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EX-32.2 - EX-32.2 - CHASE CORPccf-20200531ex322f0484c.htm
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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, 2020

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) (Zip Code)

(781) 332-0700

(Registrant’s Telephone Number, Including Area Code)

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Common stock, $.10 par value

Trading Symbol(s)

CCF

Name of each exchange on which registered

NYSE American

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 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 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 13(a) of the Exchange 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, 2020 was 9,442,659.


CHASE CORPORATION

INDEX TO FORM 10-Q

For the Quarter Ended May 31, 2020

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, 2020 (unaudited) and August 31, 2019

4

Condensed Consolidated Statements of Operations for the three and nine months ended May 31, 2020 and 2019 (unaudited)

5

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended May 31, 2020 and 2019 (unaudited)

6

Condensed Consolidated Statements of Equity for the three and nine months ended May 31, 2020 and 2019 (unaudited)

7

Condensed Consolidated Statements of Cash Flows for the nine months ended May 31, 2020 and 2019 (unaudited)

9

Notes to Condensed Consolidated Financial Statements

10

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

32

Item 3 – Quantitative and Qualitative Disclosures About Market Risk

44

Item 4 – Controls and Procedures

45

Part II – OTHER INFORMATION

Item 1 – Legal Proceedings

46

Item 1A – Risk Factors

46

Item 6 – Exhibits

47

SIGNATURES

48

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 Chase Corporation’s future operating results; seasonality expectations; plans for the development, utilization or disposal of manufacturing facilities; future economic conditions; its expectations as to legal proceedings; the effect of its market and product development efforts; and expectations or plans relating to the implementation or realization of its 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, statements relating to future dividend payments, as well as expected impact of the coronavirus disease 2019 (COVID-19) pandemic on the Company's businesses. 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 the Company operates, 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 the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2019 concerning certain factors that could cause its actual results to differ materially from the results anticipated in such forward-looking statements, as well as the supplement to those discussions contained in Part II, Item 1A of this Quarterly Report on Form 10-Q. 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, 

 

2020

    

2019

 

ASSETS

Current Assets

Cash and cash equivalents

$

83,259

$

47,771

Accounts receivable, less allowance for doubtful accounts of $433 and $739

35,999

39,324

Inventory

40,551

42,354

Prepaid expenses and other current assets

2,604

2,418

Assets held for sale

14

1,064

Prepaid income taxes

427

1,451

Total current assets

162,854

134,382

Property, plant and equipment, less accumulated depreciation of $52,035 and $49,730

26,656

29,326

Other Assets

Goodwill

82,044

81,986

Intangible assets, less accumulated amortization of $74,715 and $65,862

44,003

52,704

Cash surrender value of life insurance

4,450

4,450

Restricted investments

1,413

1,260

Deferred income taxes

3,767

3,804

Operating lease right-of-use asset (Note 8)

8,658

Other assets

25

56

Total assets

$

333,870

$

307,968

LIABILITIES AND EQUITY

Current Liabilities

Accounts payable

$

12,087

$

12,105

Accrued payroll and other compensation

5,447

6,300

Accrued expenses

5,570

4,035

Total current liabilities

23,104

22,440

Operating lease long-term liabilities (Note 8)

6,157

Deferred compensation

1,424

1,275

Accumulated pension obligation

9,575

10,485

Other liabilities

100

217

Accrued income taxes

2,017

2,324

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; 9,442,398 shares at May 31, 2020 and 9,400,748 shares at August 31, 2019 issued and outstanding

945

940

Additional paid-in capital

16,235

14,351

Accumulated other comprehensive loss

(14,945)

(14,324)

Retained earnings

289,258

270,260

Total equity

291,493

271,227

Total liabilities and equity

$

333,870

$

307,968

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, 

    

2020

    

2019

 

2020

    

2019

 

Revenue

Sales

$

64,157

$

70,883

$

194,540

$

207,689

Royalties and commissions

714

1,229

2,715

3,557

64,871

72,112

197,255

211,246

Costs and Expenses

Cost of products and services sold

39,689

46,406

122,138

136,194

Selling, general and administrative expenses

12,773

13,251

40,223

39,699

Operations optimization costs (Note 15)

