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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 November 30, 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 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 ☐ 

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 December 31, 2018 was 9,402,706

 

 

 


 

CHASE CORPORATION

INDEX TO FORM 10-Q

 

For the Quarter Ended November 30, 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 November 30, 2018 and August 31, 2018 

 

4

 

 

 

Condensed Consolidated Statements of Operations for the three months ended November  30, 2018 and 2017 

 

5

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended November 30, 2018 and 2017 

 

6

 

 

 

Condensed Consolidated Statement of Equity for the three months ended November 30, 2018 and 2017 

 

7

 

 

 

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

 

31

 

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk 

 

41

 

 

 

Item 4 – Controls and Procedures 

 

42

 

 

 

Part II – OTHER INFORMATION 

 

 

 

 

 

Item 1 – Legal Proceedings 

 

43

 

 

 

Item 1A – Risk Factors 

 

43

 

 

 

Item 6 – Exhibits 

 

44

 

 

 

SIGNATURES 

 

45

 

 

 

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, 2018 concerning certain factors that could cause our actual results to differ materially from the results anticipated in such forward-looking statements. These Risk Factors are hereby incorporated by reference into this Quarterly Report.

 

 

3


 

Item 1 — Unaudited Condensed Consolidated Financial Statements

 

CHASE CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

 

 

 

 

 

 

 

 

November 30, 

 

August 31, 

 

 

 

2018

    

2018

 

ASSETS

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

35,520

 

$

34,828

 

Accounts receivable, less allowance for doubtful accounts of $588 and $559

 

 

42,998

 

 

44,610

 

Inventory

 

 

43,335

 

 

39,699

 

Prepaid expenses and other current assets

 

 

3,701

 

 

2,595

 

Due from sale of businesses

 

 

 —

 

 

400

 

Prepaid income taxes

 

 

1,327

 

 

4,100

 

Total current assets

 

 

126,881

 

 

126,232

 

 

 

 

 

 

 

 

 

Property, plant and equipment, less accumulated depreciation of $50,124 and $49,212

 

 

32,215

 

 

32,845

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

 

 

Goodwill

 

 

84,605

 

 

84,696

 

Intangible assets, less accumulated amortization of $56,991 and $54,039

 

 

62,206

 

 

65,330

 

Cash surrender value of life insurance

 

 

4,530

 

 

4,530

 

Restricted investments

 

 

1,083

 

 

1,090

 

Funded pension plan

 

 

272

 

 

301

 

Deferred income taxes

 

 

1,218

 

 

1,347

 

Other assets

 

 

87

 

 

98

 

Total assets

 

$

313,097

 

$

316,469

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

17,877

 

$

17,810

 

Accrued payroll and other compensation

 

 

4,903

 

 

6,639

 

Accrued expenses

 

 

4,211

 

 

4,486

 

Dividend payable

 

 

7,522

 

 

 —

 

Total current liabilities

 

 

34,513

 

 

28,935

 

 

 

 

 

 

 

 

 

Long-term debt

 

 

15,000

 

 

25,000

 

Deferred compensation

 

 

1,097

 

 

1,105

 

Accumulated pension obligation

 

 

10,453

 

 

10,736

 

Other liabilities

 

 

329

 

 

283

 

Accrued income taxes

 

 

3,512

 

 

3,654

 

 

 

 

 

 

 

 

 

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; 9,402,706 shares at November 30, 2018 and 9,396,947 shares at August 31, 2018 issued and outstanding

 

 

940

 

 

939

 

Additional paid-in capital

 

 

13,608

 

 

13,104

 

Accumulated other comprehensive loss

 

 

(12,727)

 

 

(12,336)

 

Retained earnings

 

 

246,372

 

 

245,049

 

Total equity

 

 

248,193

 

 

246,756

 

Total liabilities and equity

 

$

313,097

 

$

316,469

 

 

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 November 30, 

 

 

 

    

 

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

Sales

 

 

$

71,364

 

$

60,577

 

 

Royalties and commissions

 

 

 

1,139

 

 

1,340

 

 

 

 

 

 

72,503

 

 

61,917

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

Cost of products and services sold

 

 

 

46,575

 

 

36,895

 

 

Selling, general and administrative expenses

 

 

 

13,362

 

 

11,896

 

 

Exit costs related to idle facility (Note 15)

 

 

 

260

 

 

 —

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

 

12,306

 

 

13,126

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

 

(204)

 

 

(45)

 

 

Other income (expense)

 

 

 

(294)

