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Table of Contents

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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 November 30, 2017

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 December 31, 2017 was 9,374,840

 

 

 


 

Table of Contents

CHASE CORPORATION

INDEX TO FORM 10-Q

 

For the Quarter Ended November 30, 2017

 

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, 2017 and August 31, 2017 

 

4

 

 

 

Condensed Consolidated Statements of Operations for the three months ended November 30, 2017 and 2016 

 

5

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the three months ended November 30, 2017 and 2016 

 

6

 

 

 

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

 

7

 

 

 

Condensed Consolidated Statements of Cash Flows for the three months ended November 30, 2017 and 2016 

 

8

 

 

 

Notes to Condensed Consolidated Financial Statements 

 

9

 

 

 

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

 

26

 

 

 

Item 3 – Quantitative and Qualitative Disclosures About Market Risk 

 

36

 

 

 

Item 4 – Controls and Procedures 

 

37

 

 

 

Part II – OTHER INFORMATION 

 

 

 

 

 

Item 1 – Legal Proceedings 

 

37

 

 

 

Item 1A – Risk Factors 

 

37

 

 

 

Item 6 – Exhibits 

 

38

 

 

 

SIGNATURES 

 

39

 

 

 

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Table of Contents

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 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


 

Table of Contents

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, 

 

 

 

2017

    

2017

 

ASSETS

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

54,262

 

$

47,354

 

Accounts receivable, less allowance for doubtful accounts of $333 and $456

 

 

34,976

 

 

38,051

 

Inventory

 

 

27,331

 

 

25,618

 

Prepaid expenses and other current assets

 

 

3,847

 

 

3,098

 

Due from sale of business

 

 

400

 

 

 —

 

Assets held for sale

 

 

14

 

 

14

 

Prepaid income taxes

 

 

641

 

 

 —

 

Total current assets

 

 

121,471

 

 

114,135

 

 

 

 

 

 

 

 

 

Property, plant and equipment, less accumulated depreciation of $45,614 and $44,277

 

 

34,430

 

 

34,760

 

 

 

 

 

 

 

 

 

Other Assets

 

 

 

 

 

 

 

Goodwill

 

 

50,911

 

 

50,784

 

Intangible assets, less accumulated amortization of $44,817 and $42,206

 

 

44,607

 

 

46,846

 

Cash surrender value of life insurance, less current portion

 

 

4,530

 

 

4,530

 

Restricted investments

 

 

1,057

 

 

964

 

Funded pension plan

 

 

549

 

 

566

 

Deferred income taxes

 

 

1,570

 

 

1,614

 

Other assets

 

 

129

 

 

539

 

Total assets

 

$

259,254

 

$

254,738

 

 

 

 

 

 

 

 

 

LIABILITIES AND EQUITY

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

 

 

Accounts payable

 

$

13,114

 

$

14,455

 

Accrued payroll and other compensation

 

 

4,404

 

 

6,500

 

Accrued expenses

 

 

3,826

 

 

4,052

 

Dividend payable

 

 

7,498

 

 

 —

 

Accrued income taxes

 

 

 —

 

 

2,333

 

Total current liabilities

 

 

28,842

 

 

27,340

 

 

 

 

 

 

 

 

 

Deferred compensation

 

 

1,071

 

 

979

 

Accumulated pension obligation

 

 

12,368

 

 

12,666

 

Other liabilities

 

 

1,612

 

 

1,567

 

Accrued income taxes

 

 

1,257

 

 

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; 9,374,840 shares at November 30, 2017 and  9,354,136 shares at August 31, 2017 issued and outstanding

 

 

937

 

 

935

 

Additional paid-in capital

 

 

14,734

 

 

14,060

 

Accumulated other comprehensive loss

 

 

(11,788)

 

 

(13,469)

 

Retained earnings

 

 

210,221

 

 

209,403

 

Total equity

 

 

214,104

 

 

210,929

 

Total liabilities and equity

 

$

259,254

 

$

254,738

 

 

See accompanying notes to the condensed consolidated financial statements

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CHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

In thousands, except share and per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

 

 

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

Sales

 

$

60,577

 

$

60,269

 

 

 

Royalties and commissions

 

 

1,340

 

 

1,088

 

 

 

 

 

 

61,917

 

 

61,357

 

 

 

Costs and Expenses

 

 

 

 

 

 

 

 

 

Cost of products and services sold

 

 

36,895

 

 

35,289

 

 

 

Selling, general and administrative expenses

 

 

12,059

 

 

11,752

 

 

 

Acquisition-related costs (Note 14)

 

 

 —

 

 

584

 

 

 

Exit costs related to idle facility (Note 15)

 

 

 —

 

 

27

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating income

 

 

12,963

 

 

13,705

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense

 

 

(45)

 

 

(246)

 

 

 

Gain on sale of real estate (Note 9)

