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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, 2018

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, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company,” and “emerging growth 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 ☐

Emerging growth company ☐

 

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐

 

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

 

The number of shares of Common Stock outstanding as of June 30, 2018 was 9,396,262

 

 

 


 

CHASE CORPORATION

INDEX TO FORM 10-Q

 

For the Quarter Ended May 31, 2018

 

Ca

 

 

Cautionary Note Concerning Forward-Looking Statements 

 

3

 

 

 

Part I - FINANCIAL INFORMATION

 

 

 

 

 

Item 1 – Unaudited Condensed Consolidated Financial Statements 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of May 31, 2018 and August 31, 2017 

 

4

 

 

 

Condensed Consolidated Statements of Operations for the three and nine months ended May 31, 2018 and 2017 

 

5

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended May 31, 2018 and 2017 

 

6

 

 

 

Condensed Consolidated Statement of Equity for the nine months ended May 31, 2018 

 

7

 

 

 

Condensed Consolidated Statements of Cash Flows for the nine months ended May 31, 2018 and 2017 

 

8

 

 

 

Notes to Condensed Consolidated Financial Statements 

 

9

 

 

 

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

 

30

 

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk 

 

41

 

 

 

Item 4 – Controls and Procedures 

 

42

 

 

 

Part II – OTHER INFORMATION 

 

 

 

 

 

Item 1 – Legal Proceedings 

 

42

 

 

 

Item 1A – Risk Factors 

 

42

 

 

 

Item 6 – Exhibits 

 

43

 

 

 

SIGNATURES 

 

44

 

 

 

2


 

Cautionary Note Concerning Forward-Looking Statements

 

This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements, including without limitation forward-looking statements made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” involve risks and uncertainties. Any statements contained in this Quarterly Report that are not statements of historical fact may be deemed to be forward-looking statements.  Forward-looking statements include, without limitation, statements as to our future operating results; seasonality expectations; plans for the development, utilization or disposal of manufacturing facilities; future economic conditions; our expectations as to legal proceedings; the effect of our market and product development efforts; and expectations or plans relating to the implementation or realization of our strategic goals and future growth, including through potential future acquisitions. Forward-looking statements may also include, among other things, statements relating to future sales, earnings, cash flow, results of operations, use of cash and other measures of financial performance, as well as statements relating to future dividend payments. Other forward-looking statements may be identified through the use of words such as “believes,” “anticipates,” “may,” “should,” “will,” “plans,” “projects,” “expects,” “expectations,” “estimates,” “predicts,” “targets,” “forecasts,” “strategy,” and other words of similar meaning in connection with the discussion of future operating or financial performance. These statements are based on current expectations, estimates and projections about the industries in which we operate, and the beliefs and assumptions made by management. Because forward-looking statements relate to the future, they are subject to inherent risks, uncertainties and changes in circumstances that are difficult to predict. Accordingly, the Company’s actual results may differ materially from those contemplated by the forward-looking statements. Investors, therefore, are cautioned against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance.  Readers should refer to the discussions under “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 2017 concerning certain factors that could cause our actual results to differ materially from the results anticipated in such forward-looking statements. These Risk Factors are hereby incorporated by reference into this Quarterly Report.

 

 

3


 

Item 1 — Unaudited Condensed Consolidated Financial Statements

 

CHASE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

 

 

 

 

 

 

 

 

May 31, 

 

August 31, 

 

 

 

2018

    

2017

 

ASSETS

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

33,107

 

$

47,354

 

Accounts receivable, less allowance for doubtful accounts of $702 and $456

 

 

46,351

 

 

38,051

 

Inventory

 

 

35,825

 

 

25,618

 

Prepaid expenses and other current assets

 

 

2,876

 

 

3,112

 

Due from sale of businesses

 

 

557

 

 

 —

 

Prepaid income taxes

 

 

373

 

 

 —

 

Total current assets

 

 

119,089

 

 

114,135

 

 

 

 

 

 

 

 

 

Property, plant and equipment, less accumulated depreciation of $47,743 and $44,277

 

 

35,570

 

 

34,760

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

 

 

Goodwill

 

 

85,976

 

 

50,784

 

Intangible assets, less accumulated amortization of $50,849 and $42,206

 

 

64,480

 

 

46,846

 

Cash surrender value of life insurance

 

 

4,530

 

 

4,530

 

Restricted investments

 