268

193

977

453

Loss on impairment of goodwill (Note 7)

2,410

Operating income

12,141

12,262

33,917

32,490

Interest expense

(67)

(91)

(178)

(457)

Gain on sale of real estate (Note 14)

760

760

Other income (expense)

(307)

17

(1,096)

(1,105)

Income before income taxes

12,527

12,188

33,403

30,928

Income taxes (Note 17)

2,619

3,647

8,254

8,291

Net income

$

9,908

$

8,541

$

25,149

$

22,637

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

Basic

$

1.05

$

0.91

$

2.67

$

2.41

Diluted

$

1.04

$

0.90

$

2.64

$

2.39

Weighted average shares outstanding

Basic

9,363,559

9,337,436

9,357,176

9,333,098

Diluted

9,429,263

9,378,910

9,435,897

9,377,748

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 May 31, 

Nine Months Ended May 31, 

    

2020

    

2019

 

2020

    

2019

 

Net income

$

9,908

$

8,541

$

25,149

$

22,637

Other comprehensive (loss) income:

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

7

(5)

5

(13)

Change in funded status of pension plans, net of tax

185

91

444

618

Foreign currency translation adjustment

(1,077)

(1,494)

318

(956)

Total other comprehensive (loss) income

(885)

(1,408)

767

(351)

Comprehensive income

$

9,023

$

7,133

$

25,916

$

22,286

See accompanying notes to the condensed consolidated financial statements

6


CHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

THREE MONTHS ENDED MAY 31, 2020 AND 2019

(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 February 28, 2019

9,412,323

$

941

$

14,328

$

(11,279)

$

251,645

$

255,635

Amortization of restricted stock grants

462

462

Amortization of stock option grants

126

126

Change in funded status of pension plans, net of tax $34

91

91

Foreign currency translation adjustment

(1,494)

(1,494)

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

(5)

(5)

Net income

8,541

8,541

Balance at May 31, 2019

9,412,323

$

941

$

14,916

$

(12,687)

$

260,186

$

263,356

Balance at February 29, 2020

9,448,620

$

945

$

15,882

$

(14,060)

$

279,350

$

282,117

Restricted stock grants, net of forfeitures

(432)

Amortization of restricted stock grants

606

606

Amortization of stock option grants

231

231

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

(5,790)

(484)

(484)

Change in funded status of pension plans, net of tax $65

185

185

Foreign currency translation adjustment

(1,077)

(1,077)

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

7

7

Net income

9,908

9,908

Balance at May 31, 2020

9,442,398

$

945

$

16,235

$

(14,945)

$

289,258

$

291,493

See accompanying notes to the condensed consolidated financial statements

7


CHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY

NINE MONTHS ENDED MAY 31, AND 2020 AND 2019

(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, 2018

9,396,947

$

939

$

13,104

$

(12,336)

$

245,049

$

246,756

Restricted stock grants, net of forfeitures

9,308

1

(1)

Amortization of restricted stock grants

1,257

1,257

Amortization of stock option grants

375

375

Exercise of stock options

7,022

1

301

302

Common stock received for payment of stock option exercises

(954)

(120)

(120)

Cash dividend on common stock, $0.80 per share

(7,522)

(7,522)

Change in funded status of pension plans, net of tax $218

618

618

Foreign currency translation adjustment

(956)

(956)

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

(13)

(13)

Adoption of ASC 606

22

22

Net income

22,637

22,637

Balance at May 31, 2019

9,412,323

$

941

$

14,916

$

(12,687)

$

260,186

$

263,356

Balance at August 31, 2019

9,400,748

$

940

$

14,351

$

(14,324)

$

270,260

$

271,227

Restricted stock grants, net of forfeitures

44,879

5

(5)

Amortization of restricted stock grants

1,686

1,686

Amortization of stock option grants

687

687

Exercise of stock options

3,618

123

123

Common stock received for payment of stock option exercises

(1,057)

(123)

(123)

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

(5,790)

(484)

(484)

Cash dividend on common stock, $0.80 per share

(7,539)

(7,539)

Change in funded status of pension plans, net of tax $156

444

444

Foreign currency translation adjustment

318

318

Net unrealized gain (loss) on restricted investments, net of tax $3

5

5

Adoption of ASU 2018-02 (Note 2)

