolidated financial position, results of operations or cash flows.

 

Note 3 — Inventories

 

Inventories consist of the following as of February 28, 2015 and August 31, 2014:

 

 

 

February 28, 2015

 

August 31, 2014

 

Raw materials

 

$

13,232

 

$

13,785

 

Work in process

 

7,434

 

7,359

 

Finished goods

 

12,710

 

10,395

 

Total Inventories

 

$

33,376

 

$

31,539

 

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

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 February 28,

 

Six Months Ended February 28,

 

 

 

2015

 

2014

 

2015

 

2014

 

Basic Earnings per Share

 

 

 

 

 

 

 

 

 

Net income attributable to Chase Corporation

 

$

4,066

 

$

4,520

 

$

10,971

 

$

13,295

 

Less: Allocated to participating securities

 

30

 

77

 

81

 

228

 

Net income available to common shareholders

 

$

4,036

 

$

4,443

 

$

10,890

 

$

13,067

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

9,065,511

 

8,942,045

 

9,057,738

 

8,940,075

 

Net income per share - Basic

 

$

0.45

 

$

0.50

 

$

1.20

 

$

1.46

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings per Share

 

 

 

 

 

 

 

 

 

Net income attributable to Chase Corporation

 

$

4,066

 

$

4,520

 

$

10,971

 

$

13,295

 

Less: Allocated to participating securities

 

30

 

75

 

81

 

223

 

Net income available to common shareholders

 

$

4,036

 

$

4,445

 

$

10,890

 

$

13,072

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

9,065,511

 

8,942,045

 

9,057,738

 

8,940,075

 

Additional dilutive common stock equivalents

 

159,474

 

224,325

 

155,693

 

218,452

 

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

9,224,985

 

9,166,370

 

9,213,431

 

9,158,527

 

Net income per share - Diluted

 

$

0.44

 

$

0.48

 

$

1.18

 

$

1.43

 

 

For the three and six months ended February 28, 2015, stock options to purchase 22,750 and 27,863 shares of common stock were outstanding, respectively, but were not included in the calculation of diluted income per share because their inclusion would be anti-dilutive.  For the three and six months ended February 28, 2014, stock options to purchase 25,969 and 18,222 shares of common stock were outstanding, respectively, but were not included in the calculation of diluted income per share because their inclusion would be anti-dilutive.  Included in the calculation of dilutive common stock equivalents are the unvested portion of restricted stock and stock options.

 

Note 5 — Stock-Based Compensation

 

In September 2013, the Board of Directors of the Company approved the fiscal year 2014 Long Term Incentive Plan (“2014 LTIP”) for the executive officers and other members of management.  The 2014 LTIP is an equity based plan with a grant date of September 1, 2013 and contains a performance and service based restricted stock grant of 7,529 shares in the aggregate, subject to adjustment, with a vesting date of August 31, 2016.  Based on the fiscal year 2014 financial results, 5,485 additional shares of restricted stock (total of 13,014 shares) were earned and granted subsequent to the end of fiscal year 2014 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 2014, the Board of Directors of the Company approved the fiscal year 2015 Long Term Incentive Plan (“2015 LTIP”) for the executive officers and other members of management.  The 2015 LTIP is an equity based plan with a grant date of September 1, 2014 and contains the following equity components:

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Restricted Shares — (a) performance and service based restricted stock grant of 6,993 shares in the aggregate, subject to adjustment based on fiscal 2015 results, with a vesting date of August 31, 2017.  Compensation expense is recognized on a ratable basis over the vesting period based on quarterly probability assessments with a vesting date of August 31, 2017; (b) time-based restricted stock grant of 8,132 shares in the aggregate, with a vesting date of August 31, 2017.  Compensation expense is recognized on a ratable basis over the vesting period.

 

Stock options — options to purchase 22,750 shares of common stock in the aggregate with an exercise price of $35.50 per share.  The options will vest in three equal annual installments beginning on August 31, 2015 and ending on August 31, 2017. Of the options granted, 7,438 will expire on August 31, 2024 and 15,312 will expire on September 1, 2024.  Compensation expense is recognized over the period of the award on an annual basis consistent with the vesting terms.

 

As part of their annual retainer, non-employee members of the Board of Directors receive a combined total of $194 of Chase Corporation common stock, in the form of restricted stock valued in conjunction with the start of the new year of Board service which generally coincides with the Company’s annual shareholder meeting.  The stock award vests one year from the date of grant.  In February 2015, non-employee members of the Board received a total grant of 5,361 shares of restricted stock for service for the period from January 31, 2015 through January 31, 2016.  The shares of restricted stock will vest at the conclusion of this service period.  Compensation is being recognized on a ratable basis over the twelve month vesting period.

 

Note 6 — Segment Data and Foreign Operations

 

The Company is organized into two operating segments, an Industrial Materials segment and a Construction Materials segment.  The segments are distinguished by the nature of the products and how they are delivered to their respective markets.