 

1,019

 

 

964

 

Funded pension plan

 

 

514

 

 

566

 

Deferred income taxes

 

 

2,763

 

 

1,614

 

Other assets

 

 

108

 

 

539

 

Total assets

 

$

314,049

 

$

254,738

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

14,809

 

$

14,455

 

Accrued payroll and other compensation

 

 

4,976

 

 

6,500

 

Accrued expenses

 

 

4,943

 

 

4,052

 

Accrued income taxes

 

 

 —

 

 

2,333

 

Total current liabilities

 

 

24,728

 

 

27,340

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

35,000

 

 

 —

 

Deferred compensation

 

 

1,034

 

 

979

 

Accumulated pension obligation

 

 

11,258

 

 

12,666

 

Other liabilities

 

 

1,588

 

 

1,567

 

Accrued income taxes

 

 

2,977

 

 

1,257

 

 

 

 

 

 

 

 

 

Commitments and Contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

 

 

 

 

 

 

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

 

 

 —

 

 

 —

 

Common stock, $.10 par value: Authorized 20,000,000 shares; 9,396,262 shares at May 31, 2018 and 9,354,136 shares at August 31, 2017 issued and outstanding

 

 

940

 

 

935

 

Additional paid-in capital

 

 

14,370

 

 

14,060

 

Accumulated other comprehensive loss

 

 

(11,732)

 

 

(13,469)

 

Retained earnings

 

 

233,886

 

 

209,403

 

Total equity

 

 

237,464

 

 

210,929

 

Total liabilities and equity

 

$

314,049

 

$

254,738

 

 

See accompanying notes to the condensed consolidated financial statements

4


 

CHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended May 31, 

 

 

Nine Months Ended May 31, 

 

 

 

    

2018

    

2017

 

 

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Sales

 

$

77,653

 

$

63,641

 

 

$

202,965

 

$

180,198

 

 

Royalties and commissions

 

 

1,265

 

 

1,260

 

 

 

3,745

 

 

3,368

 

 

 

 

 

78,918

 

 

64,901

 

 

 

206,710

 

 

183,566

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of products and services sold

 

 

48,252

 

 

37,511

 

 

 

127,138

 

 

105,658

 

 

Selling, general and administrative expenses

 

 

13,705

 

 

12,297

 

 

 

37,902

 

 

35,567

 

 

Acquisition-related costs (Note 14)

 

 

 —

 

 

 —

 

 

 

393

 

 

584

 

 

Exit costs related to idle facility (Note 15)

 

 

 —

 

 

 —

 

 

 

 —

 

 

50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

16,961

 

 

15,093

 

 

 

41,277

 

 

41,707

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(389)

 

 

(158)

 

 

 

(874)

 

 

(711)

 

 

Gain on sale of real estate (Note 9)

 

 

 —

 

 

 —

 

 

 

 —

 

 

860

 

 

Gain on sale of license (Note 18)

 

 

 —

 

 

 —

 

 

 

1,085

 

 

 —

 

 

Gain on sale of businesses (Note 8)

 

 

1,480

 

 

2,013

 

 

 

1,480

 

 

2,013

 

 

Other income (expense)

 

 

600

 

 

164

 

 

 

23

 

 

536

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

18,652

 

 

17,112

 

 

 

42,991

 

 

44,405

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes (Note 19)

 

 

5,109

 

 

5,257

 

 

 

11,011

 

 

13,804

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

13,543

 

$

11,855

 

 

$

31,980

 

$

30,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income available to common shareholders, per common and common equivalent share (Note 4)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.44

 

$

1.27

 

 

$

3.41

 

$

3.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

1.43

 

$

1.26

 

 

$

3.38

 

$

3.24

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

9,306,498

 

 

9,258,219

 

 

 

9,292,647

 

 

9,244,237

 

 

Diluted

 

 

9,373,183

 

 

9,336,725

 

 

 

9,362,370

 

 

9,331,470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Annual cash dividends declared per share

 

 

 

 

 

 

 

 

$

0.80

 

$

0.70

 

 

 

See accompanying notes to the condensed consolidated financial statements

5


 

CHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended May 31, 

 

Nine Months Ended May 31, 

 

 

 

    

2018

    

2017

 

2018

    

2017

 

 

Net income

 

$

13,543

 

$

11,855

 

$

31,980

 

$

30,601

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 5

 