(1,388)

1,388

Net income

25,149

25,149

Balance at May 31, 2020

9,442,398

$

945

$

16,235

$

(14,945)

$

289,258

$

291,493

See accompanying notes to the condensed consolidated financial statements

8


CHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

In thousands

Nine Months Ended May 31, 

    

2020

    

2019

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$

25,149

$

22,637

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

Gain on sale of real estate

(760)

Loss on impairment of goodwill

2,410

Depreciation

2,989

3,634

Amortization

8,724

9,339

(Recovery) provision for allowance for doubtful accounts

(307)

166

Stock-based compensation

2,373

1,632

Realized (loss) gain on restricted investments

(32)

(2)

Pension curtailment and settlement loss

75

484

Deferred taxes

(15)

(581)

Increase (decrease) from changes in assets and liabilities

Accounts receivable

3,656

3,164

Inventory

1,835

(6,135)

Prepaid expenses and other assets

(154)

(504)

Accounts payable

(183)

(4,574)

Accrued compensation and other expenses

(1,263)

(1,912)

Accrued income taxes

578

517

Net cash provided by operating activities

42,665

30,275

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of property, plant and equipment

(1,044)

(1,841)

Cost to acquire intangible assets

(36)

Proceeds from sale of real estate

1,810

Proceeds from sale of businesses

400

Changes in restricted investments

(115)

(86)

Net cash provided by (used) in investing activities

651

(1,563)

CASH FLOWS FROM FINANCING ACTIVITIES

Payments of principal on debt

(25,000)

Dividend paid

(7,539)

(7,522)

Proceeds from exercise of common stock options

182

Payments of taxes on stock options and restricted stock

(484)

Net cash used in financing activities

(8,023)

(32,340)

INCREASE IN CASH & CASH EQUIVALENTS

35,293

(3,628)

Effect of foreign exchange rates on cash

195

(562)

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

47,771

34,828

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

83,259

$

30,638

Non-cash Investing and Financing Activities

Common stock received for payment of stock option exercises

$

123

$

120

Property, plant and equipment additions included in accounts payable

$

236

$

213

See accompanying notes to the condensed consolidated financial statements

9


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 across diverse market sectors. The Company’s strategy is to maximize the performance of its core businesses and brands while seeking future opportunities through strategic acquisitions. Through investments in facilities, systems and organizational consolidation the Company seeks to improve performance and gain economies of scale.

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 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, 2019 in conjunction with its 2019 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, 2020 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, 2019 which are contained in the Company’s 2019 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, 2020, and the results of its operations, comprehensive income, changes in equity and cash flows for the interim periods ended May 31, 2020 and 2019.

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 Chase Corporation’s 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 $155 and ($451) for the three- and nine-month periods ended May 31, 2020, respectively, and $135 and ($281) for the three- and nine-month periods ended May 31, 2019, respectively.

Other Business Developments

The second and third fiscal quarters of 2020 saw the global spread of the coronavirus pandemic (COVID-19), which grew to create significant volatility, uncertainty and global economic disruption. During the third fiscal quarter, the Company implemented changes to its cost structure designed to address market changes brought by COVID-19 and demonstrate its commitment to fiscal prudence: (a) the Company made a targeted reduction in its global workforce, contemplated pre-pandemic but catalyzed by COVID-19, which resulted in the recognition of $183 in severance costs

10


during the period; and (b) the Company also instituted a temporary 20% reduction in the base salaries of its named executive officers and select members of senior management, as well as the cash compensation of the non-employee members of its Board of Directors. The reduction in force, which impacted operations in the Company’s U.S. facilities, and the adjustments in compensation, were both effective May 2020.

During the first quarter of fiscal 2020, the Company commissioned third party led studies regarding the potential upgrading of the Company’s current worldwide ERP system. Chase is currently reviewing the data and recommendations provided by the study and may further utilize third-party engineering, IT and other professional services firms in the future for similar work, as well as work around the facilities rationalization and consolidation initiative. The Company recognized $150 in expense related to these services in the first quarter of fiscal 2020, with no expense recognized in the second or third fiscal quarters. Given the ongoing nature of the review, an estimate of future costs, including those that may be capitalized, cannot currently be determined.