 

 

(482)

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

 

11,808

 

 

12,599

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes (Note 18)

 

 

 

2,985

 

 

4,284

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

8,823

 

$

8,315

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

$

0.94

 

$

0.89

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

 

$

0.93

 

$

0.88

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

 

 

9,329,570

 

 

9,281,877

 

 

Diluted

 

 

 

9,381,303

 

 

9,384,426

 

 

 

 

 

 

 

 

 

 

 

 

Annual cash dividends declared per share

 

 

$

0.80

 

$

0.80

 

 

 

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 November 30, 

 

 

 

    

 

2018

    

2017

 

 

Net income

 

 

$

8,823

 

$

8,315

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

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

 

 

 

(21)

 

 

31

 

 

Change in funded status of pension plans, net of tax

 

 

 

236

 

 

80

 

 

Foreign currency translation adjustment

 

 

 

(606)

 

 

1,570

 

 

Total other comprehensive income (loss)

 

 

 

(391)

 

 

1,681

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

$

8,432

 

$

9,996

 

 

         

See accompanying notes to the condensed consolidated financial statements

 

 

6


 

CHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

THREE MONTHS ENDED NOVEMBER 30, 2018 AND 2017

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

Accumulated Other

 

 

 

 

Total

 

 

Common Stock

 

Paid-In

 

Comprehensive

 

Retained

 

Stockholders'

 

    

Shares

    

Amount

    

Capital

    

Income (Loss)

    

Earnings

    

Equity

Balance at August 31, 2017

 

9,354,136

 

$

935

 

$

14,060

 

$

(13,469)

 

$

209,403

 

$

210,929

Restricted stock grants, net of forfeitures

 

13,121

 

 

 1

 

 

(1)

 

 

 

 

 

 

 

 

 —

Amortization of restricted stock grants

 

 

 

 

 

 

 

421

 

 

 

 

 

 

 

 

421

Amortization of stock option grants

 

 

 

 

 

 

 

112

 

 

 

 

 

 

 

 

112

Exercise of stock options

 

10,859

 

 

 1

 

 

448

 

 

 

 

 

 

 

 

449

Common stock received for payment of stock option exercises

 

(3,276)

 

 

 —

 

 

(306)

 

 

 

 

 

 

 

 

(306)

Cash dividend accrued, $0.80 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,497)

 

 

(7,497)

Change in funded status of pension plans, net of tax $41

 

 

 

 

 

 

 

 

 

 

80

 

 

 

 

 

80

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

1,570

 

 

 

 

 

1,570

Net unrealized gain (loss) on restricted investments, net of tax $15

 

 

 

 

 

 

 

 

 

 

31

 

 

 

 

 

31

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

8,315

 

 

8,315

Balance at November 30, 2017

 

9,374,840

 

$

937

 

$

14,734

 

$

(11,788)

 

$

210,221

 

$

214,104

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at August 31, 2018

 

9,396,947

 

$

939

 

$

13,104

 

$

(12,336)

 

$

245,049

 

$

246,756

Restricted stock grants, net of forfeitures

 

4,709

 

 

 1

 

 

(1)

 

 

 

 

 

 

 

 

 —

Amortization of restricted stock grants

 

 

 

 

 

 

 

380

 

 

 

 

 

 

 

 

380

Amortization of stock option grants

 

 

 

 

 

 

 

125

 

 

 

 

 

 

 

 

125

Exercise of stock options

 

2,004

 

 

 —

 

 

120

 

 

 

 

 

 

 

 

120

Common stock received for payment of stock option exercises

 

(954)

 

 

 —

 

 

(120)

 

 

 

 

 

 

 

 

(120)

Cash dividend accrued, $0.80 per share

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,522)

 

 

(7,522)

Change in funded status of pension plans, net of tax $83

 

 

 

 

 

 

 

 

 

 

236

 

 

 

 

 

236

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

(606)

 

 

 

 

 

(606)

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

 

 

 

 

 

 

 

 

 

 

(21)

 

 

 

 

 

(21)

Adoption of ASC 606 (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

22

 

 

22

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

8,823

 

 

8,823

Balance at November 30, 2018

 

9,402,706

 

$

940

 

$

13,608

 

$

(12,727)

 

$

246,372

 

$

248,193

 

See accompanying notes to the condensed consolidated financial statements

 

 

7


 

CHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

In thousands

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

 

    

 

2018

    

2017

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

Net income

 

 

$

8,823

 

$

8,315

 

 

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

 

 

 

