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EX-32.2 - EX-32.2 - CHASE CORPccf-20161130ex3229f4183.htm
EX-32.1 - EX-32.1 - CHASE CORPccf-20161130ex321d08cf3.htm
EX-31.2 - EX-31.2 - CHASE CORPccf-20161130ex3123c191d.htm
EX-31.1 - EX-31.1 - CHASE CORPccf-20161130ex311691d59.htm
EX-10.10.3 - EX-10.10.3 - CHASE CORPccf-20161130ex1010389d2.htm
EX-10.10.2 - EX-10.10.2 - CHASE CORPccf-20161130ex101027f89.htm
EX-10.10.1 - EX-10.10.1 - CHASE CORPccf-20161130ex101016ae7.htm
EX-10.1 - EX-10.1 - CHASE CORPccf-20161130ex10192addf.htm

 

 

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 November 30, 2016

Commission File Number: 1-9852

 

CHASE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

 

 

Massachusetts

 

11-1797126

(State or other jurisdiction of incorporation
of organization)

 

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

 

295 University Avenue, Westwood, Massachusetts 02090

(Address of Principal Executive Offices, Including Zip Code)

 

(781) 332-0700

(Registrant’s Telephone Number, Including Area Code)

 

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

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES ☒  NO ☐

 

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

 

 

 

Large accelerated filer ☐

Accelerated filer ☒

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

Smaller reporting company ☐

 

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

The number of shares of Common Stock outstanding as of December 31, 2016 was 9,344,559

 

 

 

 

 


 

CHASE CORPORATION

INDEX TO FORM 10-Q

 

For the Quarter Ended November 30, 2016

 

Part I - FINANCIAL INFORMATION

 

 

 

 

 

Item 1 – Unaudited Condensed Consolidated Financial Statements 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of November 30, 2016 and August 31, 2016 

 

 

 

 

Condensed Consolidated Statements of Operations for the three months ended November 30, 2016 and 2015 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended November 30, 2016 and 2015 

 

 

 

 

Condensed Consolidated Statement of Equity for the three months ended November 30, 2016 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 2016 and 2015 

 

 

 

 

Notes to Condensed Consolidated Financial Statements 

 

 

 

 

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

 

25 

 

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk 

 

36 

 

 

 

Item 4 – Controls and Procedures 

 

37 

 

 

 

Part II – OTHER INFORMATION 

 

 

 

 

 

Item 1 – Legal Proceedings 

 

37 

 

 

 

Item 1A – Risk Factors 

 

37 

 

 

 

Item 6 – Exhibits 

 

38 

 

 

 

SIGNATURES 

 

39 

 

 

 

2


 

Item 1 — Unaudited Condensed Consolidated Financial Statements

 

CHASE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

 

 

 

 

 

 

November 30, 

 

August 31, 

 

 

2016

    

2016

 

ASSETS

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

Cash & cash equivalents

$

49,324

 

$

73,411

 

Accounts receivable, less allowance for doubtful accounts of $801 and $830

 

36,406

 

 

34,835

 

Inventories

 

28,187

 

 

25,814

 

Prepaid expenses and other current assets

 

3,002

 

 

3,728

 

Due from sale of business

 

229

 

 

457

 

Assets held for sale

 

686

 

 

604

 

Total current assets

 

117,834

 

 

138,849

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

35,909

 

 

36,742

 

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

 

Goodwill

 

50,933

 

 

43,576

 

Intangible assets, less accumulated amortization of $35,112 and $33,352

 

53,745

 

 

36,580

 

Cash surrender value of life insurance, less current portion

 

4,530

 

 

4,530

 

Restricted investments

 

1,707

 

 

1,637

 

Funded pension plan

 

383

 

 

382

 

Deferred income taxes

 

412

 

 

441

 

Other assets

 

37

 

 

82

 

 

$

265,490

 

$

262,819

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

Current portion of long-term debt

$

 —

 

$

43,400

 

Accounts payable

 

12,793

 

 

12,352

 

Accrued payroll and other compensation

 

3,126

 

 

6,553

 

Accrued expenses

 

3,892

 

 

3,892

 

Dividend payable

 

6,532

 

 

 —

 

Accrued income taxes

 

1,522

 

 

2,317

 

Total current liabilities

 

27,865

 

 

68,514

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

41,300

 

 

 —

 