During the third quarter of fiscal 2019, Chase began moving the pulling and detection operations housed in its Granite Falls, NC location to its Hickory, NC facility. This is in line with the Company’s ongoing initiative to consolidate its manufacturing plants and streamline its existing processes. At the time, the pulling and detection operations were the only Chase-owned production operations in Granite Falls, NC, with the remaining portions of the building being either utilized for research and development or leased to a third party. The process of moving, including moving internal research and development capabilities, was substantially completed during the second quarter of fiscal 2020. The Company recognized $60 and $559 in expense related to the move in the three-month and six-month periods ended February 29, 2020, respectively, having recognized $526 in expense during the second half of fiscal 2019. No costs were recognized in the three months ended May 31, 2020, and future costs related to this move are not anticipated to be significant to the condensed consolidated financial statements.

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 manufacture of products previously produced in the Pawtucket, RI facility was substantially moved to Company facilities in Oxford, MA and Lenoir, NC during a two-month transition period. In the fourth quarter of fiscal 2018, the Company expensed $1,272 related to the closure. The Company also recognized $260 in expense related to the move in the three-month period ended November 30, 2018, with no additional expense recognized in the remainder of fiscal 2019. The Company completed the sale of its Pawtucket, RI location to a third party in the third quarter of fiscal 2020 for net proceeds totaling $1,810, recognizing a gain on sale of real estate of $760. Also, during the third quarter of fiscal 2020, the Company recognized $85 in final Pawtucket, RI transition and exit costs, with no further costs related to this initiative anticipated in future periods.

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, 2019. Management believes that there have been no material changes during the nine months ended May 31, 2020 to the critical accounting policies reported in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2019.

11


Note 2 — Recent Accounting Standards

Recently Issued Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-03, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which modifies the measurement approach for credit losses on financial assets measured on an amortized cost basis from an 'incurred loss' method to an 'expected loss' method. In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is an accounting pronouncement that amends ASU 2016-03. The ASU 2019-11 amendment provides clarity and improves the codification to ASU 2016-03. The pronouncements are concurrently effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years (effective fiscal 2021). The Company is currently evaluating the effects of this pronouncement on its condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, lessees are 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. In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) Targeted Improvements.” The updated guidance provided an optional transition method, which allows for the application of the standard as of the adoption date with no restatement of prior period amounts. The Company adopted the standard on September 1, 2019 (start of fiscal 2020) under the optional transition method described above. Consequently, historical financial information was not updated, and the disclosures required under the new standard are not provided for dates and periods prior to September 1, 2019.

The new standard provides several optional practical expedients in transition. The Company has elected to apply the “package of practical expedients” which allows it to not reassess i) whether existing or expired arrangements contain a lease, ii) the lease classification of existing or expired leases, or iii) whether previous initial direct costs would qualify for capitalization under the new lease standard. In preparation for adoption of the standard, the Company enhanced its internal controls to enable the preparation of financial information including the assessment of the impact of the standard. The initial adoption of the ASU resulted in the recognition of additional lease liabilities of $9,644 ($2,071 short-term and $7,573 long-term) and right-of-use assets of $10,200 as of September 1, 2019 on the condensed consolidated balance sheet as it relates to the Company’s operating leases. The new standard did not have a material impact on the Company’s condensed consolidated statement of operations or cash flows.

In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU was issued to address a narrow-scope financial reporting issue that arose as a result of the enactment of the Tax Cuts and Jobs Act (“Tax Reform”) on December 22, 2017. The objective of ASU 2018-02 is to address the tax effects of items within accumulated other comprehensive income (referred to as “stranded tax effects”) that do not reflect the appropriate tax rate enacted in the Tax Reform. As a result, the ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate. The amount of the reclassification would be the difference between the historical corporate income tax rate of 35 percent and the current enacted corporate income tax rate of 21 percent. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, including adoption in an interim period. The amendments in this ASU may be applied retrospectively to each period in which the effect of the change in the U.S. Federal corporate income tax rate in the Tax Reform is recognized. Therefore, the Company adopted ASU 2018-02 in the first quarter of the year ending August 31, 2020, and has elected to reclassify the income tax effects of the Tax Reform related to its pension funding from accumulated other comprehensive loss to retained earnings.