 

 

 

 

 

 

Depreciation

 

 

 

1,238

 

 

1,254

 

 

Amortization

 

 

 

3,113

 

 

2,314

 

 

Provision (recovery) of allowance for doubtful accounts

 

 

 

30

 

 

(126)

 

 

Stock-based compensation

 

 

 

505

 

 

533

 

 

Realized loss (gain) on restricted investments

 

 

 

17

 

 

(1)

 

 

Pension curtailment and settlement loss

 

 

 

200

 

 

 —

 

 

Deferred taxes

 

 

 

28

 

 

 —

 

 

Increase (decrease) from changes in assets and liabilities

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

1,523

 

 

3,329

 

 

Inventory

 

 

 

(3,692)

 

 

(1,593)

 

 

Prepaid expenses and other assets

 

 

 

(1,102)

 

 

(725)

 

 

Accounts payable

 

 

 

131

 

 

(1,348)

 

 

Accrued compensation and other expenses

 

 

 

(1,875)

 

 

(2,397)

 

 

Accrued income taxes

 

 

 

2,638

 

 

(3,001)

 

 

Net cash provided by operating activities

 

 

 

11,577

 

 

6,554

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

 

(639)

 

 

(851)

 

 

Cost to acquire intangible assets

 

 

 

(18)

 

 

(1)

 

 

Proceeds from sale of businesses

 

 

 

400

 

 

 —

 

 

Changes in restricted investments

 

 

 

(38)

 

 

(46)

 

 

Net cash used in investing activities

 

 

 

(295)

 

 

(898)

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

Payments of principal on debt

 

 

 

(10,000)

 

 

 —

 

 

Proceeds from exercise of common stock options

 

 

 

 —

 

 

143

 

 

Net cash (used in) provided by financing activities

 

 

 

(10,000)

 

 

143

 

 

 

 

 

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS

 

 

 

1,282

 

 

5,799

 

 

Effect of foreign exchange rates on cash

 

 

 

(590)

 

 

1,109

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

 

34,828

 

 

47,354

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

 

$

35,520

 

$

54,262

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash Investing and Financing Activities

 

 

 

 

 

 

 

 

 

Common stock received for payment of stock option exercises

 

 

$

120

 

$

306

 

 

Property, plant and equipment additions included in accounts payable

 

 

$

158

 

$

176

 

 

Annual cash dividend declared

 

 

$

7,522

 

$

7,497

 

 

 

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, 2018, in conjunction with its 2018 Annual Report on Form 10-K. Certain immaterial reclassifications have been made to the prior year amounts to conform to the current year’s presentation.

 

The results of operations for the interim period ended November 30, 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, 2018, which are contained in the Company’s 2018 Annual Report on Form 10-K.

 

The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring items) that are, in the opinion of management, necessary for a fair statement of the Company’s financial position as of November 30, 2018, the results of its operations, comprehensive income,  changes in equity and cash flows for the interim periods ended November 30, 2018 and 2017.

 

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 $52 and ($353) for the three-month periods ended November 30, 2018 and 2017, respectively.

 

9


 

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 was moved to Company facilities in Oxford, MA and Lenoir, NC during a two-month transition period, with certain additional expenditures recognized in fiscal 2019. During the quarter ended November 30, 2018, the Company recognized $260 in expenses related to this move.  The Company expensed $1,272 in the fourth quarter of fiscal 2018 related to the closure, including: (a) cash-related employee-related, logistics and uncapitalized facility improvement costs of $590; and (b) non-cash-related accelerated depreciation expense of $682. Future costs related to this move are not anticipated to be significant to the condensed consolidated financial statements.

 

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. Chase will provide certain transitional manufacturing and administrative support to the purchaser for which the Company will receive additional consideration upon the performance of services.  The purchaser also 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 prior to the acquisition, SSA, LLC, and its recently-acquired Zappa-Tec business (collectively “Zappa Stewart”) had combined revenue in excess of $24,000.  This acquisition proved to be immediately accretive to the Company’s 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 finalized purchase accounting in the first quarter of fiscal 2019, without any adjustment to amounts recorded at August 31, 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.

 

Significant Accounting Policies

 

The Company’s significant accounting policies are detailed in Note 1 —  “Summary of Significant Accounting Policies” within Item 8 of the Company’s Annual Report on Form 10-K for the year ended August 31, 2018. Significant changes to these accounting policies as a result of adopting ASC 606 “Revenue from Contracts with Customers” during the first quarter of fiscal 2019 are discussed within Note 2 —  “Recent Accounting Standards” and Note 9 — “Revenue from Contracts with Customers” within this Current Quarterly Report on Form 10-Q.