Deferred compensation

 

1,719

 

 

1,649

 

Accumulated pension obligation

 

15,649

 

 

15,563

 

Other liabilities

 

730

 

 

328

 

Accrued income taxes

 

1,229

 

 

1,229

 

Deferred income taxes

 

1,448

 

 

1,447

 

 

 

 

 

 

 

 

Commitments and Contingencies (Notes 10 and 18)

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

First Serial Preferred Stock, $1.00 par value: Authorized 100,000 shares; none issued

 

 

 

 

 

 

Common stock, $.10 par value: Authorized 20,000,000 shares; 9,344,559 shares at November 30, 2016 and 9,278,486 shares at August 31, 2016 issued and outstanding

 

935

 

 

928

 

Additional paid-in capital

 

14,280

 

 

14,719

 

Accumulated other comprehensive loss

 

(17,417)

 

 

(15,479)

 

Retained earnings

 

177,752

 

 

173,921

 

Total equity

 

175,550

 

 

174,089

 

Total liabilities and equity

$

265,490

 

$

262,819

 

 

See accompanying notes to the condensed consolidated financial statements

3


 

CHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

In thousands, except share and per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

 

 

    

2016

    

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

Sales

 

$

60,269

 

$

56,746

 

 

 

Royalties and commissions

 

 

1,088

 

 

732

 

 

 

 

 

 

61,357

 

 

57,478

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

Cost of products and services sold

 

 

35,289

 

 

34,717

 

 

 

Selling, general and administrative expenses

 

 

11,752

 

 

11,510

 

 

 

Acquisition-related costs (Note 14)

 

 

584

 

 

 —

 

 

 

Exit costs related to idle facility (Note 15)

 

 

27

 

 

 —

 

 

 

Write-down of certain assets under construction (Note 8)

 

 

 —

 

 

365

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

13,705

 

 

10,886

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(246)

 

 

(250)

 

 

 

Gain on sale of location (Note 9)

 

 

792

 

 

 —

 

 

 

Gain on sale of business  (Note 8)

 

 

 —

 

 

1,031

 

 

 

Other income (expense)

 

 

399

 

 

(31)

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

14,650

 

 

11,636

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

 

4,287

 

 

4,187

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,363

 

$

7,449

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.11

 

$

0.81

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

1.10

 

$

0.80

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

 

9,228,338

 

 

9,141,620

 

 

 

Diluted

 

 

9,321,002

 

 

9,282,670

 

 

 

 

 

 

 

 

 

 

 

 

 

Annual cash dividends declared per share

 

$

0.70

 

$

0.65

 

 

 

 

See accompanying notes to the condensed consolidated financial statements

4


 

CHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

 

    

2016

    

2015

 

 

Net income

 

$

10,363

 

$

7,449

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

Net unrealized gain on restricted investments, net of tax

 

 

13

 

 

28

 

 

Change in funded status of pension plans, net of tax

 

 

147

 

 

94

 

 

Foreign currency translation adjustment

 

 

(2,098)

 

 

(1,015)

 

 

Total other comprehensive (loss) income

 

 

(1,938)

 

 

(893)

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

8,425

 

$

6,556

 

 

         

See accompanying notes to the condensed consolidated financial statements

 

 

5


 

CHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

THREE MONTHS ENDED NOVEMBER 30, 2016

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Accumulated Other

 

 

 

 

Total

 

 

 

Common Stock

 

Paid-In

 

Comprehensive

 

Retained

 

Stockholders'

 

 

    

Shares

    

Amount

    

Capital

    

Income (loss)

    

Earnings

    

Equity

 

Balance at August 31, 2016

 

9,278,486

 

$

928

 

$

14,719

 

$

(15,479)

 

$

173,921

 

$

174,089

 

Restricted stock grants, net of forfeitures

 

42,160

 

 

4

 

 

(4)

 

 

 

 

 

 

 

 

 —

 

Amortization of restricted stock grants

 

 

 

 

 

 

 

410

 

 

 

 

 

 

 

 

410

 

Amortization of stock option grants

 

 

 

 

 

 

 

118

 

 

 

 

 

 

 

 

118

 

Exercise of stock options

 

49,291

 

 

5

 

 

874

 

 

 

 

 

 

 

 

879

 

Common stock received for payment of stock option exercises

 

(11,905)

 

 

(1)

 