12


Note 3 — Inventory

Inventory consisted of the following as of May 31, 2020 and August 31, 2019:

May 31, 

August 31, 

    

    

2020

    

2019

Raw materials

$

19,074

$

20,325

Work in process

7,660

8,748

Finished goods

13,817

13,281

Total Inventory

$

40,551

$

42,354

13


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, 

 

    

2020

    

2019

    

2020

    

2019

 

Basic Earnings per Share

Net income

 

$

9,908

 

$

8,541

 

$

25,149

 

$

22,637

Less: Allocated to participating securities

86

68

201

177

Net income available to common shareholders

 

$

9,822

 

$

8,473

 

$

24,948

 

$

22,460

Basic weighted average shares outstanding

9,363,559

9,337,436

9,357,176

9,333,098

Net income per share - Basic

 

$

1.05

 

$

0.91

 

$

2.67

 

$

2.41

Diluted Earnings per Share

Net income

 

$

9,908

 

$

8,541

 

$

25,149

 

$

22,637

Less: Allocated to participating securities

86

68

201

177

Net income available to common shareholders

 

$

9,822

 

$

8,473

 

$

24,948

 

$

22,460

Basic weighted average shares outstanding

9,363,559

9,337,436

9,357,176

9,333,098

Additional dilutive common stock equivalents

65,704

41,474

78,721

44,650

Diluted weighted average shares outstanding

9,429,263

9,378,910

9,435,897

9,377,748

Net income per share - Diluted

 

$

1.04

 

$

0.90

 

$

2.64

 

$

2.39

For the three- and nine-month periods ended May 31, 2020, stock options to purchase 17,913 and 11,841 shares of common stock, respectively, were outstanding but were not included in the calculation of diluted income per share because their inclusion would be anti-dilutive. For the three- and nine-month periods ended May 31, 2019, stock options to purchase 15,625 and 14,566 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.

14


Note 5 — Stock-Based Compensation

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 a performance and service-based restricted stock grant of 6,609 shares in the aggregate, subject to adjustment (as discussed below), with a vesting date of August 31, 2021.

During the fourth quarter of fiscal 2019, an additional grant of restricted stock was made related to the 2019 LTIP grant in conjunction with an amendment to the equity compensation program for a promoted employee. The additional grant contains the following restricted stock components: (a) a performance and service-based restricted stock grant of 211 shares in the aggregate, subject to adjustment based on fiscal 2019 results, with a vesting date of August 31, 2021, for which 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 132 shares in the aggregate, with a vesting date of August 31, 2021, for which compensation expense is recognized on a ratable basis over the vesting period.

In August 2019, restricted stock in the amount of 833 shares related to the 2019 LTIP grant was forfeited in conjunction with an amendment in the equity compensation agreement of an employee.

Based on the fiscal year 2019 financial results, 2,694 shares of restricted stock already granted were forfeited subsequent to the end of fiscal year 2019 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 2019, the Board of Directors of the Company approved the fiscal year 2020 Long Term Incentive Plan (“2020 LTIP”) for the executive officers and other members of management. The 2020 LTIP is an equity-based plan with a grant date of September 1, 2019 and contains the following equity components:

Restricted Shares — (a) a performance and service-based restricted stock grant of 3,697 shares in the aggregate, subject to adjustment based on fiscal 2020 results, with a vesting date of August 31, 2022. 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 3,689 shares in the aggregate, with a vesting date of August 31, 2022. Compensation expense is recognized on a ratable basis over the vesting period.

Stock options — options to purchase 13,418 shares of common stock in the aggregate with an exercise price of $100.22 per share. The options will vest in three equal annual installments beginning on August 31, 2020 and ending on August 31, 2022. Of the options granted, 6,218 options will expire on August 31, 2029, and 7,200 options will expire on September 1, 2029. Compensation expense is recognized over the period of the award consistent with the vesting terms.

In August 2019, 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, 2019 and contain the following equity components: (a) time-based restricted stock grant of 15,945 shares in the aggregate, and having a vesting date of August 31, 2022; and (b) options to purchase 53,642 shares of common stock in the aggregate with an exercise price of $100.22 per share. The options will cliff vest on August 31, 2022 and will expire on August 31, 2029. 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 second quarter of fiscal 2020, additional grants of 18,720, 616 and 432 shares of restricted stock (total of 19,768) were issued to non-executive members of management with vesting dates of December 31, 2021, 2022 and 2024, respectively. Compensation expense is being recognized on a ratable basis over the vesting period.

15


In February 2020, as part of their standard compensation for board service, non-employee members of the Board received a total grant of 4,906 shares of restricted stock for service for the period from January 31, 2020 through January 31, 2021. The shares of restricted stock will vest at the conclusion of this service period. Compensation is being recognized on a ratable basis over the twelve-month vesting period.

In May 2020, restricted stock in the amount of 432 shares related to a second quarter of fiscal 2020 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 three reportable operating segments: Adhesives, Sealants and Additives; Industrial Tapes; and Corrosion Protection and Waterproofing. The segments are distinguished by the nature of the products manufactured and how they are delivered to their respective markets. In the fourth quarter of the Company’s fiscal year 2019, it reorganized from two into three reportable operating segments; prior year quarter and year-to-date period amounts have been recast to reflect this change.

The Adhesives, Sealants and Additives segment offers innovative and specialized product offerings consisting of both end-use products and intermediates that are used in, or integrated into, another company’s product. Demand for the segment’s product offerings is typically dependent upon general economic conditions. The Adhesives, Sealants and Additives segment leverages the core specialty chemical competencies of the Company, and serves diverse markets and applications. The segment sells predominantly into the transportation, appliances, medical, general industrial and environmental market verticals. The segment’s products include moisture protective coatings and customized sealant and adhesive systems for electronics, polymeric microspheres, polyurethane dispersions and superabsorbent polymers.

The Industrial Tapes segment features legacy wire and cable materials, specialty tapes and other laminated and coated products. The segment derives its competitive advantage through its proven chemistries, diverse specialty offerings and the reliability its supply chain offers to end customers. These products are generally used in the assembly of other manufacturers’ products, with demand typically dependent upon general economic conditions. The Industrial Tapes segment sells mostly to established markets, with some exposure to growth opportunities through further development of existing products. Markets served include cable manufacturing, utilities and telecommunications, and electronics packaging. The segment’s offerings include insulating and conducting materials for wire and cable manufacturers, 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 and cover tapes essential to delivering semiconductor components via tape-and-reel packaging.

The Corrosion Protection and Waterproofing segment is principally composed of project-oriented product offerings that are primarily sold and used as “Chase” branded products. End markets include new and existing infrastructure projects on oil, gas, water and wastewater pipelines, highways and bridge decks, water and wastewater containment systems, and commercial buildings. The segment’s products include protective coatings for pipeline applications, coating and lining systems for waterproofing and liquid storage applications, adhesives and sealants used in architectural and building envelope waterproofing applications, high-performance polymeric asphalt additives, and expansion joint systems for waterproofing applications in transportation and architectural markets. With sales generally dependent on outdoor project work, the segment experiences highly seasonal sales patterns.

16


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

Three Months Ended May 31, 

Nine Months Ended May 31, 

    

2020

    

2019

2020

    

2019

    

 

Revenue

Adhesives, Sealants and Additives

$

22,922

$

26,009

$

73,184

$

78,814

Industrial Tapes

31,752

33,704

91,931

98,324

Corrosion Protection and Waterproofing

10,197

12,399

32,140

34,108

Total

$

64,871

$

72,112

$

197,255

$

211,246

Income before income taxes

Adhesives, Sealants and Additives

$

6,704

$

7,509

$

20,936

$

20,530

(f)

Industrial Tapes

9,011

6,929

(b)

24,050

(d)

20,980

(g)

Corrosion Protection and Waterproofing

4,149

4,817

12,240

11,667

Total for reportable segments

19,864

19,255

57,226

53,177

Corporate and common costs

(7,337)

(a)

(7,067)

(c)

(23,823)

(e)

(22,249)

(h)

Total

$

12,527

$

12,188

$

33,403

$

30,928

Includes the following costs by segment:

Adhesives, Sealants and Additives

Interest

$

26

$

34

$

68

$

172

Depreciation

199

356

791

1,121

Amortization

2,340