 

 

 

10


 

Note 2 — Recent Accounting Standards

 

Recently Issued Accounting Pronouncements

 

In February 2016, the Financial Accounting Standards Board ("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 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 18 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 and 2019 related to the Tax Act.

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The amended guidance establishes a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance, including industry-specific guidance.

 

The amended guidance clarifies that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the amended guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASC 606 is effective for the Company’s interim and annual reporting periods beginning September 1, 2018 (fiscal 2019), and is to be adopted using either a full retrospective or modified retrospective transition method. 

 

The Company adopted the amended guidance and all related amendments using the modified retrospective approach on September 1, 2018, at which time it became effective for the Company.  The Company recognized the cumulative effect of initially applying the new revenue standard to all open contracts requiring recognition over time that were not completed on the date of adoption as an adjustment to the opening balance of retained earnings.

 

At the adoption date, the cumulative impact of revenue that would have been recognized over time was $80. The related adoption impact to retained earnings was $22, net of tax. The impact to net sales and net income as a result of applying ASC 606 was an increase of $105 and $45, respectively, for the quarter ended November 30, 2018. See Note 9 — “Revenue from Contracts with Customers” for further discussion of the effects of adoption.

 

11


 

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 Company adopted ASU No. 2016-15 on September 1, 2018, and the adoption did not have a material effect on its financial statements and related disclosures.

 

In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.”  The new guidance dictates that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, it should be treated as an acquisition or disposal of an asset. The Company adopted the ASU on September 1, 2018. The adoption had no material effect on the financial statements and related disclosures in the first quarter of fiscal 2019. The effect ASU No. 2017-01 will have on the financial statements and related disclosures of the Company in future periods will be dependent on the nature of potential future acquisitions and divestitures.

 

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 Company adopted ASU No. 2017-07 on September 1, 2018, which resulted in the reclassification of $163 in expense, previously reported in selling, general and administrative expense, to other income (expense) for the three-month period ended November 30, 2017 (prior year). Further reclassifications will be required on the condensed consolidated statement of operations for periods of fiscal 2018 subsequent to November 30, 2017. The adoption of ASU 2017-07 did not have any effect on the historically stated condensed consolidated balance sheets or condensed consolidated statement of cash flows.

 

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. The Company adopted the ASU 2017-09 on September 1, 2018. The adoption had no material effect on the financial statements and related disclosures in the first quarter of fiscal 2019. The effect ASU No. 2017-09 will have on the financial statements and related disclosures of the Company in future periods will be dependent on the nature of potential future changes the Company may make to the terms or conditions of any share-based payment awards.

 

 

Note 3 — Inventory

 

Inventory consisted of the following as of November 30,  2018 and August 31, 2018:

 

 

 

 

 

 

 

 

 

 

 

    

November 30, 2018

    

August 31, 2018

 

    

Raw materials

 

$

23,350

 

$

21,998

 

 

Work in process

 

 

7,972

 

 

7,653

 

 

Finished goods

 

 

12,013

 

 

10,048

 

 

Total Inventory

 

$

43,335

 

$

39,699

 

 

 

 

 

12


 

Note 4 — Net Income Per Share

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

    

 

2018

    

2017

 

 

 

 

 

 

 

 

 

 

Basic Earnings per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

8,823

 

$

8,315

 

Less: Allocated to participating securities

 

 

 

69

 

 

79

 

Net income available to common shareholders

 

 

$

8,754

 

$

8,236

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

 

9,329,570

 

 

9,281,877

 

Net income per share - Basic

 

 

$

0.94

 

$

0.89

 

 

 

 

 

 

 

 

 

 

Diluted Earnings per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

$

8,823

 

$

8,315

 

Less: Allocated to participating securities

 

 

 

69

 

 

79

 

Net income available to common shareholders

 

 

$

8,754

 

$

8,236

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

 

9,329,570

 

 

9,281,877

 

Additional dilutive common stock equivalents

 

 

 

51,733

 

 

102,549

 

Diluted weighted average shares outstanding

 

 

 

9,381,303

 

 

9,384,426

 

Net income per share - Diluted

 

 

$

0.93

 

$

0.88

 

 

For the three months ended November 30, 2018 and 2017, stock options to purchase 12,418 and 9,622 shares 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.