 

(845)

 

 

 

 

 

 

 

 

(846)

 

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

 

(13,473)

 

 

(1)

 

 

(992)

 

 

 

 

 

 

 

 

(993)

 

Cash dividend accrued, $0.70 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,532)

 

 

(6,532)

 

Change in funded status of pension plan, net of tax $78

 

 

 

 

 

 

 

 

 

 

147

 

 

 

 

 

147

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

(2,098)

 

 

 

 

 

(2,098)

 

Net unrealized gain on restricted investments, net of tax $7

 

 

 

 

 

 

 

 

 

 

13

 

 

 

 

 

13

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

10,363

 

 

10,363

 

Balance at November 30, 2016

 

9,344,559

 

$

935

 

$

14,280

 

$

(17,417)

 

$

177,752

 

$

175,550

 

 

See accompanying notes to the condensed consolidated financial statements

 

 

6


 

CHASE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

 

 

    

2016

    

2015

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

Net income

 

$

10,363

 

$

7,449

 

 

 

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

 

 

 

 

 

 

 

 

 

Gain on sale of location

 

 

(792)

 

 

 —

 

 

 

Loss on write-down of certain assets under construction

 

 

 —

 

 

365

 

 

 

Gain on sale of business

 

 

 —

 

 

(1,031)

 

 

 

Depreciation

 

 

1,335

 

 

1,473

 

 

 

Amortization

 

 

2,176

 

 

1,916

 

 

 

Cost of sale of inventory step-up

 

 

190

 

 

 —

 

 

 

(Recovery) provision for allowance for doubtful accounts

 

 

(5)

 

 

61

 

 

 

Stock-based compensation

 

 

528

 

 

318

 

 

 

Realized gain on restricted investments

 

 

(3)

 

 

(2)

 

 

 

Decrease in cash surrender value life insurance

 

 

 —

 

 

45

 

 

 

Deferred taxes

 

 

10

 

 

 —

 

 

 

Increase (decrease) from changes in assets and liabilities

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

5

 

 

5,008

 

 

 

Inventories

 

 

(1,397)

 

 

36

 

 

 

Prepaid expenses & other assets

 

 

(535)

 

 

(279)

 

 

 

Accounts payable

 

 

(12)

 

 

(2,113)

 

 

 

Accrued compensation and other expenses

 

 

(2,826)

 

 

(3,793)

 

 

 

Accrued income taxes

 

 

(771)

 

 

(445)

 

 

 

Deferred compensation

 

 

71

 

 

73

 

 

 

Net cash provided by operating activities

 

 

8,337

 

 

9,081

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

(652)

 

 

(418)

 

 

 

Cost to acquire intangible assets

 

 

(14)

 

 

 —

 

 

 

Payments for acquisitions

 

 

(30,435)

 

 

 —

 

 

 

Proceeds from sale of location

 

 

1,382

 

 

 —

 

 

 

Net proceeds from sale of business

 

 

229

 

 

1,500

 

 

 

Increase in restricted investments

 

 

(47)

 

 

(53)

 

 

 

Proceeds from settlement of life insurance policies

 

 

1,504

 

 

 —

 

 

 

Payments for cash surrender value life insurance

 

 

 —

 

 

(46)

 

 

 

Net cash (used in) provided by investing activities

 

 

(28,033)

 

 

983

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

Payments of principal on debt

 

 

(2,100)

 

 

(2,100)

 

 

 

Proceeds from exercise of common stock options

 

 

33

 

 

91

 

 

 

Payments of taxes on stock options and restricted stock

 

 

(993)

 

 

 —

 

 

 

Net cash used in financing activities

 

 

(3,060)

 

 

(2,009)

 

 

 

 

 

 

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS

 

 

(22,756)

 

 

8,055

 

 

 

Effect of foreign exchange rates on cash

 

 

(1,331)

 

 

(420)

 

 

 

CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

73,411

 

 

43,819

 

 

 

CASH & CASH EQUIVALENTS, END OF PERIOD

 

$

49,324

 

$

51,454

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash Investing and Financing Activities

 

 

 

 

 

 

 

Common stock received for payment of stock option exercises

 

$

846

 

$

100

 

 

 

Property, plant and equipment additions included in accounts payable

 

$

47

 

$

12

 

 

 

Annual cash dividend declared

 

$

6,532

 

$

5,999

 

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

7


 

Table of Contents

CHASE CORPORATION

NOTES TO CONDENSED 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, 2016, in conjunction with its 2016 Annual Report on Form 10-K.