 

41

 

 

(13)

 

 

87

 

 

Change in funded status of pension plans, net of tax

 

 

92

 

 

147

 

 

277

 

 

441

 

 

Foreign currency translation adjustment

 

 

(2,197)

 

 

1,504

 

 

1,473

 

 

(631)

 

 

Total other comprehensive income (loss)

 

 

(2,100)

 

 

1,692

 

 

1,737

 

 

(103)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

$

11,443

 

$

13,547

 

$

33,717

 

$

30,498

 

 

         

See accompanying notes to the condensed consolidated financial statements

 

 

6


 

CHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

NINE MONTHS ENDED MAY 31, 2018

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Accumulated Other

 

 

 

 

Total

 

 

 

Common Stock

 

Paid-In

 

Comprehensive

 

Retained

 

Stockholders'

 

 

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Earnings

    

Equity

 

Balance at August 31, 2017

 

9,354,136

 

$

935

 

$

14,060

 

$

(13,469)

 

$

209,403

 

$

210,929

 

Restricted stock grants, net of forfeitures

 

15,900

 

 

 2

 

 

(2)

 

 

 

 

 

 

 

 

 —

 

Amortization of restricted stock grants

 

 

 

 

 

 

 

1,228

 

 

 

 

 

 

 

 

1,228

 

Amortization of stock option grants

 

 

 

 

 

 

 

336

 

 

 

 

 

 

 

 

336

 

Exercise of stock options

 

46,843

 

 

 5

 

 

917

 

 

 

 

 

 

 

 

922

 

Common stock received for payment of stock option exercises

 

(7,656)

 

 

(1)

 

 

(779)

 

 

 

 

 

 

 

 

(780)

 

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

 

(12,961)

 

 

(1)

 

 

(1,390)

 

 

 

 

 

 

 

 

(1,391)

 

Cash dividend paid, $0.80 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,497)

 

 

(7,497)

 

Change in funded status of pension plan, net of tax $89

 

 

 

 

 

 

 

 

 

 

277

 

 

 

 

 

277

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

1,473

 

 

 

 

 

1,473

 

Net unrealized gain (loss) on restricted investments, net of tax $5

 

 

 

 

 

 

 

 

 

 

(13)

 

 

 

 

 

(13)

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

31,980

 

 

31,980

 

Balance at May 31, 2018

 

9,396,262

 

$

940

 

$

14,370

 

$

(11,732)

 

$

233,886

 

$

237,464

 

 

See accompanying notes to the condensed consolidated financial statements

 

 

7


 

CHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended May 31, 

 

 

 

    

 

2018

    

2017

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

Net income

 

 

$

31,980

 

$

30,601

 

 

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

 

 

 

 

 

 

 

 

 

Gain on sale of real estate

 

 

 

 —

 

 

(860)

 

 

Gain on sale of license

 

 

 

(1,085)

 

 

 —

 

 

Gain on sale of businesses

 

 

 

(1,480)

 

 

(2,013)

 

 

Depreciation

 

 

 

3,870

 

 

3,859

 

 

Amortization

 

 

 

8,450

 

 

6,816

 

 

Cost of sale of inventory step-up

 

 

 

1,530

 

 

190

 

 

Provision (recovery) of allowance for doubtful accounts

 

 

 

245

 

 

(129)

 

 

Stock-based compensation

 

 

 

1,564

 

 

1,659

 

 

Realized gain on restricted investments

 

 

 

(92)

 

 

(55)

 

 

Deferred taxes

 

 

 

1,072

 

 

 8

 

 

Increase (decrease) from changes in assets and liabilities

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

(4,830)

 

 

1,448

 

 

Inventory

 

 

 

(4,897)

 

 

(2,550)

 

 

Prepaid expenses and other assets

 

 

 

286

 

 

(1,003)

 

 

Accounts payable

 

 

 

(47)

 

 

409

 

 

Accrued compensation and other expenses

 

 

 

(1,784)

 

 

(1,369)

 

 

Accrued income taxes

 

 

 

(3,132)

 

 

1,325

 

 

Net cash provided by operating activities

 

 

 

31,650

 

 

38,336

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

 

(2,908)

 

 

(2,198)

 

 

Cost to acquire intangible assets

 

 

 

(79)

 

 

(81)

 

 

Payments for acquisitions

 

 

 

(73,469)

 

 

(30,270)