 

 

13


 

Note 5 — Stock-Based Compensation

 

In August 2017, the Board of Directors of the Company approved the fiscal year 2018 Long Term Incentive Plan (“2018 LTIP”) for the executive officers and other members of management.  The 2018 LTIP is an equity-based plan with a grant date of September 1, 2017 and contains a performance and service-based restricted stock grant of 4,249 shares in the aggregate, subject to adjustment, with a vesting date of August 31, 2020.  Based on the fiscal year 2018 financial results, 572 additional shares of restricted stock (total of 4,821 shares) were earned and granted subsequent to the end of fiscal year 2018 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 2018, the Board of Directors of the Company approved the fiscal year 2019 Long Term Incentive Plan (“2019 LTIP”) for the executive officers and other members of management.  The 2019 LTIP is an equity-based plan with a grant date of September 1, 2018 and contains the following equity components:

 

Restricted Shares — (a) a performance and service-based restricted stock grant of 3,541 shares in the aggregate, subject to adjustment based on fiscal 2019 results, with a vesting date of August 31, 2021.  Compensation expense is recognized on a ratable basis over the vesting period based on quarterly probability assessments; and (b) a time-based restricted stock grant of 3,068 shares in the aggregate, with a vesting date of August 31, 2021. Compensation expense is recognized on a ratable basis over the vesting period.

 

Stock options — options to purchase 8,603 shares of common stock in the aggregate with an exercise price of $123.95 per share.  The options will vest in three equal annual installments beginning on August 31, 2019 and ending on August 31, 2021. Of the options granted, 3,927 options will expire on August 31, 2028, and 4,676 options will expire on September 1, 2028. Compensation expense is recognized over the period of the award consistent with the vesting terms.

 

In September 2018, restricted stock in the amount of 2,472 shares related to a first quarter of fiscal 2017 grant was forfeited in conjunction with the termination of employment of a non-executive member of management of the Company.

 

Note 6 — Segment Data and Foreign Operations

 

The Company is organized into two reportable 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 and customized sealant and adhesive systems for electronics, laminated durable papers, laminates for the packaging and industrial laminate markets, custom manufacturing services, pulling and detection tapes used in the installation, measurement and location of fiber optic cables and water and natural gas lines, cover tapes essential to delivering semiconductor components via tape and reel packaging, composite materials and elements, polymeric microspheres, polyurethane dispersions and superabsorbent polymers. Beginning December 31, 2017, the Industrial Materials segment includes the acquired operations of Zappa Stewart, included in the Company’s specialty chemical intermediates product line. Following the April 20, 2018 sale of the structural composites rod business, future product sales of composite materials and elements are not anticipated to be significant to the condensed consolidated financial statements.

 

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.

 

14


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

 

 

2018

 

    

2017

    

 

Revenue

 

 

 

 

 

 

 

 

 

Industrial Materials

 

$

60,160

 

 

$

49,985

 

 

Construction Materials

 

 

12,343

 

 

 

11,932

 

 

Total

 

$

72,503

 

 

$

61,917

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

 

 

 

 

 

 

 

 

Industrial Materials

 

$

14,803

(a)

 

$

15,365

 

 

Construction Materials

 

 

4,466

 

 

 

4,246

 

 

Total for reportable segments

 

 

19,269

 

 

 

19,611

 

 

Corporate and common costs

 

 

(7,461)

(b)

 

 

(7,012)

 

 

Total

 

$

11,808

 

 

$

12,599

 

 

 

 

 

 

 

 

 

 

 

 

Includes the following costs by segment:

 

 

 

 

 

 

 

 

 

Industrial Materials

 

 

 

 

 

 

 

 

 

Interest

 

$

163

 

 

$

36

 

 

Depreciation

 

 

839

 

 

 

800

 

 

Amortization

 

 

2,790

 

 

 

1,987

 

 

 

 

 

 

 

 

 

 

 

 

Construction Materials

 

 

 

 

 

 

 

 

 

Interest

 

$

41

 

 

$

 9

 

 

Depreciation

 

 

175

 

 

 

190

 

 

Amortization

 

 

323

 

 

 

327

 

 

 


(a)

Includes $260 of expense related to the closure and exit of our Pawtucket, RI location recognized in the first quarter of fiscal 2019

(b)

Includes $200 of pension-related settlement costs due to the timing of lump-sum distributions

 

15


 

Total assets for the Company’s reportable segments as of November 30, 2018 and August 31, 2018 were:

 

 

 

 

 

 

 

 

 

 

 

 

November 30,