 

The Industrial Materials segment reflects specified products that are used in, or integrated into, another company’s product with demand typically dependent upon general economic conditions.  Industrial Materials products include insulating and conducting materials for wire and cable manufacturers, moisture protective coatings for electronics and printing services, laminated durable papers, laminates for the packaging and industrial laminate markets, pulling and detection tapes used in the installation, measurement and location of fiber optic cables and water and natural gas lines, cover tapes essential to delivering semiconductor components via tape and reel packaging, wind energy composite materials and elements and glass-based strength elements products, designed to allow fiber optic cables to withstand mechanical and environmental strain and stress and which we operated as a joint venture prior to October 31, 2014. Further, beginning January 30, 2015, the Industrial Materials segment includes microspheres, sold under the Dualite brand, and polyurethane dispersions; both obtained through acquisition, and included in the Company’s specialty chemical product line.

 

The Construction Materials segment comprises of typically project-oriented product offerings that are primarily sold and used as “Chase” branded products.  Construction Materials products include protective coatings for pipeline applications, coating and lining systems for use in liquid storage and containment applications, adhesives and sealants used in architectural and building envelope water proofing applications, high performance polymeric asphalt additives, and expansion and control joint systems for use in the transportation and architectural markets.

 

The following tables summarize financial information about the Company’s reportable segments:

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

 

 

Three Months Ended February 28,

 

Six Months Ended February 28,

 

 

 

2015

 

2014

 

2015

 

2014

 

Revenue from external customers

 

 

 

 

 

 

 

 

 

Industrial Materials

 

$

40,330

 

$

39,920

 

$

82,725

 

$

81,590

 

Construction Materials

 

11,974

 

11,271

 

25,512

 

23,784

 

Total

 

$

52,304

 

$

51,191

 

$

108,237

 

$

105,374

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

 

 

 

 

 

 

 

Industrial Materials

 

$

10,213

(a)

$

10,075

(c)

$

22,828

 

$

26,817

(c), (d)

Construction Materials

 

2,592

 

1,507

(c)

6,465

 

3,944

(c)

Total for reportable segments

 

12,805

 

11,582

 

29,293

 

30,761

 

Corporate and Common Costs

 

(6,549

)(b)

(4,682

)(c)

(12,268

)(b)

(10,297

)(c)

Total

 

$

6,256

 

$

6,900

 

$

17,025

 

$

20,464

 

 

 

 

 

 

 

 

 

 

 

Includes the following costs by segment:

 

 

 

 

 

 

 

 

 

Industrial Materials

 

 

 

 

 

 

 

 

 

Interest

 

$

225

 

$

237

 

$

455

 

$

484

 

Depreciation

 

976

 

998

 

1,953

 

1,981

 

Amortization

 

1,283

 

766

 

2,053

 

1,520

 

 

 

 

 

 

 

 

 

 

 

Construction Materials

 

 

 

 

 

 

 

 

 

Interest

 

$

45

 

$

48

 

$

89

 

$

104

 

Depreciation

 

280

 

286

 

569

 

577

 

Amortization

 

418

 

427

 

831

 

866

 

 


(a)         Includes $49 of expenses related to inventory step-up in fair value related to the January 2015 acquisition of the specialty chemical product lines

(b)         Includes $584 in expenses related to the January 2015 acquisition of the specialty chemical product lines

(c)          Includes the reclassification of $2,367, $640, $5,502 and $1,486 of Selling, general and administrative expense from Industrial Materials and Construction Materials segments, respectively, into Corporate and Common Costs for the second fiscal quarter of 2014 and year to date February 28, 2014, respectively. The reclassification reflects the methodology with which the Company internally reviews expenses in the current year

(d)         Includes $5,706 gain on sale of Insulfab product line, for the year to date period ended February 28, 2014

 

The Company’s products are sold world-wide.  For the quarters ended February 28, 2015 and 2014, sales from its operations located in the United Kingdom accounted for 14% and 12% of consolidated revenue, respectively.  In the fiscal year to date period, sales from its operations located in the United Kingdom accounted for 12% of total Company revenue compared to 10% in the same period in fiscal 2014.  No other foreign geographic area accounted for more than 10% of consolidated revenue for the three or six month periods ended February 28, 2015 or 2014.

 

 

 

February 28, 2015

 

August 31, 2014

 

Total assets

 

 

 

 

 

Industrial Materials

 

$155,878

 

$127,820

 

Construction Materials

 

50,269

 

50,972

 

Total for reportable segments

 

206,147

 

178,792

 

Corporate and Common Assets

 

34,541

 

66,753

 

Total

 

$240,688

 

$245,545

 

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

As of February 28, 2015 and August 31, 2014, the Company had long-lived assets (that will provide a future economic benefit beyond the current year or operating period, including buildings, equipment and leasehold improvements) of $4,064 and $4,349, respectively, located in the United Kingdom.  These balances exclude goodwill and intangibles of $9,873 and $9,924, as of February 28, 2015 and August 31, 2014, respectively, associated with its operations in the United Kingdom.

