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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 May 31, 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

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

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 June 30, 2015 was 9,198,762.

 

 

 



Table of Contents

 

CHASE CORPORATION

INDEX TO FORM 10-Q

 

For the Quarter Ended May 31, 2015

 

Part I - FINANCIAL INFORMATION

 

 

 

 

 

Item 1 – Unaudited Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of May 31, 2015 and August 31, 2014

 

3

 

 

 

Consolidated Statements of Operations for the three and nine months ended May 31, 2015 and 2014

 

4

 

 

 

Consolidated Statements of Comprehensive Income for the three and nine months ended May 31, 2015 and 2014

 

5

 

 

 

Consolidated Statement of Equity for the nine months ended May 31, 2015

 

6

 

 

 

Consolidated Statements of Cash Flows for the nine months ended May 31, 2015 and 2014

 

7

 

 

 

Notes to Consolidated Financial Statements

 

8

 

 

 

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

 

21

 

 

 

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

 

Item 1 — Unaudited Financial Statements

 

CHASE CORPORATION

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

May 31,

 

August 31,

 

 

 

2015

 

2014

 

ASSETS

 

 

 

 

 

Current Assets:

 

 

 

 

 

Cash & cash equivalents

 

$

29,709

 

$

53,222

 

Accounts receivable, less allowance for doubtful accounts of $839 and $670

 

36,394

 

35,601

 

Inventories

 

33,055

 

31,539

 

Prepaid expenses and other current assets

 

2,690

 

2,437

 

Due from sale of product line

 

 

739

 

Deferred income taxes

 

2,188

 

2,315

 

Total current assets

 

104,036

 

125,853

 

 

 

 

 

 

 

Property, plant and equipment, net

 

42,627

 

44,085

 

 

 

 

 

 

 

Other Assets:

 

 

 

 

 

Goodwill

 

44,081

 

38,280

 

Intangible assets, less accumulated amortization of $27,063 and $22,941

 

46,966

 

27,215

 

Cash surrender value of life insurance

 

7,256

 

7,249

 

Restricted investments

 

1,449

 

1,256

 

Funded pension plan

 

1,091

 

962

 

Deferred income taxes

 

450

 

470

 

Other assets

 

144

 

175

 

 

 

$

248,100

 

$

245,545

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current Liabilities:

 

 

 

 

 

Accounts payable

 

$

15,362

 

$

15,121

 

Accrued payroll and other compensation

 

3,995

 

7,754

 

Accrued expenses

 

4,735

 

4,842

 

Accrued income taxes

 

1,425

 

1,377

 

Current portion of long-term debt

 

8,050

 

7,000

 

Total current liabilities

 

33,567

 

36,094

 

 

 

 

 

 

 

Long-term debt, less current portion

 

45,500

 

51,800

 

Deferred compensation

 

2,174

 

2,037

 

Accumulated pension obligation

 

10,626

 

10,418

 

Other liabilities

 

99

 

126

 

Accrued income taxes

 

1,049

 

 

Deferred income taxes

 

7,567

 

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; 9,198,762 shares at May 31, 2015 and 9,103,292 shares at August 31, 2014 issued and outstanding

 

920

 

910

 

Additional paid-in capital

 

14,653

 

13,620

 

Accumulated other comprehensive loss

 

(6,987

)

(4,250

)

Retained earnings

 

138,932

 

126,272

 

Chase Corporation stockholders’ equity

 

147,518

 

136,552

 

Non-controlling interest

 

 

938

 

Total equity

 

147,518

 

137,490

 

Total liabilities and equity

 

$

248,100

 

$

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 May 31,

 

Nine Months Ended May 31,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

Sales

 

$

64,102

 

$

56,973

 

$

170,772

 

$

161,040

 

Royalties and commissions

 

796

 

625

 

2,363

 

1,932

 

 

 

64,898

 

57,598

 

173,135

 

162,972

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

Cost of products and services sold

 

40,144

 

37,067

 

108,859

 

106,496

 

Selling, general and administrative expenses

 

12,125

 

10,518

 

34,844

 

30,887

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

12,629

 

10,013

 

29,432

 

25,589

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

(266

)

(278

)

(810

)

(866

)

Gain on sale of product line (Note 8)

 

 

 

 

5,706

 

Other income (expense)

 

(500

)

(10

)

266

 

(240

)

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

11,863

 

9,725

 

28,888

 

30,189

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

4,697

 

3,404

 

10,656

 

10,566

 

 

 

 

 

 

 

 

 

 

 

Net income

 

7,166

 

6,321

 

18,232

 

19,623

 

Net loss (gain) attributable to non-controlling interest

 

 

3

 

(95

)

(4

)