 

 

 —

 

 

792

 

 

 

Other income (expense)

 

 

(319)

 

 

399

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before income taxes

 

 

12,599

 

 

14,650

 

 

 

 

 

 

 

 

 

 

 

 

 

Income taxes

 

 

4,284

 

 

4,287

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,315

 

$

10,363

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

0.89

 

$

1.11

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted

 

$

0.88

 

$

1.10

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average shares outstanding

 

 

 

 

 

 

 

 

 

Basic

 

 

9,281,877

 

 

9,228,338

 

 

 

Diluted

 

 

9,384,426

 

 

9,321,002

 

 

 

 

 

 

 

 

 

 

 

 

 

Annual cash dividends declared per share

 

$

0.80

 

$

0.70

 

 

 

 

See accompanying notes to the condensed consolidated financial statements

5


 

Table of Contents

CHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

 

    

 

2017

    

2016

 

 

Net income

 

 

$

8,315

 

$

10,363

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

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

 

 

 

31

 

 

13

 

 

Change in funded status of pension plans, net of tax

 

 

 

80

 

 

147

 

 

Foreign currency translation adjustment

 

 

 

1,570

 

 

(2,098)

 

 

Total other comprehensive income (loss)

 

 

 

1,681

 

 

(1,938)

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income

 

 

$

9,996

 

$

8,425

 

 

         

See accompanying notes to the condensed consolidated financial statements

 

 

6


 

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CHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

THREE MONTHS ENDED NOVEMBER 30, 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 plan, net of tax $41

 

 

 

 

 

 

 

 

 

 

80

 

 

 

 

 

80

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

1,570

 

 

 

 

 

1,570

 

Net unrealized gain 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

 

 

See accompanying notes to the condensed consolidated financial statements

 

 

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CHASE CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

In thousands, except share and per share amounts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

 

    

 

2017

    

2016

 

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

 

Net income

 

 

$

8,315

 

$

10,363

 

 

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

 

 

 

 

 

 

 

 

 

Gain on sale of real estate

 

 

 

 —

 

 

(792)

 

 

Depreciation

 

 

 

1,254

 

 

1,335

 

 

Amortization

 

 

 

2,314

 

 

2,176

 

 

Cost of sale of inventory step-up

 

 

 

 —

 

 

190

 

 

Recovery of allowance for doubtful accounts

 

 

 

(126)

 

 

(5)

 

 

Stock-based compensation

 

 

 

533

 

 

528

 

 

Realized gain on restricted investments

 

 

 

(1)

 

 

(3)

 

 

Deferred taxes

 

 

 

 —

 

 

10

 

 

Increase (decrease) from changes in assets and liabilities

 

 

 

 

 

 

 

 

 

Accounts receivable

 

 

 

3,329

 

 

 5

 

 

Inventory

 

 

 

(1,593)

 

 

(1,397)

 

 

Prepaid expenses and other assets

 

 

 

(725)

 

 

(535)

 

 

Accounts payable

 

 

 

(1,348)

 

 

(12)

 

 

Accrued compensation and other expenses

 

 

 

(2,397)

 

 

(2,755)

 

 

Accrued income taxes

 

 

 

(3,001)

 

 

(771)

 

 

Net cash provided by operating activities

 

 

 

6,554

 

 

8,337

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

 

Purchases of property, plant and equipment

 

 

 

(851)

 

 

(652)

 

 

Cost to acquire intangible assets

 

 

 

(1)

 

 

(14)

 

 

Payments for acquisitions

 

 

 

 —

 

 

(30,435)

 

 

Proceeds from sale of real estate

 

 

 

 —

 

 

1,382

 

 

Net proceeds from sale of businesses

 

 

 

 —

 

 

229

 

 

Increase in restricted investments

 

 

 

(46)

 

 

(47)

 

 

Proceeds from settlement of life insurance policies

 

 

 

 —

 

 

1,504

 

 

Net cash used in investing activities

 

 

 

(898)

 

 

(28,033)

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

 

Payments of principal on debt

 

 

 

 —

 

 

(2,100)

 

 

Proceeds from exercise of common stock options

 

 

 

143

 

 

33

 

 

Payments of taxes on stock options and restricted stock

 

 

 

 —

 

 

(993)

 

 

Net cash provided by (used in) financing activities

 

 

 

143

 

 

(3,060)

 

 

 

 

 

 

 

 

 

 

 

 

INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS

 

 

 

5,799

 

 

(22,756)

 

 

Effect of foreign exchange rates on cash

 

 

 

1,109

 

 

(1,331)

 

 

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

 

 

47,354

 

 

73,411

 

 

CASH AND CASH EQUIVALENTS, END OF PERIOD

 

 

$

54,262

 

$

49,324

 

 

 

 

 

 

 

 

 

 

 

 