 

Note 7 — Goodwill and Other Intangibles

 

The changes in the carrying value of goodwill are as follows:

 

 

 

Industrial
Materials

 

Construction
Materials

 

Consolidated

 

Balance at August 31, 2014

 

$

27,528

 

$

10,752

 

$

38,280

 

Acquisition of specialty chemical product lines

 

6,371

 

 

 

6,371

 

Foreign currency translation adjustment

 

(495

)

(19

)

(514

)

Balance at February 28, 2015

 

$

33,404

 

$

10,733

 

$

44,137

 

 

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 identified several reporting units within each of its two operating segments that are used to evaluate the possible impairment of goodwill.  Goodwill impairment exists when the carrying amount 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 balances is required annually.  The amount and timing of any impairment charges based on these assessments require the estimation of future cash flows and the fair market value of the related assets based on management’s best estimates of certain key factors, including future selling prices and volumes, operating, raw material and energy costs, and various other projected operating and economic factors.  When testing, fair values of the reporting units and the related implied fair values of their respective goodwill are established using public company analysis and discounted cash flows. The Company evaluates the possible impairment of goodwill annually each fourth quarter and whenever events or circumstances indicate the carrying value of goodwill may not be recoverable.

 

Intangible assets subject to amortization consist of the following as of February 28, 2015 and August 31, 2014:

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

 

 

Weighted-Average

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

 

 

Amortization Period

 

Value

 

Amortization

 

Value

 

February 28, 2015

 

 

 

 

 

 

 

 

 

Patents and agreements

 

12.0 years

 

$

3,036

 

$

2,301

 

$

735

 

Formulas and technology

 

8.4 years

 

8,455

 

3,084

 

5,371

 

Trade names

 

5.9 years

 

7,242

 

3,601

 

3,641

 

Customer lists and relationships

 

9.3 years

 

55,481

 

16,091

 

39,390

 

 

 

 

 

$

74,214

 

$

25,077

 

$

49,137

 

 

 

 

 

 

 

 

 

 

 

August 31, 2014

 

 

 

 

 

 

 

 

 

Patents and agreements

 

11.9 years

 

$

3,104

 

$

2,281

 

$

823

 

Formulas and technology

 

9.1 years

 

5,849

 

2,851

 

2,998

 

Trade names

 

5.7 years

 

6,406

 

3,153

 

3,253

 

Customer lists and relationships

 

10.2 years

 

34,797

 

14,656

 

20,141

 

 

 

 

 

$

50,156

 

$

22,941

 

$

27,215

 

 

Aggregate amortization expense related to intangible assets for the six months ended February 28, 2015 and 2014 was $2,884 and $2,386, respectively.  Estimated amortization expense for the remainder of fiscal year 2015 and for future periods is as follows:

 

Years ending August 31,

 

 

 

2015 (remaining 6 months)

 

$

3,991

 

2016

 

7,848

 

2017

 

7,411

 

2018

 

7,180

 

2019

 

6,481

 

2020

 

5,613

 

 

 

$

38,524

 

 

Note 8 — Sale of Insulfab Product Line

 

On October 7, 2013, the Company sold substantially all of the property and assets, including intellectual property, comprising the Insulfab® product line, to an unrelated third party (“Buyer”).  The Insulfab product line is primarily focused on manufacturing high quality, engineered barrier laminates used in aerospace applications.  The sale proceeds of $7,394 were subject to certain post-closing adjustments based on the change in the final net book value compared to the bid date net book value.  In the quarter ending November 30, 2013, management determined these post-closing adjustments resulted in an increase in the sale proceeds of $2,516 based on the increase of inventory sold to the Buyer at closing.  This adjustment was settled and paid by the Buyer to the Company in the quarter ending February 28, 2014, net of amounts held in escrow.  The net proceeds from the sale are available for debt reduction, investment in the Company’s core businesses and future acquisitions.

 

This transaction resulted in a pre-tax book gain of $5,706 ($3,709 after-tax gain) which was recorded in the quarter ending November 30, 2013.  The portion of the sale price held in escrow of $739 is recorded as a current asset (Due from sale of product line) as of both February 28, 2015 and August 31, 2014, and is available to resolve any submitted claims or adjustments up to 18 months from the closing date of the Insulfab sale.

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Note 9 — Joint Venture

 

On October 31, 2014, the Company purchased the 50% non-controlling membership interest of NEPTCO JV LLC (the “JV”) owned by its now-former joint venture partner, an otherwise unrelated party. The purchase consideration is subject to certain contingent adjustments based on certain future events related to the JV. The purchase price, including these contingent adjustments, was not, nor will be, material to the Company. Because of the Company’s controlling financial interest, the JV’s assets, liabilities and results of operations have been consolidated within the Company’s consolidated financial statements since June 27, 2012, the date the Company acquired NEPTCO. The Company will continue to fully consolidate the assets, liabilities and results of operations of the JV, but will no longer record an offsetting amount for a non-controlling interest. The ($95) recorded in the Consolidated Statement of Operations as Net (gain) loss attributable to non-controlling interest for the six months ended February 28, 2015, represents the now-former joint venture partner’s share of the results of operations of the JV for the period from September 1, 2014 through October 31, 2014.

 

The Company accounted for the joint venture partner’s non-controlling interest in the JV under ASC Topic 810 “Consolidations” (“ASC 810”). Based on the criteria in ASC 810, the Company had determined that the JV qualified as a variable interest entity (“VIE”).