 

The results of operations for the interim period ended November 30, 2016 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.  These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended August 31, 2016, which are contained in the Company’s 2016 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 November 30, 2016, the results of its operations, comprehensive income and cash flows for the interim periods ended November 30, 2016 and 2015, and changes in equity for the interim period ended November 30, 2016.

 

The financial statements include the accounts of the Company and its wholly-owned subsidiaries.  All intercompany transactions and balances have been eliminated in consolidation.  The Company uses the US dollar as the reporting currency for financial reporting.  The financial position and results of operations of the Company’s UK-based operations are measured using the UK pound sterling as the functional currency. The financial position and results of operations of the Company’s operations based in France are measured using the euro as the functional currency.  The financial position and results of the Company’s Spray Products (India) Private Limited business in India are measured using the Indian rupee as the functional currency. The functional currency for all of our other operations is the US dollar. Foreign currency translation gains and losses are determined using current exchange rates for monetary items and historical exchange rates for other balance sheet items, and are recorded as a change in other comprehensive income.  Transaction gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of applicable operation are included in other income / (expense) on the condensed consolidated statements of operations and were $399, and ($96) for the three-month periods ended November 30, 2016 and 2015, respectively.

 

On September 30, 2016, the Company acquired certain assets of Resin Designs, LLC (“Resin Designs”), an advanced adhesives and sealants manufacturer, with locations in Woburn, MA and Newark, CA. The business was acquired for a purchase price of $30,435, pending any final working capital adjustment and excluding acquisition-related costs. As part of this transaction, Chase acquired all working capital and fixed assets of the business, and entered into multi-year leases at both locations. The Company expensed $584 of acquisition-related costs during the three-month period ended November 30, 2016 associated with this acquisition. The purchase was funded entirely with available cash on hand. Resin Designs is a formulator of customized adhesive and sealant systems used in high-reliability electronic applications. The acquisition broadens the Company’s adhesives and sealants product offering and manufacturing capabilities, and expands its market reach. The Company is currently in the process of finalizing purchase accounting, and anticipates completion within the first half of fiscal 2017. Since the effective date of the acquisition, the financial results of Resin Designs’ operations have been included in the Company’s financial statements within the electronic and industrial coatings product line, contained within the Industrial Materials operating segment. See Note 14 to the Condensed Consolidated Financial Statements for additional information on the acquisition of the assets and operations of Resin Designs.

 

8


 

Table of Contents

CHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

On June 23, 2016, the Company acquired all the capital stock of Spray Products (India) Private Limited for $1,161, net of cash acquired. This acquired business works closely with our HumiSeal® manufacturing operation in Winnersh, Wokingham, England. The acquisition in India enhances the Company’s ability to provide technical, sales, manufacturing, chemical handling, and packaging services in the region. Since the effective date for this acquisition, the financial results of the business have been included in the Company's financial statements within the Company’s Industrial Materials operating segment in the electronic and industrial coatings product line. Purchase accounting was completed in the quarter ended August 31, 2016.

 

In November 2015, the Company sold its RodPack®  wind energy business, contained within its structural composites product line, to an otherwise unrelated party (“Buyer”) for proceeds of $2,186. The Company’s structural composites product line is a part of the Company’s Industrial Materials operating segment.

 

Note 2 — Recent Accounting Standards

 

Recently Issued Accounting Pronouncements

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers,” which will replace most of the existing revenue recognition guidance under US Generally Accepted Accounting Principles (“GAAP”). The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. In March, April and May 2016, the FASB issued ASU 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net),” ASU 2016-10 “Identifying Performance Obligations and Licensing,” and ASU 2016-12, “Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients” all of which provide further clarification to be considered when implementing ASU 2014-09. The ASU will be effective for the Company beginning September 1, 2018 (fiscal 2019), including interim periods in its fiscal year 2019, and allows for either retrospective or modified retrospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this ASU on the Company’s consolidated financial position, results of operations and cash flows.