Non-cash Investing and Financing Activities

 

 

 

 

 

 

 

 

 

Common stock received for payment of stock option exercises

 

 

$

306

 

$

846

 

 

Property, plant and equipment additions included in accounts payable

 

 

$

176

 

$

47

 

 

Annual cash dividend declared

 

 

$

7,497

 

$

6,532

 

 

 

See accompanying notes to the condensed consolidated financial statements

 

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Table of Contents

Note 1 — Basis of Financial Statement Presentation

 

Description of Business

 

Chase Corporation (the “Company,” “Chase,” “we,” or “us”), 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 (“US 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.  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 November 30, 2017 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 November 30, 2017, the results of its operations, comprehensive income and cash flows for the interim periods ended November 30, 2017 and 2016, and changes in equity for the interim period ended November 30, 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 Sterling as the functional currency. The financial position and results of operations of the Company’s operations based in France are measured using the euro as the functional currency.  The financial position and results of the Company’s 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 ($353) and $399 for the three-month periods ended November 30, 2017 and 2016, respectively.

 

Other Business Developments

 

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 ZappaTec business (collectively “Zappa Stewart”), had combined revenue in excess of $24,000. Chase expects this acquisition to be immediately accretive to its earnings. The business was acquired for a purchase price of $71,382, net of cash acquired, pending any 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 purchase was funded from a combination of Chase’s existing revolving credit facility and available cash on hand. Zappa Stewart’s protective materials technology is complementary to Chase’s current specialty chemical offerings. This acquisition is aligned with the Company’s core strategies and extends its reach into growing medical, environmental and

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consumer applications. The Company is currently in the process of finalizing purchase accounting, and anticipates completion during fiscal 2018. Following the effective date of the acquisition (which occurred subsequent to November 30, 2017), the financial results of Zappa Stewart operations will be included in the Company’s financial statements within the specialty chemical intermediates product line, contained within the Industrial Materials operating segment. See Note 19 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 Company’s financial statements within the electronic and industrial coatings product line, contained within the Industrial Materials operating segment. See Note 14 to the condensed consolidated financial statements for additional information on the acquisition of the assets and operations of Resin Designs.

 

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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. The Company expects to utilize the modified retrospective method of adoption. From a timing of revenue recognition standpoint (point in time versus over time), it is anticipated that certain specialized products will be more affected than other products sold. The Company continues to assess the full impact the adoption will have on its consolidated financial statements and disclosures thereto.

 

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.  Changes were made to align lessor accounting with the lessee accounting model and ASU No. 2014-09, “Revenue from Contracts with Customers.” The ASU will be effective for the Company beginning September 1, 2019 (fiscal 2020). Early application is permitted. 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 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

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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 Company is currently in the process of evaluating the impact of ASU 2017-09 on our financial position and result of operations.

 

Note 3 — Inventory

 

Inventory consisted of the following as of November 30, 2017 and August 31, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

November 30, 

 

August 31, 

 

    

    

2017

    

2017

Raw materials

 

 

$

12,874

 

$

11,636

Work in process

 

 

 

6,897

 

 

6,877

Finished goods

 

 

 

7,560

 

 

7,105

Total Inventory

 

 

$

27,331

 

$

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 November 30, 

 

 

    

2017

    

2016

    

 

 

 

 

 

 

 

 

Basic Earnings per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,315

 

$

10,363

 

Less: Allocated to participating securities

 

 

79

 

 

113

 

Net income available to common shareholders

 

$

8,236

 

$

10,250

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

9,281,877

 

 

9,228,338

 

Net income per share - Basic

 

$

0.89

 

$

1.11

 

 

 

 

 

 

 

 

 

Diluted Earnings per Share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

8,315

 

$

10,363

 

Less: Allocated to participating securities

 

 

79

 

 

113

 

Net income available to common shareholders

 

$

8,236

 

$

10,250

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

9,281,877

 

 

9,228,338

 

Additional dilutive common stock equivalents

 

 

102,549

 

 

92,664

 

Diluted weighted average shares outstanding

 

 

9,384,426

 

 

9,321,002

 

Net income per share - Diluted

 

$

0.88

 

$

1.10

 

 

For the three months ended November 30, 2017 and 2016, stock options to purchase 9,622 and 38,591 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.

 

 

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Note 5 — Stock-Based Compensation

 

In August 2016, the Board of Directors of the Company approved the fiscal year 2017 Long Term Incentive Plan (“2017 LTIP”) for the executive officers and other members of management.  The 2017 LTIP is an equity-based plan with a grant date of September 1, 2016 and contains a performance and service-based restricted stock grant of 5,399 shares in the aggregate, subject to adjustment, with a vesting date of August 31, 2019.  Based on the fiscal year 2017 financial results, 5,399 additional shares of restricted stock (total of 10,798 shares) were earned and granted subsequent to the end of fiscal year 2017 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 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 the following equity components:

 

Restricted Shares — (a) a performance and service-based restricted stock grant of 4,249 shares in the aggregate, subject to adjustment based on fiscal 2018 results, with a vesting date of August 31, 2020.  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 3,473 shares in the aggregate, with a vesting date of August 31, 2020. Compensation expense is recognized on a ratable basis over the vesting period.