 

Under the JV agreement, which terminated with the Company’s October 2014 acquisition of the 50% outstanding non-controlling membership interest in the JV, the JV had agreed to purchase a minimum of 80% of its total glass fiber requirements from the now-former joint venture partner. Additionally, the JV agreed to purchase private-label products exclusively from an affiliate of the now-former joint venture partner; however, the JV was not subject to a minimum purchase requirement on private-label products. Purchases from the now-former joint venture partner totaled $332 for the period from September 1, 2014 through October 31, 2014 and $300 and $767 for the three and six month periods ended February 28, 2014, respectively. The JV had amounts due to the now-former joint venture partner of $385 and $394 at February 28, 2015 and August 31, 2014, respectively.

 

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 cashflows, litigation is inherently unpredictable. Therefore, judgments could be rendered or settlements entered, that could adversely affect the Company’s operating results or cash flows in a particular period. The Company routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where the Company assesses the likelihood of loss as probable.

 

Note 11 - Pensions and Other Post-Retirement Benefits

 

The components of net periodic benefit cost for the three and six months ended February 28, 2015 and 2014 are as follows:

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

 

 

Three Months Ended February 28,

 

Six Months Ended February 28,

 

 

 

2015

 

2014

 

2015

 

2014

 

Service cost

 

$

91

 

$

81

 

$

181

 

$

161

 

Interest cost

 

170

 

161

 

339

 

321

 

Expected return on plan assets

 

(153

)

(178

)

(306

)

(355

)

Amortization of prior service cost

 

1

 

1

 

2

 

2

 

Amortization of unrecognized loss

 

167

 

73

 

335

 

147

 

Net periodic benefit cost

 

$

276

 

$

138

 

$

551

 

$

276

 

 

When funding is required, the Company’s policy is to contribute amounts that are deductible for federal income tax purposes.  As of February 28, 2015, the Company has made contributions of $115 in the current fiscal year to fund its obligations under its pension plan, and plans to make the necessary contributions over the remainder of fiscal 2015 to ensure the qualified plan continues to be adequately funded given the current market conditions. The Company made contributions of $200 in the first six months of the prior year.

 

Note 12 — Fair Value Measurements

 

The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The Company uses a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

The Company utilizes the best available information in measuring fair value.  Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement.  The financial assets classified as Level 1 and Level 2 as of February 28, 2015 and August 31, 2014 represent investments that are restricted for use in a nonqualified retirement savings plan for certain key employees and directors.

 

The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of February 28, 2015 and August 31, 2014:

 

 

 

 

 

 

 

Fair value measurement category

 

 

 

Fair value
measurement date

 

Total

 

Quoted prices
in active
markets
(Level 1)

 

Significant other
observable inputs
(Level 2)

 

Significant
unobservable
inputs
(Level 3)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

Restricted investments

 

February 28, 2015

 

$

1,377

 

$

1,339

 

$

38

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Restricted investments

 

August 31, 2014

 

$

1,256

 

$

1,216

 

$

40

 

$

 

 

The following table presents the fair value of the Company’s long-term debt as of February 28, 2015 and August 31, 2014, which is recorded at its carrying value:

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

 

 

 

 

 

 

Fair value measurement category

 

 

 

Fair value
measurement date

 

Total

 

Quoted prices
in active
markets
(Level 1)

 

Significant other
observable inputs
(Level 2)

 

Significant
unobservable
inputs
(Level 3)

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

February 28, 2015

 

$

57,300

 

$

 

$

57,300

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term debt

 

August 31, 2014

 

$

58,800

 

$

 

$

58,800

 

$

 

 

The carrying value of the long-term debt approximates its fair value, as the monthly interest rate is set based on the movement of the underlying market rates.

 

Note 13 — Accumulated Other Comprehensive Income

 

The changes in accumulated other comprehensive income (loss), net of tax, were as follows:

 

 

 

Restricted
Investments

 

Change in Funded
Status of Pension
Plan

 

Foreign Currency
Translation
Adjustment

 

Total

 

Balance at August 31, 2014

 

$

209

 

$

(4,785

)

$

326

 

$

(4,250

)

 

 

 

 

 

 

 

 

 

 

Other comprehensive gains (losses) before reclassifications (1)

 

40

 

 

(2,909

)

(2,869

)

Reclassifications to net income of previously deferred (gains) losses (2)

 

(48

)

219

 

 

171

 

Other comprehensive income (loss)

 

(8

)

219

 

(2,909

)

(2,698

)

 

 

 

 

 

 

 

 

 

 

Balance at February 28, 2015

 

$

201

 

$

(4,566

)

$

(2,583

)

$

(6,948

)

 


(1)         Net of tax benefit of $22, $0, $0, respectively.

(2)         Net of tax expense of $26, tax benefit of $118, $0, respectively.