Net income attributable to Chase Corporation

 

$

7,166

 

$

6,324

 

$

18,137

 

$

19,619

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

Basic

 

$

0.78

 

$

0.69

 

$

1.98

 

$

2.16

 

Diluted

 

$

0.77

 

$

0.68

 

$

1.95

 

$

2.11

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

9,093,602

 

8,950,763

 

9,076,386

 

8,943,849

 

Diluted

 

9,245,953

 

9,165,482

 

9,216,731

 

9,161,343

 

 

 

 

 

 

 

 

 

 

 

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 May 31,

 

Nine Months Ended May 31,

 

 

 

2015

 

2014

 

2015

 

2014

 

Net income

 

$

7,166

 

$

6,321

 

$

18,232

 

$

19,623

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

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

 

11

 

(27

)

3

 

46

 

Change in funded status of pension plans, net of tax

 

224

 

48

 

443

 

144

 

Foreign currency translation adjustment

 

(274

)

130

 

(3,183

)

2,313

 

Total other comprehensive (loss) income

 

(39

)

151

 

(2,737

)

2,503

 

Comprehensive income

 

7,127

 

6,472

 

15,495

 

22,126

 

Comprehensive (income) loss attributable to non-controlling interest

 

 

3

 

(95

)

(4

)

Comprehensive income attributable to Chase Corporation

 

$

7,127

 

$

6,475

 

$

15,400

 

$

22,122

 

 

See accompanying notes to the consolidated financial statements

 

5



Table of Contents

 

CHASE CORPORATION

CONSOLIDATED STATEMENT OF EQUITY

NINE MONTHS ENDED MAY 31, 2015

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

 

 

 

 

Additional

 

Accumulated Other

 

 

 

Chase

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Comprehensive

 

Retained

 

Stockholders’

 

Non-controlling

 

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

 

29,785

 

3

 

(3

)

 

 

 

 

 

 

 

 

Amortization of restricted stock grants

 

 

 

 

 

629

 

 

 

 

 

629

 

 

 

629

 

Amortization of stock option grants

 

 

 

 

 

190

 

 

 

 

 

190

 

 

 

190

 

Exercise of stock options

 

144,038

 

15

 

2,143

 

 

 

 

 

2,158

 

 

 

2,158

 

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

 

 

 

 

 

285

 

 

 

 

 

285

 

(1,033

)

(748

)

Change in funded status of pension plan, net of tax of $239

 

 

 

 

 

 

 

443

 

 

 

443

 

 

 

443

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

(3,183

)

 

 

(3,183

)

 

 

(3,183

)

Net unrealized gain (loss) on restricted investments, net of tax of $1

 

 

 

 

 

 

 

3

 

 

 

3

 

 

 

3

 

Net income

 

 

 

 

 

 

 

 

 

18,137

 

18,137

 

95

 

18,232

 

Balance at May 31, 2015

 

9,198,762

 

$

920

 

$

14,653

 

$

(6,987

)

$

138,932

 

$

147,518

 

 

$

147,518

 

 

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

 

 

 

Nine Months Ended May 31,

 

 

 

2015

 

2014

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net income

 

$

18,232

 

$

19,623

 

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

 

4,238

 

4,278

 

Amortization

 

4,940

 

3,584

 

Cost of sale of inventory step-up

 

65

 

 

Provision on allowance for doubtful accounts

 

193

 

10

 

Stock based compensation

 

819

 

812

 

Realized gain on restricted investments

 

(79

)

(57

)

Decrease in cash surrender value life insurance

 

135

 

90

 

Excess tax benefit from stock based compensation

 

(730

)

(156

)

Pension settlement loss

 

177

 

 

Deferred taxes

 

(149

)

 

Increase (decrease) from changes in assets and liabilities

 

 

 

 

 

Accounts receivable

 

(1,529

)

(1,956

)

Inventories

 

(1,295

)

(2,649

)

Prepaid expenses & other assets

 

(143

)

(520

)

Accounts payable

 

426

 

1,018

 

Accrued compensation and other expenses

 

(3,414

)

(2,985

)

Accrued income taxes

 

1,842

 

(779

)

Deferred compensation

 

138

 

76

 

Net cash provided by operating activities

 

23,866

 

14,679

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Purchases of property, plant and equipment

 

(1,954

)

(3,460

)

Payments for acquisitions

 

(33,285

)

 

Cost to acquire intangible assets

 

(34

)

(105

)

Contingent purchase price paid for acquisition

 

 

(156

)

Proceeds from sale of fixed assets

 

 

14

 

Net proceeds from sale of product line

 

739

 

9,179

 

Contributions from restricted investments

 

(110

)

24

 

Payments for cash surrender value life insurance

 

(138

)

(137

)

Net cash provided by (used in) investing activities

 

(34,782

)

5,359

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Borrowings on debt

 

2,000

 

2,104

 

Payments of principal on debt

 

(7,250

)

(6,304

)

Dividend paid

 

(5,477

)

(4,093

)

Proceeds from exercise of common stock options

 

392

 

32

 

Payments of statutory minimum taxes on stock options and restricted stock

 

(1,182

)

(190

)

Excess tax benefit from stock based compensation

 

730

 

156

 

Payment for acquisition of non-controlling interest

 

(500

)

 

Net cash used in financing activities

 

(11,287

)

(8,295

)

 

 

 

 

 

 

(DECREASE) INCREASE IN CASH & CASH EQUIVALENTS

 

(22,203

)

11,743

 

Effect of foreign exchange rates on cash

 

(1,310

)

835

 

CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD

 

53,222

 

29,997

 

CASH & CASH EQUIVALENTS, END OF PERIOD

 

$

29,709

 

$

42,575

 

 

 

 

 

 

 

Non-cash Investing and Financing Activities

 

 

 

 

 

Common stock received for payment of stock option exercises

 

$

1,767

 

$

579

 

Property, plant & equipment additions included in accounts payable

 

$

99

 

$

59

 

Deferred tax assets and liabilities acquired from non-controlling interest

 

$

248

 

$

 

 

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 May 31, 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 May 31, 2015, the results of operations, comprehensive income and cash flows for the interim periods ended May 31, 2015 and 2014, and changes in equity for the interim period ended May 31, 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, 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, and obtained exclusive distribution rights and intellectual property related to the Seller’s polyurethane dispersions product line, operating in the Elgin, IL location. We refer to these collectively as the specialty chemical product lines. Under the agreement, Chase entered into a ten-year facility operating lease at the Seller’s Greenville, SC location.  The Seller will perform certain manufacturing and application services for Chase at the Seller’s Elgin, IL location for three years. 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. Purchase accounting was completed in the quarter ended May 31, 2015 with no material adjustments made to the initial amounts recorded at the end of the second fiscal quarter. Please see Note 14 to the Consolidated Financial Statements for additional information on the acquisition of the specialty chemical product lines.

 

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 continues to fully consolidate the assets, liabilities and results of operations of the JV, but no longer records an offsetting amount for a non-controlling interest 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 nine months ended May 31, 2015, represents the now-former joint venture partner’s share of the results of operations of the JV for the period from September 1, 2014 through October 31, 2014.

 

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 either retrospective or modified retrospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this ASU on the Company’s consolidated financial position, results of operations and cash flows.

 

In 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 will have on the Company’s consolidated financial position, results of operations and cash flows.

 

9



Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Note 3 — Inventories

 

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

 

 

 

May 31, 2015

 

August 31, 2014

 

Raw materials

 

$

13,605

 

$

13,785

 

Work in process

 

7,941

 

7,359

 

Finished goods

 

11,509

 

10,395

 

Total Inventories

 

$

33,055

 

$

31,539

 

 

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 May 31,

 

Nine Months Ended May 31,

 

 

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Chase Corporation

 

$

7,166

 

$

6,324

 

$

18,137

 

$

19,619

 

Less: Allocated to participating securities

 

60

 

106

 

141

 

333

 

Net income available to common shareholders

 

$

7,106

 

$

6,218

 

$

17,996

 

$

19,286

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

9,093,602

 

8,950,763

 

9,076,386

 

8,943,849

 

Net income per share - Basic

 

$

0.78

 

$

0.69

 

$

1.98

 

$

2.16

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to Chase Corporation

 

$

7,166

 

$

6,324

 

$

18,137

 

$

19,619

 

Less: Allocated to participating securities

 

59

 

103

 

139

 

325

 

Net income available to common shareholders

 

$

7,107

 

$

6,221

 

$

17,998

 

$

19,294

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

9,093,602

 

8,950,763

 

9,076,386

 

8,943,849

 

Additional dilutive common stock equivalents

 

152,351

 

214,719

 

140,345

 

217,494

 

Diluted weighted average shares outstanding

 

9,245,953

 

9,165,482

 

9,216,731

 

9,161,343

 

Net income per share - Diluted

 

$

0.77

 

$

0.68

 

$

1.95

 

$

2.11

 

 

For the three and nine months ended May 31, 2015, stock options to purchase 15,169 and 22,750 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 nine months ended May 31, 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.

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

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:

 

Restricted Shares — (a) 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; (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.

 

During the quarter ended May 31, 2015, an additional 16,000 restricted shares were issued to non-executive members of management; 15,000 with a vesting date of April 16, 2020 and 1,000 with a vesting date of January 31, 2018. Compensation expense is being recognized on a ratable basis over the vesting period.

 

Note 6 — Segment Data & Foreign Operations

 

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

 

The Industrial Materials segment 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, and wind energy composite materials and elements. This segment also includes 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

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

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 is composed of typically project-oriented product offerings that are primarily sold and used as “Chase” branded products.  Construction Materials products include protective coatings for pipeline applications, coating and lining systems for use in liquid storage and containment applications, adhesives and sealants used in architectural and building envelope 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 information about the Company’s reportable segments:

 

 

 

Three Months Ended May 31,

 

Nine Months Ended May 31,

 

 

 

2015

 

2014

 

2015

 

2014

 

Revenue

 

 

 

 

 

 

 

 

 

Industrial Materials

 

$

47,288

 

$

42,678

 

$

130,013

 

$

124,268

 

Construction Materials

 

17,610

 

14,920

 

43,122

 

38,704

 

Total

 

$

64,898

 

$

57,598

 

$

173,135

 

$

162,972

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

 

 

 

 

 

 

Industrial Materials

 

$

13,129

(a)

$

11,048

(c)

$

35,957

(a)

$

37,792

(c),(d)

Construction Materials

 

5,586

 

4,109

(c)

12,051

 

8,061

(c)

Total for reportable segments

 

18,715

 

15,157

 

48,008

 

45,853

 

Corporate and Common Costs

 

(6,852

)

(5,432

)(c)

(19,120

)(b)

(15,664

)(c)

Total

 

$

11,863

 

$

9,725

 

$

28,888

 

$

30,189

 

 

 

 

 

 

 

 

 

 

 

Includes the following costs by segment:

 

 

 

 

 

 

 

 

 

Industrial Materials

 

 

 

 

 

 

 

 

 

Interest

 

$

235

 

$

225

 

$

690

 

$

709

 

Depreciation

 

959

 

990

 

2,912

 

2,971

 

Amortization

 

1,647

 

771

 

3,700

 

2,291

 

 

 

 

 

 

 

 

 

 

 

Construction Materials

 

 

 

 

 

 

 

 

 

Interest

 

$

31

 

$

53

 

$

120

 

$

157

 

Depreciation

 

326

 

289

 

895

 

866

 

Amortization

 

409

 

427

 

1,240

 

1,293

 

 


(a)         Includes $16 and $65 of expenses for the three months and nine months ended May 31, 2015, respectively, 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 $2,113, $1,326, $7,542 and $2,820 of expenses from Industrial Materials and Construction Materials segments, respectively, resulting in a net increase in Corporate and Common Costs for the third fiscal quarter of 2014 and the year to date period ended May 31, 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 May 31, 2014

 

The Company’s products are sold world-wide.  For the quarters ended May 31, 2015 and 2014, sales from its operations located in the United Kingdom accounted for 15% and 11% of total Company revenue, respectively.  In the fiscal year to date period, sales from its operations located in the United Kingdom accounted for 13% 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 and nine month periods ended May 31, 2015 and 2014.

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Total assets for the Company’s reportable segments as of May 31, 2015 and August 31, 2014:

 

 

 

May 31, 2015

 

August 31, 2014

 

Total assets

 

 

 

 

 

Industrial Materials

 

$

151,964

 

$

127,820

 

Construction Materials

 

48,639

 

50,972

 

Total for reportable segments

 

200,603

 

178,792

 

Corporate and Common Assets

 

47,497

 

66,753

 

Total

 

$

248,100

 

$

245,545

 

 

As of May 31, 2015 and August 31, 2014, the Company had long-lived assets (that provide future economic benefit beyond the current year or operating period, including buildings, equipment and leasehold improvements) of $3,870 and $4,349, respectively, located in the United Kingdom.  These balances exclude goodwill and intangibles of $9,504 and $9,924, as of May 31, 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

 

(550

)

(20

)

(570

)

Balance at May 31, 2015

 

$

33,349

 

$

10,732

 

$

44,081

 

 

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 forecasting of future cash flows and the fair market value of the related assets based on management’s best forecast 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.

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

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

 

 

 

Weighted-Average

 

Gross Carrying

 

Accumulated

 

Net Carrying

 

 

 

Amortization Period

 

Value

 

Amortization

 

Value

 

May 31, 2015

 

 

 

 

 

 

 

 

 

Patents and agreements

 

12.1 years

 

$

2,956

 

$

2,315

 

$

641

 

Formulas and technology

 

8.4 years

 

8,446

 

3,312

 

5,134

 

Trade names

 

5.9 years

 

7,235

 

3,859

 

3,376

 

Customer lists and relationships

 

9.3 years

 

55,392

 

17,577

 

37,815

 

 

 

 

 

$

74,029

 

$

27,063

 

$

46,966

 

 

 

 

 

 

 

 

 

 

 

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 nine months ended May 31, 2015 and 2014 was $4,940 and $3,584, respectively.  Estimated amortization expense for the remainder of fiscal year 2015 and for the next five years is as follows:

 

Years ending August 31,

 

 

 

2015 (remaining 3 months)

 

$

1,957

 

2016

 

7,840

 

2017

 

7,403

 

2018

 

7,172

 

2019

 

6,473

 

2020

 

5,605

 

 

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 ended 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 was recorded as a current asset (Due from sale of product line) as of August 31, 2014 and was available to resolve any submitted claims or adjustments up to 18 months from the closing date of the Insulfab sale. The escrow was released and the Company received the full $739 during the quarter ended May 31, 2015.

 

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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 continues to fully consolidate the assets, liabilities and results of operations of the JV, but no longer records an offsetting amount for a non-controlling interest. The ($95) recorded in the Consolidated Statement of Operations as Net (gain) loss attributable to non-controlling interest for the nine months ended May 31, 2015, represents the now-former joint venture partner’s share of the results of operations of the JV for the period from September 1, 2014 through October 31, 2014.

 

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 $383 and $1,150 for the three and nine month periods ended May 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 forecast of the ultimate loss in situations where the Company assesses the likelihood of loss as probable.

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Note 11 - Pensions and Other Post Retirement Benefits

 

The components of net periodic benefit cost for the three and nine months ended May 31, 2015 and 2014 are as follows:

 

 

 

Three Months Ended May 31,

 

Nine Months Ended May 31,

 

 

 

2015

 

2014

 

2015

 

2014

 

Service cost

 

$

91

 

$

81

 

$

272

 

$

242

 

Interest cost

 

170

 

161

 

509

 

482

 

Expected return on plan assets

 

(153

)

(178

)

(459

)

(533

)

Amortization of prior service cost

 

1

 

1

 

3

 

3

 

Amortization of unrecognized loss

 

167

 

73

 

502

 

220

 

Settlement loss

 

177

 

 

177

 

 

Net periodic benefit cost

 

$

453

 

$

138

 

$

1,004

 

$

414

 

 

When funding is required, the Company’s policy is to contribute amounts that are deductible for federal income tax purposes.  As of May 31, 2015, the Company has made contributions of $214 in the current fiscal year to fund its obligations under its pension plans, and plans to make the necessary contributions over the remainder of fiscal 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 nine months of the prior year.

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

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 as of May 31, 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 May 31, 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

 

May 31, 2015

 

$

1,449

 

$

1,413

 

$

36

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

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 May 31, 2015 and August 31, 2014, which is recorded at its carrying value:

 

 

 

 

 

 

 

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

 

May 31, 2015

 

$

53,550

 

$

 

$

53,550

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

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)

 

54

 

 

(3,183

)

(3,129

)

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

 

(51

)

443

 

 

392

 

Other comprehensive income (loss)

 

3

 

443

 

(3,183

)

(2,737

)

Balance at May 31, 2015

 

$

212

 

$

(4,342

)

$

(2,857

)

$

(6,987

)

 


(1)         Net of tax benefit of $29, $0, $0, respectively.

(2)         Net of tax expense of $28, tax benefit of $239, $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 May 31,

 

Nine Months Ended May 31,

 

Location of Gain (Loss) Reclassified from Accumulated

 

 

 

2015

 

2014

 

2015

 

2014

 

Other Comprehensive Income (Loss) into Income

 

Gains on Restricted Investments:

 

 

 

 

 

 

 

 

 

 

 

Realized gain on sale of restricted investments

 

$

(3

)

$

(20

)

$

(79

)

$

(57

)

Selling, general and administrative expenses

 

Tax expense (benefit)

 

1

 

7

 

28

 

20

 

 

 

Gain net of tax

 

$

(2

)

$

(13

)

$

(51

)

$

(37

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on Funded Pension Plan adjustments:

 

 

 

 

 

 

 

 

 

 

 

Amortization of prior pension service costs and unrecognized losses

 

$

5

 

$

20

 

$

16

 

$

60

 

Cost of products and services sold

 

Amortization of prior pension service costs and unrecognized losses

 

163

 

54

 

489

 

162

 

Selling, general and administrative expenses

 

Pension settlement costs

 

177

 

 

177

 

 

Selling, general and administrative expenses

 

Tax expense (benefit)

 

(121

)

(26

)

(239

)

(78

)

 

 

Loss net of tax

 

$

224

 

$

48

 

$

443

 

$

144

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net loss reclassified for the period

 

$

222

 

$

35

 

$

392

 

$

107

 

 

 

 

Note 14 — Acquisition of Specialty Chemical Intermediates 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 working capital adjustments 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, and obtained exclusive distribution rights and intellectual property related to the Seller’s polyurethane dispersions product line, operating in the Elgin, IL location. Under the agreement, Chase entered into a ten-year facility operating lease at the Seller’s Greenville, SC location. The Seller will perform certain manufacturing and application services for Chase at the Seller’s Elgin, IL location for 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

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

expensed $584 of acquisition-related costs during the nine-month period ended May 31, 2015 to selling, general and administrative expenses.

 

Purchase accounting was completed in the quarter ended May 31, 2015 with no material adjustments made to the initial amounts recorded at the end of the second fiscal quarter. 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

 

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:

 

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

 

 

 

 

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Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Supplemental Pro Forma Data

 

The following table presents the pro forma results of the Company for the three month period ended May 31, 2014 and nine month periods ended May 31, 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 gain attributable to Chase Corporation for the specialty chemicals product lines since the acquisition date included in the consolidated statement of operations are $7,236 and $204, respectively, inclusive of the effects of the $584 in acquisition costs, $65 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 May 31,

 

Nine Months Ended May 31,

 

 

 

2014

 

2015

 

2014

 

Revenue

 

$

63,553

 

$

181,664

 

$

178,482

 

Net Income

 

$

7,035

 

$

19,655

 

20,439

 

Net income attributable to Chase Corporation

 

$

7,038

 

$

19,560

 

$

20,436

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

Basic earnings per share

 

$

0.78

 

$

2.13

 

$

2.25

 

Diluted earnings per share

 

$

0.76

 

$

2.10

 

$

2.20

 

 

Note 15 — Subsequent events

 

In June 2015, subsequent to the third fiscal quarter, Chase entered into an agreement to sell certain assets of its structural composites product line. This transaction is conditional upon the execution of a definitive asset purchase agreement and certain other deliverables including the transfer of tangible assets and intellectual property. It is anticipated that this transaction will close sometime in the fourth quarter of fiscal 2015 or the first quarter of fiscal 2016, if these conditions are met. The Company has determined the net book value of the assets anticipated to be sold are immaterial to the financial statements, and that these assets will qualify for held for sale disclosure under ASC Topic 360, “Property, Plant and Equipment” for subsequent  periods.

 

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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 both the quarter and year to date periods exceeded prior year results as the current year has benefited from the first four months of sales of our newly acquired specialty chemical product lines, as well as overall increased demand for our legacy product lines and a favorable sales mix.  Net income for the quarter ended May 31, 2015 exceeded prior year results. However, given the significant contribution to earnings provided by the nonrecurring sale of the Insulfab product line in the prior year period, year to date net income did not exceed the prior year.

 

Quarter to date and year to date revenue from our Industrial Materials segment increased over the prior year as a result of continued high demand for our electronic coatings and pulling and detection products and the first four months of operation for our newly acquired specialty chemicals product lines. These increased sales in the year to date period were partially offset by a reduction in demand for wire and cable and durable paper products.

 

Revenue for our Construction Materials segment exceeded the prior year in both the quarter and year to date periods. This was primarily driven by the continued increased demand for pipeline coatings products produced at our Rye, UK facility for water infrastructure projects in the Middle East. These have been on-going since the second quarter of the prior year.   Additionally, we observed increased demand for our building envelope products. These increases were partially offset in the current quarter and the year to date periods by decreased sales of our coating and lining systems and bridge and highway products.

 

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.

 

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 Intermediates

 

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 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 waterproofing 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.

 

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Table of Contents

 

Results of Operations

 

Revenue and Operating Profit by Segment are as follows (Dollars in Thousands):

 

 

 

Three Months Ended
May 31, 2015

 

% of
Total
Revenue

 

Three Months Ended
May 31, 2014

 

% of
Total
Revenue

 

Nine Months Ended
May 31, 2015

 

% of
Total
Revenue

 

Nine Months Ended
May 31, 2014

 

% of
Total
Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial Materials

 

$

47,288

 

73

%

$

42,678

 

74

%

$

130,013

 

75

%

$

124,268

 

76

%

Construction Materials

 

17,610

 

27

%

14,920

 

26

%

43,122

 

25

%

38,704

 

24

%

Total

 

$

64,898

 

 

 

$

57,598

 

 

 

$

173,135

 

 

 

$

162,972

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended
May 31, 2015

 

% of
Segment
Revenue

 

Three Months Ended
May 31, 2014

 

% of
Segment
Revenue

 

Nine Months Ended
May 31, 2015

 

% of
Segment
Revenue

 

Nine Months Ended
May 31, 2014

 

% of
Segment
Revenue

 

Income before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Industrial Materials

 

$

13,129

(a)

28

%

$

11,048

(c)

26

%

$

35,957

(a)

28

%

$

37,792

(c), (d)

30

%

Construction Materials

 

5,586

 

32

%

4,109

(c)

28

%

12,051

 

28

%

8,061

(c)

21

%

Total for reportable segments

 

18,715

 

29

%

15,157

 

26

%

48,008

 

28

%

45,853

 

28

%

Corporate and Common Costs

 

(6,852

)

 

 

(5,432

)(c)

 

 

(19,120

)(b)

 

 

(15,664

)(c)

 

 

Total

 

$

11,863

 

18

%

$

9,725

 

17

%

$

28,888

 

17

%

$

30,189

 

19

%

 


(a)              Includes $16 and $65 of expenses for the three months and nine months ended May 31, 2015, respectively, 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 $2,113, $1,326, $7,542 and $2,820 of expenses from Industrial Materials and Construction Materials segments, respectively, resulting in a net increase in Corporate and Common Costs for the third fiscal quarter of 2014 and the year to date period ended May 31, 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 May 31, 2014

 

Total Revenue

 

Total revenue increased $7,300,000 or 13% to $64,898,000 for the quarter ended May 31, 2015 compared to $57,598,000 in the same quarter of the prior year.  Total revenue increased $10,163,000 or 6% to $173,135,000 in the fiscal year to date period compared to $162,972,000 in the same period in fiscal 2014.

 

Revenue in our Industrial Materials segment increased $4,610,000 or 11% in the current quarter compared to the prior year quarter and $5,745,000 or 5% in the year to date period over the prior year.  The increase in this segment compared to the prior year periods was primarily due to the following:  (a) our newly acquired specialty chemical product lines’ first full quarter of sales totaling $5,774,000, with total sales since the January 30, 2015 acquisition date of $7,236,000; (b) increased sales of $418,000 and $1,943,000 from our electronic coatings products resulting from higher sales volume in the Americas, with favorable demand in automotive applications, as well as continued strength in Europe and Asia; and (c) increased sales of $841,000 and $2,249,000 from our pulling and detection products reflecting continuing higher demand in product volume by the utility and telecom industries.  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 $1,617,000 and $3,813,000, respectively, reflecting reduced demand in energy related applications; (b) decreased sales volume for durable paper products of $55,000 and $1,208,000 for the current quarter and year to date periods, respectively; and (c) a decrease in specialty materials product sales in the current quarter and year to date fiscal 2015 periods of $171,000 and $500,000, respectively.

 

Revenue from our Construction Materials segment increased $2,690,000 or 18% in the current quarter compared to the prior year quarter and increased $4,418,000 or 11% compared to the prior year to date

 

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Table of Contents

 

period.  The increase from our Construction Materials segment compared to the prior year quarter and year to date period was primarily due to increased sales volumes of $2,824,000 and $4,208,000, respectively, in pipeline coating products. Net increases in pipeline coating product sales resulted from increased sales of products produced at our Rye, UK facility to meet continued heavy Middle East water infrastructure project demand, partially offset by a decrease in demand for domestically produced pipeline coatings products, which are primarily sold into the oil and gas pipeline industries. This net increase was partially offset by reduced sales of $749,000 and $442,000 from our coating and lining systems products for the quarter and year to date periods as compared to the prior fiscal year, respectively.

 

Cost of Products and Services Sold

 

Cost of products and services sold increased $3,077,000 or 8% to $40,144,000 for the quarter ended May 31, 2015 compared to $37,067,000 in the prior year quarter.  Cost of products and services sold increased $2,363,000 or 2% to $108,859,000 in the fiscal year to date period compared to $106,496,000 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 May 31,

 

Nine Months Ended May 31,

 

Cost of products and services sold

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

Industrial Materials

 

61.9

%

64.1

%

62.6

%

64.5

%

Construction Materials

 

61.8

%

65.2

%

63.7

%

68.0

%

Total

 

61.9

%

64.4

%

62.9

%

65.3

%

 

Cost of products and services sold in our Industrial Materials segment was $29,263,000 and $81,391,000 in the current quarter and year to date periods compared to $27,343,000 and $80,193,000 in the comparable periods in the prior year.  Cost of products and services sold in our Construction Materials segment was $10,881,000 and $27,468,000 for the quarter and fiscal year to date periods ended May 31, 2015, respectively, compared to $9,724,000 and $26,303,000 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 $1,607,000 or 15% to $12,125,000 for the quarter ended May 31, 2015 compared to $10,518,000 in the prior year quarter. As a percentage of revenue, selling, general and administrative expenses increased to 19% in the current fiscal quarter compared to 18% in the prior year period.  Selling, general and administrative expenses increased $3,957,000 or 13% to $34,844,000 in the fiscal year to date period compared to $30,887,000 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 20% 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 acquisition related costs recognized in the nine month period ended May 31, 2015 for our January 30, 2015 acquisition of the specialty chemical product lines; (b) increased amortization expense on acquired intangible assets of $858,000 and $1,356,000 for the quarter and year to date periods ended May 31, 2015, respectively, primarily attributable to the specialty chemical product lines acquisition in the second quarter; (c) increased international sales commission expenses of $176,000 and $837,000 over the prior year quarter and year to date periods, respectively, incurred related to increased revenue generated by sales in those regions; (d) increased pension costs of

 

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Table of Contents

 

$315,000 in the current quarter against the same period in the prior year, and a $590,000 increase against the prior year to date period, with both current year periods being inclusive of a $177,000 settlement loss charge; and (e) a quarter over quarter decrease of $23,000 and year over year decrease of $97,000 in the capitalization of internal labor, most notably related to our multiyear companywide single ERP system rollout, which was substantially completed as to our previously existing locations in December 2014. These increases in cost were partially offset by our ongoing efforts with production facility consolidation, efficiency improvements and streamlining overhead costs.

 

Interest Expense

 

Interest expense decreased $12,000 to $266,000 for the quarter ended May 31, 2015 compared to $278,000 in the prior year quarter.  Interest expense decreased $56,000 to $810,000 for the fiscal year to date period compared to $866,000 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 debt balance through required 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 nine month period ended May 31, 2014.

 

Other Income (Expense)

 

Other income (expense) was an expense of $500,000 in the quarter ended May 31, 2015 compared to an expense of $10,000 in the same period in the prior year, a difference of $490,000.  Other income (expense) was an income of $266,000 for the fiscal year to date period compared to an expense of $240,000 in the same period in the prior year, a difference of $506,000.  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 Taxes

 

The effective tax rates for the third quarter and nine month period ended May 31, 2015 were 39.6 % and 36.9%, respectively, and 35% for both the quarter and year to date period ended May 31, 2014. The higher than historically observed effective tax rates for the quarter and year-to-date periods ended May 31, 2015 were due primarily to the finalization of our state and federal tax returns for the year ended August 31, 2014, which were filed during the three months ended May 31, 2015.   A federal deduction return to provision true-up resulted from the inclusion of the one-time gain on the sale of the Insulfab product line in the calculation of our domestic production deduction and resulted in an additional $355,000 tax expense in both the third quarter and year-to-date period.  Future blended effective tax rates are anticipated to be closer to historically observed rates.

 

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 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.

 

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Table of Contents

 

Net Income attributable to Chase Corporation

 

Net income attributable to Chase Corporation increased $842,000 or 13% to $7,166,000 in the quarter ended May 31, 2015 compared to $6,324,000 in the prior year quarter.  The increase in net income in the current quarter is primarily due to increased sales volume, including increases in revenue and earnings provided by the recently acquired specialty chemical product lines, and a favorable product sales mix which drove improved margins in the current quarter.

 

Net income attributable to Chase Corporation decreased $1,482,000 or 8% to $18,137,000 for the fiscal year to date period compared to $19,619,000 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 ($3,709,000 after-tax) gain on the Company’s Insulfab product line sold in October 2013 which significantly contributed to earnings and cash flows in the first nine months of the prior fiscal year, and which did not reoccur in fiscal 2015.

 

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.  The Company believes EBITDA and Adjusted EBITDA are commonly used by financial analysts and others in the industries in which the Company operates and, thus, provide useful information to investors.  EBITDA and Adjusted EBITDA 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 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 May 31,

 

Nine Months Ended May 31,

 

 

 

2015

 

2014

 

2015

 

2014

 

Net income attributable to Chase Corporation

 

$

7,166,000

 

$

6,324,000

 

$

18,137,000

 

$

19,619,000

 

Interest expense

 

266,000

 

278,000

 

810,000

 

866,000

 

Income taxes

 

4,697,000

 

3,404,000

 

10,656,000

 

10,566,000

 

Depreciation expense

 

1,426,000

 

1,426,000

 

4,238,000

 

4,278,000

 

Amortization expense

 

2,056,000

 

1,198,000

 

4,940,000

 

3,584,000

 

EBITDA

 

$

15,611,000

 

$

12,630,000

 

$

38,781,000

 

$

38,913,000