 

Stock options — options to purchase 9,622 shares of common stock in the aggregate with an exercise price of $93.50 per share.  The options will vest in three equal annual installments beginning on August 31, 2018 and ending on August 31, 2020. Of the options granted, 4,591 options will expire on August 31, 2027, and 5,031 options will expire on September 1, 2027. Compensation expense is recognized over the period of the award consistent with the vesting terms.

 

Note 6 — Segment Data and Foreign Operations

 

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

 

The Industrial Materials segment includes specified products that are used in, or integrated into, another company’s product, with demand typically dependent upon general economic conditions. Industrial Materials products include insulating and conducting materials for wire and cable manufacturers, moisture protective coatings for electronics, laminated durable papers, laminates for the packaging and industrial laminate markets, 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 and polyurethane dispersions. Beginning September 30, 2016, the Industrial Materials segment includes the acquired operations of Resin Designs, LLC, which was obtained through acquisition and is included in the Company’s electronic and industrial coatings product line. Prior to the April 3, 2017 sale of the business, the segment’s products also included glass-based strength elements, designed to allow fiber optic cables to withstand mechanical and environmental strain and stress.

 

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.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

 

 

    

2017

    

 

2016

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

Industrial Materials

 

$

49,985

 

 

$

49,024

 

 

 

Construction Materials

 

 

11,932

 

 

 

12,333

 

 

 

Total

 

$

61,917

 

 

$

61,357

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

 

 

 

 

 

 

 

 

 

Industrial Materials

 

$

15,365

 

 

$

16,415

(a)

 

 

Construction Materials

 

 

4,246

 

 

 

5,150

 

 

 

Total for reportable segments

 

 

19,611

 

 

 

21,565

 

 

 

Corporate and common costs

 

 

(7,012)

 

 

 

(6,915)

(b)

 

 

Total

 

$

12,599

 

 

$

14,650

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Includes the following costs by segment:

 

 

 

 

 

 

 

 

 

 

Industrial Materials

 

 

 

 

 

 

 

 

 

 

Interest

 

$

36

 

 

$

184

 

 

 

Depreciation

 

 

800

 

 

 

1,062

 

 

 

Amortization

 

 

1,987

 

 

 

1,862

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction Materials

 

 

 

 

 

 

 

 

 

 

Interest

 

$

 9

 

 

$

62

 

 

 

Depreciation

 

 

190

 

 

 

158

 

 

 

Amortization

 

 

327

 

 

 

314

 

 

 

 


(a)

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

(b)

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

 

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Total assets for the Company’s reportable segments as of November 30, 2017 and August 31, 2017 were:

 

 

 

 

 

 

 

 

 

 

 

 

November 30, 

 

August 31, 

 

 

 

    

2017

    

2017

 

 

Total Assets

 

 

 

 

 

 

 

 

Industrial Materials

 

$

156,903

 

$

156,263

 

 

Construction Materials

 

 

34,274

 

 

38,162

 

 

Total for reportable segments

 

 

191,177

 

 

194,425

 

 

Corporate and common assets

 

 

68,077

 

 

60,313

 

 

Total

 

$

259,254

 

$

254,738

 

 

 

The Company’s products are sold worldwide.  Revenue for the three-month periods ended November 30, 2017 and 2016 are attributed to operations located in the following countries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30, 

 

 

 

 

 

2017

    

 

2016

 

 

 

Revenue

 

 

 

 

 

 

 

 

 

 

United States

 

$

52,477

 

 

$

51,808

 

 

 

United Kingdom

 

 

4,397

 

 

 

4,759

 

 

 

All other foreign (1)

 

 

5,043

 

 

 

4,790

 

 

 

Total

 

$

61,917

 

 

$

61,357

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

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

 

As of November 30, 2017 and August 31, 2017, the Company had long-lived assets (defined as tangible assets providing the Company with a future economic benefit beyond the current year or operating period, including buildings, equipment and leasehold improvements) and goodwill and intangible assets, less accumulated amortization, in the following countries:

 

 

 

 

 

 

 

 

 

 

 

 

November 30, 

 

August 31, 

 

 

 

 

2017

    

2017

 

 

Long-lived Assets

 

 

 

 

 

 

 

 

United States

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

$

29,855

 

$

30,253

 

 

Goodwill and Intangible assets, less accumulated amortization

 

 

88,484

 

 

90,673

 

 

 

 

 

 

 

 

 

 

 

United Kingdom