 

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 February 28,

 

Six Months Ended February 28,

 

Location of Gain (Loss) Reclassified from Accumulated Other

 

 

 

2015

 

2014

 

2015

 

2014

 

Comprehensive Income (Loss) into Income

 

Gains on Restricted Investments:

 

 

 

 

 

 

 

 

 

 

 

Realized gain on sale of restricted investments

 

$

(75

)

$

(32

)

$

(76

)

$

(37

)

Selling, general and administrative expenses

 

Tax expense (benefit)

 

26

 

11

 

27

 

13

 

 

 

Gain net of tax

 

$

(48

)

$

(21

)

$

(48

)

$

(24

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on Funded Pension Plan adjustments:

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior pension service costs and unrecognized losses

 

$

5

 

$

20

 

$

10

 

$

40

 

Cost of products and services sold

 

Amortization of prior pension service costs and unrecognized losses

 

163

 

54

 

326

 

108

 

Selling, general and administrative expenses

 

Tax expense (benefit)

 

(59

)

(26

)

(118

)

(52

)

 

 

Loss net of tax

 

$

109

 

$

48

 

$

219

 

$

96

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net loss reclassified for the period

 

$

62

 

$

27

 

$

171

 

$

72

 

 

 

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Note: Gains on Restricted Investments and losses on funded pension plan adjustments may not sum for the quarter end or year to date period due to rounding.

 

Note 14 — Acquisition of Specialty Chemical Product Lines

 

On January 30, 2015, the Company acquired two product lines from Henkel Corporation (the “Seller”). The product lines were acquired for a purchase price of $33,285, after initial working capital adjustments, and excluding any acquisition related costs.  As part of this transaction, which was completed to expand the products and service offerings of the Company, Chase acquired the Seller’s microspheres product line, sold under the Dualite brand, located in Greenville, SC, as well as obtained exclusive distribution rights and intellectual property related to the Seller’s polyurethane dispersions product line, operating in the Elgin, IL location. Under the agreement, Chase entered into a ten-year facility operating lease at the Seller’s Greenville, SC location, and the Seller will perform certain manufacturing and application services, at the Seller’s Elgin, IL location for Chase for the next three years. The purchase was funded entirely with available cash on hand.

 

Since the effective date for this acquisition, January 30, 2015, the financial results of the specialty chemical product lines, have been included in the Company’s financial statements within the Industrial Materials operating segment. The acquisition was accounted for as a business combination under ASC Topic 805, “Business Combinations.” In accordance with this accounting standard, the Company expensed $584 of acquisition related costs during both the three and six month periods ended February 28, 2015 to selling, general and administrative expenses.

 

Management is currently in the process of finalizing purchase accounting pending final valuation of customer relationships. The purchase price has been initially allocated to the acquired tangible and identifiable intangible assets assumed based on their fair values as of the date of the acquisition:

 

Assets & Liabilities

 

Amount

 

Inventory

 

$

610

 

Property, plant & equipment

 

1,064

 

Goodwill

 

6,371

 

Intangible assets

 

25,240

 

Total purchase price

 

$

33,285

 

 

The excess of the purchase price over the net tangible and intangible assets acquired resulted in goodwill of $6,371 that is largely attributable to the synergies and economies of scale from combining the operations and technologies of Chase and the two product lines, particularly as it pertains to the expansion of the Company’s product and service offerings, the established workforce, and marketing efforts. This goodwill is not deductible for income tax purposes.

 

All assets, including goodwill, acquired as part of the specialty chemical product lines are included in the Industrial Materials operating segment. Identifiable intangible assets purchased with this transaction are as follows:

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Intangible Asset

 

Amount

 

Useful life

 

Customer relationships

 

$

21,300

 

8 years

 

Technology

 

2,700

 

7 years

 

Trade name

 

910

 

7 years

 

Backlog

 

330

 

2 months

 

Total intangible assets

 

$

25,240

 

 

 

 

Supplemental Pro Forma Data

 

The following table presents the pro forma results of the Company for the three and six month periods ended February 28, 2015 and 2014, as though the specialty chemical product lines acquisition described above occurred on September 1, 2013. The actual revenue and expenses for the specialty chemical product lines acquisition are included in the Company’s fiscal 2015 consolidated results beginning on January 30, 2015. Revenue and net loss attributable to Chase Corporation for the specialty chemicals product lines since the acquisition date included in the consolidated statement of operations were $1,462 and $445, respectively, inclusive of the effects of the $584 in acquisition costs, $49 in sale of inventory step-up cost and additional amortization expense recognized as part of the transaction. The pro forma results include adjustments for the estimated amortization of intangibles, acquisition related costs, sale of inventory step-up cost and the income tax impact of the pro forma adjustments at the statutory rate of 35%. The following pro forma information is not necessarily indicative of the results that would have been achieved if the acquisition had been effective on September 1, 2013.

 

 

 

Three Months Ended February 28,

 

Six Months Ended February 28,

 

 

 

2015

 

2014

 

2015

 

2014

 

Revenue

 

$

55,873

 

$

56,291

 

$

116,766

 

$

114,929

 

Net income

 

4,955

 

4,923

 

12,329

 

13,405

 

Net income attributable to Chase Corporation

 

4,955

 

4,958

 

12,234

 

13,398

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders, per common and common equivalent share

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.54

 

$

0.55

 

$

1.34

 

$

1.47

 

Diluted earnings per share

 

$

0.53

 

$

0.53

 

$

1.32

 

$

1.44

 

 

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Table of Contents

 

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 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, 2014.