 

In August 2014, the FASB issued ASU No. 2014-15 “Presentation of Financial Statements: Going Concern (Subtopic 205-40),” which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The guidance applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter (fiscal year 2017 for the Company). The adoption of ASU 2014-15, which occurred in the first quarter of fiscal 2017, did not have a material effect on the Company’s consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which requires that debt issue costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the amount of the debt liability, consistent with debt discounts and premiums. Amortization of such costs is still reported as interest expense. ASU 2015-03 is effective for fiscal years, and interim periods therein, beginning after December 15, 2015 (fiscal year 2017 for the Company). In August 2015, the FASB issued ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issue Costs Associated with Line-of-Credit Arrangements." ASU 2015-15 supplements the requirements of ASU 2015-03 by allowing an entity to defer and present debt issue costs related to a line of credit arrangement as an asset and subsequently amortize the deferred costs ratably over the term of the line of credit arrangement. The adoption of ASU 2015-03 and ASU 2015-15, which occurred in the first quarter of fiscal 2017, did not have a material effect on the Company’s consolidated financial statements.

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CHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  Changes were made to align lessor accounting with the lessee accounting model and ASU No. 2014-09, “Revenue from Contracts with Customers.” The ASU will be effective for the Company beginning September 1, 2019 (fiscal 2020). Early application is permitted for all public business entities upon issuance. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. We are currently evaluating the impact of the application of this ASU on our consolidated financial statements and disclosures thereto.

 

In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting.” This ASU simplifies the accounting for share-based payment transactions including the accounting for income taxes, forfeitures, statutory tax withholding requirements and classification in the statement of cash flows. The required effective date for adoption of this guidance would be our fiscal year beginning September 1, 2017 (fiscal 2018), with early adoption allowed. The updated standard no longer requires cash flows related to excess tax benefits to be presented as a financing activity separate from other income tax cash flows. The update also allows entities to repurchase more of an employee's shares for tax withholding purposes without triggering liability accounting, clarifies that all cash payments to taxing authorities made on an employee's behalf for withheld shares should be presented as a financing activity on the statement of cash flows, and provides for an accounting policy election to account for forfeitures as they occur. The Company early adopted this standard as of September 1, 2016 and during the first quarter of fiscal 2016 recognized an excess tax benefit from stock-based compensation of $794 within income tax expense on the condensed consolidated statement of operations (adopted prospectively). The adoption did not impact the existing classification of the awards. Excess tax benefits from stock based compensation is now classified in net income in the statement of cash flows instead of being separately stated in financing activities for the three months ended November 30, 2016 (adopted prospectively). Given the Company’s historical practice of including employee withholding taxes paid within financing activities in the statement of cash flows, no prior period reclassifications are required by the clarifications on classification provided by ASU No. 2016-09. Due predominately to the inclusion of the excess tax benefit, the effective tax rate for the first quarter of fiscal 2017 decreased to 29.3%, compared to effective tax rates of 36.0% and 34.5% recognized for the first quarter and whole year periods of fiscal 2016, respectively; further, the Company anticipates the potential for increased periodic volatility in future effective tax rates based on the continued application of the ASU No. 2016-09. Following the adoption of the new standard, the Company has elected to account for forfeitures as they occur.

 

In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230).” This ASU provides guidance on the presentation and classification of specific cash flow items to improve consistency within the statement of cash flows. The effective date for adoption of this guidance would be our fiscal year beginning September 1, 2018 (fiscal 2019), with early adoption permitted. The Company is currently evaluating the effect that ASU No. 2016-15 will have on its financial statements and related disclosures.

 

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CHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Note 3 — Inventories

 

Inventories consist of the following as of November 30, 2016 and August 31, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

November 30, 

 

August 31, 

 

    

    

2016

    

2016

Raw materials

 

 

$

13,343

 

$

12,879

Work in process

 

 

 

7,053

 

 

6,019

Finished goods

 

 

 

7,791

 

 

6,916

Total Inventories

 

 

$

28,187

 

$

25,814

 

 

 

Note 4 — Net Income Per Share

 

The Company has unvested share-based payment awards with a right to receive non-forfeitable dividends which are considered participating securities under ASC Topic 260, “Earnings Per Share.”  The Company allocates earnings to participating securities and computes earnings per share using the two class method.  The determination of earnings per share under the two class method is as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

    

2016

    

2015

    

 

 

 

 

 

 

 

 

Basic Earnings per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,363

 

$

7,449

 

Less: Allocated to participating securities

 

 

113

 

 

67

 