 

 

Proceeds from sale of real estate

 

 

 

 —

 

 

2,122

 

 

Proceeds from sale of license

 

 

 

1,000

 

 

 —

 

 

Proceeds from sale of businesses

 

 

 

2,075

 

 

3,687

 

 

Changes in restricted investments

 

 

 

19

 

 

(123)

 

 

Proceeds from settlement of life insurance policies

 

 

 

 —

 

 

1,504

 

 

Net cash used in investing activities

 

 

 

(73,362)

 

 

(25,359)

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

Borrowings on debt

 

 

 

65,000

 

 

 —

 

 

Payments of principal on debt

 

 

 

(30,000)

 

 

(23,400)

 

 

Dividend paid

 

 

 

(7,497)

 

 

(6,532)

 

 

Proceeds from exercise of common stock options

 

 

 

142

 

 

95

 

 

Payments of taxes on stock options and restricted stock

 

 

 

(1,391)

 

 

(2,014)

 

 

Net cash provided by (used in) financing activities

 

 

 

26,254

 

 

(31,851)

 

 

 

 

 

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS

 

 

 

(15,458)

 

 

(18,874)

 

 

Effect of foreign exchange rates on cash

 

 

 

1,211

 

 

(407)

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

 

47,354

 

 

73,411

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

 

$

33,107

 

$

54,130

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash Investing and Financing Activities

 

 

 

 

 

 

 

 

 

Common stock received for payment of stock option exercises

 

 

$

780

 

$

1,158

 

 

Property, plant and equipment additions included in accounts payable

 

 

$

66

 

$

65

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

8


 

Note 1 — Basis of Financial Statement Presentation

 

Description of Business

 

Chase Corporation (the “Company,” “Chase,” “we,” or “us”), a global specialty chemicals company founded in 1946, is a leading manufacturer of protective materials for high-reliability applications.  Our strategy is to maximize the performance of our core businesses and brands while seeking future opportunities through strategic acquisitions.

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting, and instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Therefore, they do not include all information and footnote disclosures necessary for a complete presentation of Chase Corporation’s financial position, results of operations and cash flows, in conformity with generally accepted accounting principles.  The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Chase Corporation filed audited consolidated financial statements, which included all information and notes necessary for such a complete presentation, for the three years ended August 31, 2017, in conjunction with its 2017 Annual Report on Form 10-K. Certain immaterial reclassifications have been made to the prior year amounts to conform to the current year’s presentation.

 

The results of operations for the interim period ended May 31, 2018 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.  These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended August 31, 2017, which are contained in the Company’s 2017 Annual Report on Form 10-K.

 

The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring items) that are, in the opinion of management, necessary for a fair statement of the Company’s financial position as of May 31, 2018, the results of its operations, comprehensive income and cash flows for the interim periods ended May 31, 2018 and 2017, and changes in equity for the interim period ended May 31, 2018.

 

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 U.S. dollar as the reporting currency for financial reporting.  The financial position and results of operations of the Company’s U.K.-based operations are measured using the British pound as the functional currency. The financial position and results of operations of the Company’s operations based in France are measured using the euro as the functional currency.  The financial position and results of the Company’s HumiSeal India Private Limited business are measured using the Indian rupee as the functional currency. The functional currency for all our other operations is the U.S. dollar. Foreign currency translation gains and losses are determined using current exchange rates for monetary items and historical exchange rates for other balance sheet items, and are recorded as a change in other comprehensive income.  Transaction gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of each applicable operation are included in other income (expense) on the condensed consolidated statements of operations, and were $546 and ($131) for the three- and nine-month periods ended May 31, 2018, respectively, and ($188) and $173 for the three- and nine-month periods ended May 31, 2017, respectively.

 

Other Business Developments

 

On June 25, 2018, the Company announced to its employees the planned closing of its Pawtucket, RI manufacturing facility effective August 31, 2018. This is in line with the Company’s ongoing efforts to consolidate its manufacturing plants and streamline its existing processes. The manufacturing of products previously produced in the Pawtucket, RI facility will be moved to Company facilities in Oxford, MA and Lenoir, NC during a two-month transition period. The Company estimates total pre-tax charges of approximately $300 associated with facility closing activities. Of this amount, employee transition bonuses and other employee-related costs are estimated to be $275. The Company expects

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the transition to be substantially completed and the majority of these cash expenditures to be incurred in the fourth quarter of fiscal 2018.

 

On April 20, 2018, Chase finalized an agreement with an unrelated party to sell all inventory, operational machinery and equipment and intangible assets of the Company’s structural composites rod business, as well as a license related to the production and sale of rod, for proceeds of $2,232, net of transaction costs and following certain working capital adjustments. This business, which was part of the structural composites product line within the Industrial Materials segment, had limited growth and profitability prospects as part of the Company, and was outside the areas Chase has identified for strategic emphasis. The resulting pre-tax gain on sale of $1,480 was recognized in the third quarter of fiscal 2018 as a gain on sale of businesses within the condensed consolidated statement of operations. Chase received $2,075, net of transaction costs, in the third quarter of fiscal 2018, with the remaining $157 received in the fourth quarter of fiscal 2018 as a result of a working capital true-up. In relation to this transaction, the purchaser entered into a royalty agreement with the Company. The purchaser will make royalty payments to Chase based on future sales of certain structural composite material manufactured by the purchaser.

 

On December 29, 2017, Chase entered an agreement to acquire Stewart Superabsorbents, LLC (“SSA, LLC”), an advanced superabsorbent polymer (SAP) formulator and solutions provider, with operations located in Hickory and McLeansville, NC. The transaction closed on December 31, 2017. In the most recently completed fiscal year, SSA, LLC, and its recently-acquired Zappa-Tec business (collectively “Zappa Stewart”) had combined revenue in excess of $24,000. Chase expects this acquisition to be immediately accretive to its earnings, after adjusting for nonrecurring costs associated with the transaction and financing cost. The business was acquired for a purchase price of $73,469, after final working capital adjustments and excluding acquisition-related costs.  As part of this transaction, Chase acquired all assets of the business, and entered multiyear leases at both locations. The Company expensed $393 of acquisition-related costs associated with this acquisition during the second quarter of fiscal 2018.  The purchase was funded from a combination of Chase’s existing revolving credit facility and available cash on hand. Zappa Stewart’s protective materials technology complements Chase’s current specialty chemicals offerings. This acquisition is aligned with the Company’s core strategies and extends its reach into growing medical, environmental and consumer applications. The Company is currently in the process of finalizing purchase accounting, with regard to a calculation of a deferred tax balance and a final allocation of the purchase price to tangible and identifiable intangible assets assumed, and anticipates completion within fiscal 2018. Following the effective date of the acquisition the financial results of Zappa Stewart’s operations have been included in the Company’s financial statements in the specialty chemical intermediates 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 Zappa Stewart.

 

On April 3, 2017, Chase executed an agreement with an unrelated third party to sell all inventory, machinery and equipment and intangible assets of the Company’s fiber optic cable components product line for proceeds of $3,858, net of transaction costs and following certain working capital adjustments. The resulting pre-tax gain on sale of $2,013 was recognized in the third quarter of fiscal 2017 as gain on sale of businesses within the condensed consolidated statement of operations.  Further, the purchaser entered a multiyear lease for a portion of the manufacturing space at the Company’s Granite Falls, NC facility. Chase will provide ongoing manufacturing and administrative support to the purchaser for which the Company will receive additional consideration upon the performance of services. The Company’s fiber optic cable components product line was formerly a part of the Company’s Industrial Materials operating segment. See Note 8 to the condensed consolidated financial statements for additional information on the sale of the fiber optic cable components product line.

 

On September 30, 2016, the Company acquired certain assets of Resin Designs, LLC (“Resin Designs”), an advanced adhesives and sealants manufacturer, with locations in Woburn, MA and Newark, CA. The business was acquired for a purchase price of $30,270, after final working capital adjustments and excluding acquisition-related costs. As part of this transaction, Chase acquired all working capital and fixed assets of the business and entered multiyear leases at both locations. The Company expensed $584 of acquisition-related costs associated with this acquisition during the first quarter of fiscal 2017. 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. Since the effective date of the acquisition, the financial results of Resin Designs’ operations have been included in the

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Company’s financial statements in 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.

 

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 U.S. 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.

 

Given the scope of work required to implement the recognition and disclosure requirements under the ASU, we began our assessment process during fiscal 2017.  Chase continues to evaluate the impact of ASU No. 2014-09 on our consolidated financial statements and anticipates the new disclosure requirements and changes to process and controls will be significant. We expect revenue recognition for most of our products, which are shipments to OEMs based on individual purchase orders received, to remain largely unchanged. From a timing of revenue recognition standpoint (point in time versus over time), it is anticipated that certain products will be more affected than other products sold, since these certain products contain assets that a customer controls. Chase has considered customized products sold to customers having no alternative use and enforceable right to payment relating to those sales, and expects minimal impact on these types of orders. Guided by our scoping and risk assessment, we continue to conduct a comprehensive contract review in applying the guidance in Topic 606 focusing on the major steps in the five-step model outlined in the ASU. During the remainder of fiscal 2018, Chase will continue assessing system impacts, enhancing internal controls and financial reporting policies to address this standard’s requirements and risks, and finalizing our understanding of the financial impact of this standard on our consolidated financial statements, including the cumulative effect adjustment to be recorded upon implementation of this standard. The Company expects to utilize the modified retrospective method of adoption, coinciding with the start of fiscal 2019. We expect to finalize the evaluation and quantify the impact in upcoming quarters and will provide updates on its progress in future filings.

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use asset, which represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  The ASU will be effective for the Company beginning September 1, 2019 (fiscal 2020). Early application is permitted. Lessees must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the impact of the application of this ASU on our consolidated financial statements and disclosures thereto.

 

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

 

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.”  The new guidance dictates that when substantially all of the fair value of the gross assets acquired (or

11


 

disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, it should be treated as an acquisition or disposal of an asset. The guidance will be effective for the fiscal year beginning on September 1, 2018 (fiscal 2019), including interim periods within that year, with early adoption permitted.

 

In March 2017, the FASB issued ASU No. 2017-07, “Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This ASU applies to all employers that offer to their employees defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715, Compensation — Retirement Benefits. The ASU requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The ASU also allows only the service cost component to be eligible for capitalization when applicable (e.g., as a cost of internally manufactured inventory or a self-constructed asset). The required effective date for adoption of this guidance for the Company will be our fiscal year beginning September 1, 2018 (fiscal 2019), including interim periods within that annual period. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. The Company is currently evaluating the effect that ASU No. 2017-07 will have on its financial statements and related disclosures. 

 

In May 2017, the FASB issued ASU No. 2017-09, "Scope of Modification Accounting."  This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 (our fiscal year 2019), including interim periods within that reporting period. The impact of this ASU will be dependent on the nature and occurrence of such changes to the terms or conditions of a share-based payment award during the future effective period.

 

In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” Under previously existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The amendments in this ASU also require certain disclosures about stranded tax effects. The guidance is required for fiscal years beginning after December 15, 2018 (our fiscal year 2020), and interim periods within those fiscal years. Early adoption in any period is permitted. The Company is currently evaluating the effect that ASU No. 2018-02 will have on its financial statements and related disclosures. See Note 19 to the condensed consolidated financial statements for additional information on the effects of the Tax Act on our financial position and result of operations, including provisional transitional adjustments that were recorded during fiscal 2018 related to the Tax Act.

 

Note 3 — Inventory

 

Inventory consisted of the following as of May 31, 2018 and August 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

May 31, 

 

August 31, 

 

    

    

2018

    

2017

Raw materials

 

 

$

17,842

 

$

11,636

Work in process

 

 

 

7,315

 

 

6,877

Finished goods

 

 

 

10,668

 

 

7,105

Total Inventory

 

 

$

35,825

 

$

25,618

 

 

 

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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, 

 

 

    

2018

    

2017

    

 

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic Earnings per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

13,543

 

$

11,855

 

 

$

31,980

 

$

30,601

 

Less: Allocated to participating securities

 

 

128

 

 

127

 

 

 

304

 

 

332

 

Net income available to common shareholders

 

$

13,415

 

$

11,728

 

 

$

31,676

 

$

30,269

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

9,306,498

 

 

9,258,219

 

 

 

9,292,647

 

 

9,244,237

 

Net income per share - Basic

 

$

1.44

 

$

1.27

 

 

$

3.41

 

$

3.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted Earnings per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

13,543

 

$

11,855

 

 

$

31,980

 

$

30,601

 

Less: Allocated to participating securities

 

 

128

 

 

127

 

 

 

304

 

 

332

 

Net income available to common shareholders

 

$

13,415

 

$

11,728

 

 

$

31,676

 

$

30,269

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

9,306,498