 

Overview

 

Revenue and operating income in the year to date period exceeded prior year results primarily due to increased demand, more favorable sales mix and additional sales generated by the January 30, 2015 acquisition of the specialty chemical product lines. Revenue for the current quarter increased over the same prior year period, but operating income for the quarterly period decreased from the prior year, primarily as a result of additional expenses recognized in the current quarter, in part related to the January 30, 2015 acquisition of the specialty chemical product lines. These acquisition related expenses also affected operating income for the year to date period, but to an overall lesser degree. These increases in cost were partially offset by our ongoing efforts with production facility consolidation, efficiency improvements and streamlining overhead costs.

 

Revenue from our Industrial Materials segment increased over the prior year periods primarily due to increased sales volume from our electronic coatings, pulling and detection, and fiber optic cable components products, as well as the inclusion of the specialty chemical product lines for one month of the current quarter. These increases were partially offset by a reduction in demand for wire and cable, durable paper products and cover tape products.

 

Revenue for our Construction Materials segment increased over the prior year periods primarily due to increased sales volume from our pipeline coatings and coating and linings systems products.  This segment saw increased demand for pipeline coatings products produced at our Rye, UK facility from continuing water infrastructure projects in the Middle East in the quarter and year to date periods ended February 28, 2015.

 

Our second fiscal quarter has historically generated lower sales for several of our product lines, particularly the seasonally affected domestic sales of our Construction Materials segment, especially compared to our third and fourth quarters.  During the remainder of the fiscal year, we will continue to focus on our key strategies, which include marketing and product development efforts, and a continued emphasis on identifying potential acquisition targets, as well as fully integrating the specialty chemical product lines acquired in the second quarter.

 

Our balance sheet remains strong, with cash on hand of $17,406,000 and a current ratio of 2.9 as of February 28, 2015.  The balance of our term debt was $57,300,000, including a $2,000,000 draw on our line of credit at the end of the second quarter. Given subsequent repayment of the draw, our $15,000,000 million line of credit is fully available as of March 31, 2015.

 

We have two reportable segments as summarized below:

 

Segment

 

Product Lines

 

Manufacturing Focus and Products

Industrial Materials

 

·        Wire and Cable

·        Electronic Coatings

·        Specialty Products

·        Pulling and Detection

·        Electronic Materials

·        Structural Composites

·        Fiber Optic Cable Components (JV) (1)

·        Specialty Chemical

 

Protective coatings and tape products, including insulating and conducting materials for wire and cable manufacturers; moisture protective coatings for electronics and printing services; laminated durable papers, packaging and industrial laminate products; pulling and detection tapes used in the installation, measurement and location of fiber optic cables and water and natural gas lines; cover tapes essential to delivering semiconductor components via tape and reel packaging; wind energy composite materials

 

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Table of Contents

 

 

 

Intermediates

 

elements; glass-based strength elements designed to allow fiber optic cables to withstand mechanical and environmental strain and stress; microspheres, sold under the Dualite® brand; and polyurethane dispersions.

 

 

 

 

 

Construction Materials

 

·        Pipeline

·        Bridge and Highway

·        Coating and Lining Systems

·        Building Envelope

 

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 water proofing applications; high-performance polymeric asphalt additives; and expansion and control joint systems for use in the transportation and architectural markets.

 


(1)         Through a 50% owned joint venture until October 31, 2014, when we purchased the non-controlling 50% interest.

 

Results of Operations

 

Revenue and Operating Profit by Segment are as follows (dollars in thousands):

 

 

 

Three Months Ended
February 28, 2015

 

% of
Total
Revenue

 

Three Months Ended
February 28, 2014

 

% of
Total
Revenue

 

Six Months Ended
February 28, 2015

 

% of
Total
Revenue

 

Six Months Ended
February 28, 2014

 

% of
Total
Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue from external customers

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial Materials

 

$

40,330

 

77

%

$

39,920

 

78

%

$

82,725

 

76

%

$

81,590

 

77

%

Construction Materials

 

11,974

 

23

%

11,271

 

22

%

25,512

 

24

%

23,784

 

23

%

Total

 

$

52,304

 

 

 

$

51,191

 

 

 

$

108,237

 

 

 

$

105,374

 

 

 

 

 

 

Three Months Ended
February 28, 2015

 

% of
Segment
Revenue

 

Three Months Ended
February 28, 2014

 

% of
Segment
Revenue

 

Six Months Ended
February 28, 2015

 

% of
Segment
Revenue

 

Six Months Ended
February 28, 2014

 

% of
Segment
Revenue

 

Income (loss) before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial Materials

 

$

10,213

(a)

25

%

$

10,075

(c)

25

%

$

22,828

 

28

%

$

26,817

(c), (d)

33

%

Construction Materials

 

2,592

 

22

%

1,507

(c)

13

%

6,465

 

25

%

3,944

(c)

17

%

Total for reportable segments

 

12,805

 

24

%

11,582

 

23

%

29,293

 

27

%

30,761

 

29

%

Corporate and Common Costs

 

(6,549

)(b)

 

 

(4,682

)(c)

 

 

(12,268

)(b)

 

 

(10,297

)(c)

 

 

Total

 

$

6,256

 

12

%

$

6,900

 

13

%

$

17,025

 

16

%

$

20,464

 

19

%

 


(a)         Includes $49 of expenses for inventory step-up in fair value related to the January 2015 acquisition of the specialty chemical product lines

(b)         Includes $584 in expenses related to the January 2015 acquisition of the specialty chemical product lines

(c)          Includes the reclassification of $2,367, $640, $5,502 and $1,486 of Selling, general and administrative expense from Industrial Materials and Construction Materials segments, respectively, into Corporate and Common Costs for the second fiscal quarter of 2014 and year to date February 28, 2014, respectively. The reclassification reflects the methodology with which the Company internally reviews expenses in the current year

(d)         Includes $5,706 gain on sale of Insulfab product line, for the year to date period ended February 28, 2014

 

Total Revenue

 

Total revenue increased $1,113,000 or 2% to $52,304,000 for the quarter ended February 28, 2015 compared to $51,191,000 in the same quarter of the prior year.  Total revenue increased $2,863,000 or 3% to $108,237,000 in the fiscal year to date period compared to $105,374,000 in the same period in fiscal 2014.

 

Revenue in our Industrial Materials segment increased $410,000 or 1% and $1,135,000 or 1% in the current quarter and year to date periods, respectively.  The increase in this segment compared to the prior year periods is primarily due to the following for the current quarter and year to date periods, respectively:  (a) our newly acquired specialty chemical product lines’ first full, but seasonally affected, month of sales totaling $1,462,000 (b) increased sales of $1,071,000 and $1,485,000 from our electronic coatings products resulting from higher sales volume domestically, as well as in Europe and Asia, including increased demand from the automotive and appliance markets; (c) increase sales of $606,000

 

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Table of Contents

 

and $1,407,000 from our pulling and detection products reflecting higher demand in product volume by the utility and telecom industries; and (d) increased sales of $631,000 and $821,000 from fiber optic cable components products.  These increases were partially offset by: (a) decreased sales volume of our wire and cable products in the current quarter and year to date periods of $2,083,000 and $2,200,000, respectively, reflecting reduced demand in the energy markets; (b) decreased sales volume for durable paper products of $412,000 and $1,154,000 for the current quarter and year to date periods, respectively; and (c) a decrease in cover tape product sales in the current quarter and year to date fiscal 2015 periods of $554,000 and $426,000, respectively.

 

Revenue from our Construction Materials segment increased $703,000 or 6% and $1,728,000 or 7% in the current quarter and year to date periods, respectively, compared to the same periods in the prior year.  Increases in sales from this segment were primarily due to a net increase in sales of $419,000 and $1,389,000 from our pipeline coatings products for the current quarter and year to date periods, respectively, over the same prior year periods. The net increase within pipeline coatings, for both the current quarter and year to date periods, was the result of increases in sales of our Rye, UK produced water infrastructure pipeline products sold into the Middle East, offset by period-over-period reductions in sales on domestically produced oil and gas pipeline products, which are sold primarily in the Americas. The segment also benefited from an increase in sales volume of its coating and lining systems products of $87,000 and $307,000 for the current quarter and year to date periods, respectively, over the prior year.

 

Cost of Products and Services Sold

 

Cost of products and services sold increased $284,000 or 1% to $34,235,000 for the quarter ended February 28, 2015 compared to $33,951,000 in the prior year quarter.  Cost of products and services sold decreased $714,000 or 1% to $68,715,000 in the fiscal year to date period compared to $69,429,000 in the same period in fiscal 2014.

 

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 February 28,

 

Six Months Ended February 28,

 

Cost of products and services sold

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Industrial Materials

 

64.5

%

64.7

%

63.0

%

64.8

%

Construction Materials

 

68.6

%

72.2

%

65.0

%

69.7

%

Total

 

65.5

%

66.3

%

63.5

%

65.9

%

 

Cost of products and services sold in our Industrial Materials segment was $26,022,000 and $52,128,000 in the current quarter and year to date periods compared to $25,817,000 and $52,850,000 in the comparable periods in the prior year.  Cost of products and services sold in our Construction Materials segment was $8,213,000 and $16,587,000 for the quarter and fiscal year to date periods ended February 28, 2015, respectively, compared to $8,134,000 and $16,579,000 in the same periods of the prior year.  As a percentage of revenue, cost of products and services sold in both segments decreased primarily due to product mix as we had decreased sales volume from our lower margin products within the segments.  We continue to closely monitor raw material pricing across all product lines in both segments to preserve margins.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased $1,994,000 or 20% to $11,924,000 for the quarter ended February 28, 2015 compared to $9,930,000 in the prior year quarter.  As a percentage of revenue, selling, general and administrative expenses increased to 23% in the current fiscal quarter compared to 19% in the prior year period.  Selling, general and administrative expenses increased $2,350,000 or 12%

 

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Table of Contents

 

to $22,719,000 in the fiscal year to date period compared to $20,369,000 in the same period in fiscal 2014.  For the current fiscal year to date period, selling, general and administrative expenses as a percentage of revenue increased to 21% compared to 19% in the same period in fiscal 2014.  The percentage increase for both the current fiscal quarter and year to date period compared to the prior year periods is primarily attributable to: (a) $584,000 in professional fees incurred related to the acquisition of the specialty chemical product lines; (b) an additional $493,000 in amortization expense recognized in the quarter and year to date periods associated with the intangible assets obtained as part of the acquisition; (c) increased international sales commission expenses of $375,000 and $661,000 over the prior year quarter and year to date periods, respectively, incurred related to increased revenue generated by those sales activities; (d) quarter over quarter decrease of $130,000 and year over year decrease of $142,000 in the capitalization of internal labor, most notably related to our multiyear companywide single ERP system rollout, which was substantively completed with regard to our previously existing locations in December 2014; and (e) increased pension periodic benefit costs of $138,000 in the current quarter against the same period in the prior year, and a $275,000 increase against the prior year to date period. The Company continues its emphasis on controlling operating costs, while maintaining an active mergers and acquisitions program, exploring new sales channels and staying focused on its key strategies.

 

Interest Expense

 

Interest expense decreased $15,000 or 5% to $270,000 for the quarter ended February 28, 2015 compared to $285,000 in the prior year quarter.  Interest expense decreased $44,000 or 7% to $544,000 for the fiscal year to date period compared to $588,000 in the same period in fiscal 2014.  The decrease in interest expense from the prior year period is a direct result of a reduction in our overall average debt balance through principal payments made from operating cash flow over the past year.

 

Gain on sale of product line

 

On October 7, 2013, we sold substantially all of our property and assets, including intellectual property, comprising the Insulfab product line, to an unrelated buyer.  This transaction resulted in a pre-tax book gain of $5,706,000, which was recorded in the six month period ended February 28, 2014.

 

Other Income (Expense)

 

Other income (expense) was an income of $381,000 in the quarter ended February 28, 2015 compared to an expense of $125,000 in the same period in the prior year, a difference of $506,000.  Other income (expense) was an income of $766,000 for the fiscal year to date period compared to an expense of $230,000 in the same period in the prior year, a difference of $996,000.  Other income (expense) primarily includes interest income and foreign exchange gains (losses) caused by changes in exchange rates on transactions or balances denominated in currencies other than the functional currency of our subsidiaries.  Income in the current quarter and year to date periods are primarily the result of sales made from our UK based operations, denominated in US dollars.

 

Income Taxes

 

The effective tax rate for the second quarter and the six month period ended February 28 was 35%, for both fiscal 2015 and fiscal 2014.

 

Non-controlling Interest

 

The income (loss) from non-controlling interest relates to a joint venture we had, prior to our October 2014 acquisition of the 50% outstanding non-controlling membership interest.  The joint venture between

 

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Table of Contents

 

the Company and its now-former joint venture partner (an otherwise unrelated party) was managed and operated on a day-to-day basis by the Company.

 

Net Income attributable to Chase Corporation

 

Net income attributable to Chase Corporation decreased $454,000 or 10% to $4,066,000 in the quarter ended February 28, 2015 compared to $4,520,000 in the prior year quarter.  The decrease in net income in the current quarter is primarily due to the previously mentioned acquisition related expenses, inclusive of both professional services fees and the increased amortization expense recognized as a result of intangibles acquired in the transaction.

 

Net income attributable to Chase Corporation decreased $2,324,000 or 17% to $10,971,000 for the fiscal year to date period compared to $13,295,000 in the same period in fiscal 2014.  The decrease in net income in the year to date period is primarily due to the $5,706,000 pre-tax gain on the Company’s Insulfab product line sold in October 2013 which significantly contributed to earnings and cash flows in the first half of the prior fiscal year, and which did not reoccur in the first half of fiscal 2015.  Additionally, year to date net income was reduced by the previously mentioned acquisition related expenses.

 

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Table of Contents

 

Other Important Performance Measures

 

We believe that EBITDA and Adjusted EBITDA are useful performance measures.  They are used by our executive management team and board of directors to measure operating performance, to allocate resources, to evaluate the effectiveness of our business strategies and to communicate with our board of directors and investors concerning our financial performance.  EBITDA and Adjusted EBITDA are non-GAAP financial measures.

 

We define EBITDA as follows:  net income attributable to Chase Corporation before interest expense from borrowings, income tax expense, depreciation expense from fixed assets, and amortization expense from intangible assets.  We define Adjusted EBITDA as EBITDA excluding costs and gains/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 plan, and other significant nonrecurring items.

 

The use of EBITDA and Adjusted EBITDA 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.  Our measurement of Adjusted EBITDA may not be comparable to similarly titled measures used by other companies.

 

The following unaudited table provides a reconciliation of net income attributable to Chase Corporation, the most directly comparable financial measure presented in accordance with U.S. GAAP, to EBITDA and Adjusted EBITDA for the periods presented:

 

 

 

Three Months Ended February 28,

 

Six Months Ended February 28,

 

 

 

2015

 

2014

 

2015