Net income available to common shareholders

 

$

10,250

 

$

7,382

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

9,228,338

 

 

9,141,620

 

Net income per share - Basic

 

$

1.11

 

$

0.81

 

 

 

 

 

 

 

 

 

Diluted Earnings per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

10,363

 

$

7,449

 

Less: Allocated to participating securities

 

 

113

 

 

55

 

Net income available to common shareholders

 

$

10,250

 

$

7,394

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

9,228,338

 

 

9,141,620

 

Additional dilutive common stock equivalents

 

 

92,664

 

 

141,050

 

Diluted weighted average shares outstanding

 

 

9,321,002

 

 

9,282,670

 

Net income per share - Diluted

 

$

1.10

 

$

0.80

 

 

For the three months ended November 30, 2016 and 2015, stock options to purchase 38,591 and 31,485 shares, respectively, of common stock were outstanding but were not included in the calculation of diluted income per share because their inclusion would be anti-dilutive.  Included in the calculation of dilutive common stock equivalents are the unvested portion of restricted stock and stock options.

 

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CHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Note 5 — Stock-Based Compensation

 

In August 2015, the Board of Directors of the Company approved the fiscal year 2016 Long Term Incentive Plan (“2016 LTIP”) for the executive officers and other members of management.  The 2016 LTIP is an equity-based plan with a grant date of September 1, 2015 and contains a performance and service-based restricted stock grant of 6,962 shares in the aggregate, subject to adjustment, with a vesting date of August 31, 2018.  Based on the fiscal year 2016 financial results, 6,277 additional shares of restricted stock (total of 13,239 shares) were earned and granted subsequent to the end of fiscal year 2016 in accordance with the performance measurement criteria.  No further performance-based measurements apply to this award.  Compensation expense is being recognized on a ratable basis over the vesting period.

 

In August 2016, the Board of Directors of the Company approved the fiscal year 2017 Long Term Incentive Plan (“2017 LTIP”) for the executive officers and other members of management.  The 2017 LTIP is an equity-based plan with a grant date of September 1, 2016 and contains the following equity components:

 

Restricted Shares — (a) a performance and service-based restricted stock grant of 5,399 shares in the aggregate, subject to adjustment based on fiscal 2017 results, with a vesting date of August 31, 2019.  Compensation expense is recognized on a ratable basis over the vesting period based on quarterly probability assessments; (b) a time-based restricted stock grant of 5,367 shares in the aggregate, with a vesting date of August 31, 2019. Compensation expense is recognized on a ratable basis over the vesting period.

 

Stock options — options to purchase 15,028 shares of common stock in the aggregate with an exercise price of $64.37 per share.  The options will vest in three equal annual installments beginning on August 31, 2017 and ending on August 31, 2019. Of the options granted, 5,596 options will expire on August 31, 2026, and 9,432 options will expire on September 1, 2026. Compensation expense is recognized over the period of the award consistent with the vesting terms.

 

In August 2016, the Board of Directors of the Company approved equity retention agreements with certain executive officers.  The equity-based retention agreements have a grant date of September 1, 2016 and contain the following equity components: (a) time-based restricted stock grant of 16,312 shares in the aggregate, with 7,768 shares having a vesting date of August 31, 2019, and 8,544 shares having a vesting date of August 31, 2021; (b) options to purchase 23,563 shares of common stock in the aggregate with an exercise price of $64.37 per share (the options will cliff vest on August 31, 2019 and will expire on August 31, 2026). Compensation expense for both the restricted stock and the stock option components of the equity retention agreements is recognized on a ratable basis over the vesting period.

 

During the first quarter of fiscal 2016, additional grants totaling 8,805 shares of restricted shares were issued to non-executive members of management with a vesting date of August 31, 2021. Compensation expense is 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 includes specified products that are used in, or integrated into, another company’s product, with demand typically dependent upon general economic conditions. Industrial Materials products include insulating and conducting materials for wire and cable manufacturers, moisture protective coatings for electronics, laminated durable papers, laminates for the packaging and industrial laminate markets, pulling and detection tapes used in the installation, measurement and location of fiber optic cables and water and natural gas lines, cover tapes essential to delivering semiconductor components via tape and reel packaging, composite materials and elements, glass-based

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CHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

strength element products designed to allow fiber optic cables to withstand mechanical and environmental strain and stress, microspheres, sold under the Dualite brand, and polyurethane dispersions. Further, beginning June 23, 2016, and September 30, 2016, respectively, the Industrial Materials segment includes the acquired operations of Spray Products (India) Limited and of Resin Designs, LLC.  Both were obtained through acquisition and included in the Company’s electronic and industrial coatings product line.

 

The Construction Materials segment is principally composed of project-oriented product offerings that are primarily sold and used as “Chase” branded products. Construction Materials products include protective coatings for pipeline applications, coating and lining systems for use in liquid storage and containment applications, adhesives and sealants used in architectural and building envelope waterproofing applications, high-performance polymeric asphalt additives, and expansion and control joint systems for use in the transportation and architectural markets. The following tables summarize information about the Company’s reportable segments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

 

 

    

2016

    

 

2015

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

Industrial Materials

 

$

49,024

 

 

$

43,299

 

 

 

Construction Materials

 

 

12,333

 

 

 

14,179

 

 

 

Total

 

$

61,357

 

 

$

57,478

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

 

 

 

 

 

 

 

 

 

Industrial Materials

 

$

16,415

(a)

 

$

12,929

(c)

 

 

Construction Materials

 

 

5,150

 

 

 

5,455

 

 

 

Total for reportable segments

 

 

21,565

 

 

 

18,384

 

 

 

Corporate and common costs

 

 

(6,915)

(b)

 

 

(6,748)

 

 

 

Total

 

$

14,650

 

 

$

11,636

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Includes the following costs by segment:

 

 

 

 

 

 

 

 

 

 

Industrial Materials

 

 

 

 

 

 

 

 

 

 

Interest

 

$

184

 

 

$

187

 

 

 

Depreciation

 

 

1,062

 

 

 

991

 

 

 

Amortization

 

 

1,862

 

 

 

1,560

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction Materials

 

 

 

 

 

 

 

 

 

 

Interest

 

$

62

 

 

$

63

 

 

 

Depreciation

 

 

158

 

 

 

264

 

 

 

Amortization

 

 

314

 

 

 

356

 

 

 

 


(a)

Includes $190 of expenses related to inventory step-up in fair value attributable to the September 2016 acquisition of certain assets of Resin Designs, LLC

(b)

Includes $584 in acquisition-related expenses attributable to the September 2016 acquisition of certain assets of Resin Designs, LLC, facility exit and demolition costs of $27 incurred during the quarter, relating to the Company’s Randolph, MA location and a $792 gain related to the November 2016 sale of the Company’s Paterson, NJ location

(c)

Includes both a $1,031 gain on sale of our RodPack wind energy business contained within our structural composites product line and a $365 write-down on certain other structural composites assets based on usage constraints following the sale, both recognized in November 2015

 

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CHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

 

Total assets for the Company’s reportable segments as of November 30, 2016 and August 31, 2016 were:

 

 

 

 

 

 

 

 

 

 

 

 

November 30, 

 

August 31, 

 

 

 

    

2016

    

2016

 

 

Total assets

 

 

 

 

 

 

 

 

Industrial Materials

 

$

165,172

 

$

136,003

 

 

Construction Materials

 

 

38,095

 

 

38,983

 

 

Total for reportable segments

 

 

203,267

 

 

174,986

 

 

Corporate and common assets

 

 

62,223

 

 

87,833

 

 

Total

 

$

265,490

 

$

262,819

 

 

 

The Company’s products are sold worldwide.  Revenue for the three-month periods ended November 30, 2016 and 2015 are attributed to operations located in in the following countries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

 

 

 

2016

 

    

2015

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

United States

 

$

51,808

 

 

$

48,412

 

 

 

United Kingdom

 

 

4,759

 

 

 

5,165

 

 

 

All other foreign (1)

 

 

4,790

 

 

 

3,901

 

 

 

Total

 

$

61,357

 

 

$

57,478

 

 

 

 

(1)

Inclusive of sales originated from our Paris, France location, royalty revenue attributable to our licensed manufacturer in Asia, and Chase foreign manufacturing operations.

 

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CHASE CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

As of November 30, 2016 and August 31, 2016, the Company had long-lived assets (defined as tangible assets providing the Company with a future economic benefit beyond the current year or operating period, including buildings, equipment and leasehold improvements) and goodwill and intangible assets, less accumulated amortization, in the following countries: