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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,November 30, 2020
Commission File Number: 1-9852
CHASE CORPORATION
(Exact name of registrant as specified in its charter)
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Massachusetts | | 11-1797126 |
(State or other jurisdiction of incorporation | | (I.R.S. Employer Identification No.) |
295 University Avenue, Westwood, Massachusetts02090
(Address of Principal Executive Offices) (Zip Code)
(781) (781) 332-0700
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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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.
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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,December 31, 2020 was 9,442,659.9,446,391.
CHASE CORPORATION
For the Quarter Ended May 31,November 30, 2020
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Part I - FINANCIAL INFORMATION | | |
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Item 1 – Unaudited Condensed Consolidated Financial Statements | | |
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Notes to Unaudited Condensed Consolidated Financial Statements | | 9 |
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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations | |
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Item 3 – Quantitative and Qualitative Disclosures About Market Risk | |
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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.acquisitions and divestitures. 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 the expected impact of the coronavirus disease 2019 (COVID-19) pandemic on the Company's businesses. Other forward-lookingForward-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’sour Annual Report on Form 10-K for the fiscal year ended August 31, 20192020 concerning certain factors that could cause itsour 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.statements. These Risk Factors are hereby incorporated by reference into this Quarterly Report.
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Item 1 — Unaudited Condensed Consolidated Financial Statements
CHASE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
In thousands, except share and per share amounts
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| | May 31, | | August 31, | | ||
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| 2020 |
| 2019 |
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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 | |
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Property, plant and equipment, less accumulated depreciation of $52,035 and $49,730 | | | 26,656 | | | 29,326 | |
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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 | |
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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 | |
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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 | |
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Commitments and contingencies (Note 10) | | | | | | | |
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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 | |
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| | November 30, | | August 31, | | ||
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| 2020 |
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ASSETS | | | | | | | |
Current Assets | | | | | | | |
Cash and cash equivalents | | $ | 90,062 | | $ | 99,068 | |
Accounts receivable, less allowance for doubtful accounts and credit losses of $477 and $438 | | | 38,894 | | | 36,993 | |
Inventory | | | 35,962 | | | 39,058 | |
Prepaid expenses and other current assets | | | 4,389 | | | 2,470 | |
Prepaid income taxes | | | 800 | | | 231 | |
Total current assets | | | 170,107 | | | 177,820 | |
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Property, plant and equipment, less accumulated depreciation of $52,544 and $52,283 | | | 25,477 | | | 25,574 | |
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Other Assets | | | | | | | |
Goodwill | | | 95,486 | | | 82,402 | |
Intangible assets, less accumulated amortization of $81,409 and $78,351 | | | 50,217 | | | 41,200 | |
Cash surrender value of life insurance | | | 4,450 | | | 4,450 | |
Restricted investments | | | 1,780 | | | 1,619 | |
Deferred income taxes | | | 5,041 | | | 4,929 | |
Operating lease right-of-use asset (Note 8) | | | 8,751 | | | 8,821 | |
Other assets | | | 4 | | | 15 | |
Total assets | | $ | 361,313 | | $ | 346,830 | |
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LIABILITIES AND EQUITY | | | | | | | |
Current Liabilities | | | | | | | |
Accounts payable | | $ | 12,070 | | $ | 12,525 | |
Accrued payroll and other compensation | | | 5,073 | | | 5,751 | |
Accrued expenses | | | 4,431 | | | 4,867 | |
Dividend payable | | | 7,557 | | | — | |
Total current liabilities | | | 29,131 | | | 23,143 | |
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Operating lease long-term liabilities (Note 8) | | | 6,427 | | | 6,395 | |
Deferred compensation | | | 1,790 | | | 1,629 | |
Accumulated pension obligation | | | 10,617 | | | 10,930 | |
Other liabilities | | | 933 | | | — | |
Deferred income taxes | | | 3,512 | | | — | |
Accrued income taxes | | | 1,957 | | | 1,941 | |
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Commitments and contingencies (Note 10) | | | | | | | |
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Equity | | | | | | | |
First Serial Preferred Stock, $1.00 par value: Authorized 100,000 shares; NaN issued | | | — | | | — | |
Common stock, $.10 par value: Authorized 20,000,000 shares; 9,446,281 shares at November 30, 2020 and 9,439,082 shares at August 31, 2020 issued and outstanding | | | 945 | | | 944 | |
Additional paid-in capital | | | 17,264 | | | 16,674 | |
Accumulated other comprehensive loss | | | (12,809) | | | (13,092) | |
Retained earnings | | | 301,546 | | | 298,266 | |
Total equity | | | 306,946 | | | 302,792 | |
Total liabilities and equity | | $ | 361,313 | | $ | 346,830 | |
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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
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| | Three Months Ended May 31, | | | Nine Months Ended May 31, | | | ||||||||
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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 | | |
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Operating income | | | 12,141 | | | 12,262 | | | | 33,917 | | | 32,490 | | |
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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) | | |
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Income before income taxes | | | 12,527 | | | 12,188 | | | | 33,403 | | | 30,928 | | |
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Income taxes (Note 17) | | | 2,619 | | | 3,647 | | | | 8,254 | | | 8,291 | | |
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Net income | | $ | 9,908 | | $ | 8,541 | | | $ | 25,149 | | $ | 22,637 | | |
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Net income available to common shareholders, per common and common equivalent share (Note 4) | | | | | | | | | | | | | | | |
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Basic | | $ | 1.05 | | $ | 0.91 | | | $ | 2.67 | | $ | 2.41 | | |
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Diluted | | $ | 1.04 | | $ | 0.90 | | | $ | 2.64 | | $ | 2.39 | | |
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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 | | |
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Annual cash dividends declared per share | | | | | | | | | $ | 0.80 | | $ | 0.80 | | |
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| | | Three Months Ended November 30, | | | ||||
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| | 2020 |
| 2019 |
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Revenue | | | | | | | | | |
Sales | | | $ | 66,136 | | $ | 65,757 | | |
Royalties and commissions | | | | 1,040 | | | 1,045 | | |
| | | | 67,176 | | | 66,802 | | |
Costs and Expenses | | | | | | | | | |
Cost of products and services sold | | | | 39,605 | | | 41,783 | | |
Selling, general and administrative expenses | | | | 12,260 | | | 12,622 | | |
Research and product development costs | | | | 1,051 | | | 1,018 | | |
Operations optimization costs (Note 15) | | | | — | | | 649 | | |
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Operating income | | | | 14,260 | | | 10,730 | | |
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Interest expense | | | | (69) | | | (55) | | |
Other income (expense) | | | | (214) | | | (604) | | |
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Income before income taxes | | | | 13,977 | | | 10,071 | | |
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Income taxes (Note 14) | | | | 3,140 | | | 2,709 | | |
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Net income | | | $ | 10,837 | | $ | 7,362 | | |
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Net income available to common shareholders, per common and common equivalent share (Note 4) | | | | | | | | | |
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Basic | | | $ | 1.15 | | $ | 0.78 | | |
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Diluted | | | $ | 1.14 | | $ | 0.77 | | |
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Weighted average shares outstanding | | | | | | | | | |
Basic | | | | 9,375,819 | | | 9,352,148 | | |
Diluted | | | | 9,418,675 | | | 9,434,218 | | |
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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
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| | Three Months Ended May 31, | | Nine Months Ended May 31, | | | ||||||||
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| 2020 |
| 2019 |
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| 2019 | |
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Net income | | $ | 9,908 | | $ | 8,541 | | $ | 25,149 | | $ | 22,637 | | |
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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) | | |
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Comprehensive income | | $ | 9,023 | | $ | 7,133 | | $ | 25,916 | | $ | 22,286 | | |
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| | | Three Months Ended November 30, | | | ||||
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| 2020 |
| 2019 | |
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Net income | | | $ | 10,837 | | $ | 7,362 | | |
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Other comprehensive income: | | | | | | | | | |
Net unrealized gain on restricted investments, net of tax | | | | 70 | | | 41 | | |
Change in funded status of pension plans, net of tax | | | | 122 | | | 131 | | |
Foreign currency translation adjustment | | | | 91 | | | 1,537 | | |
Total other comprehensive income | | | | 283 | | | 1,709 | | |
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Comprehensive income | | | $ | 11,120 | | $ | 9,071 | | |
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See accompanying notes to the condensed consolidated financial statements
6
CHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
THREE MONTHS ENDED MAY 31,NOVEMBER 30, 2020 AND 2019
(UNAUDITED)
In thousands, except share and per share amounts
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| | | | | | | Additional | | Accumulated Other | | | | | Total | |||
| | Common Stock | | Paid-In | | Comprehensive | | Retained | | Stockholders' | |||||||
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| Shares |
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| 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 |
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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 |
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| | | | | | | Additional | | Accumulated Other | | | | | Total | |||
| | Common Stock | | Paid-In | | Comprehensive | | Retained | | Stockholders' | |||||||
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| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Earnings |
| Equity | |||||
Balance at August 31, 2019 | | 9,400,748 | | $ | 940 | | $ | 14,351 | | $ | (14,324) | | $ | 270,260 | | $ | 271,227 |
Restricted stock grants, net of forfeitures | | 20,637 | | | 2 | | | (2) | | | | | | | | | — |
Amortization of restricted stock grants | | | | | | | | 486 | | | | | | | | | 486 |
Amortization of stock option grants | | | | | | | | 228 | | | | | | | | | 228 |
Exercise of stock options | | 3,618 | | | — | | | 123 | | | | | | | | | 123 |
Common stock received for payment of stock option exercises | | (1,057) | | | — | | | (123) | | | | | | | | | (123) |
Cash dividend on common stock, $0.80 per share | | | | | | | | | | | | | | (7,539) | | | (7,539) |
Change in funded status of pension plans, net of tax $44 | | | | | | | | | | | 131 | | | | | | 131 |
Foreign currency translation adjustment | | | | | | | | | | | 1,537 | | | | | | 1,537 |
Net unrealized gain (loss) on restricted investments, net of tax $14 | | | | | | | | | | | 41 | | | | | | 41 |
Adoption of ASU 2018-02 | | | | | | | | | | | (1,388) | | | 1,388 | | | — |
Net income | | | | | | | | | | | | | | 7,362 | | | 7,362 |
Balance at November 30, 2019 | | 9,423,946 | | $ | 942 | | $ | 15,063 | | $ | (14,003) | | $ | 271,471 | | $ | 273,473 |
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Balance at August 31, 2020 | | 9,439,082 | | $ | 944 | | $ | 16,674 | | $ | (13,092) | | $ | 298,266 | | $ | 302,792 |
Restricted stock grants, net of forfeitures | | 7,378 | | | 1 | | | (1) | | | | | | | | | — |
Amortization of restricted stock grants | | | | | | | | 569 | | | | | | | | | 569 |
Amortization of stock option grants | | | | | | | | 248 | | | | | | | | | 248 |
Exercise of stock options | | 2,532 | | | — | | | 40 | | | | | | | | | 40 |
Common stock received for payment of stock option exercises | | (386) | | | — | | | (40) | | | | | | | | | (40) |
Common stock retained to pay statutory minimum withholding taxes on common stock | | (2,325) | | | — | | | (226) | | | | | | | | | (226) |
Cash dividend on common stock, $0.80 per share | | | | | | | | | | | | | | (7,557) | | | (7,557) |
Change in funded status of pension plans, net of tax $43 | | | | | | | | | | | 122 | | | | | | 122 |
Foreign currency translation adjustment | | | | | | | | | | | 91 | | | | | | 91 |
Net unrealized gain (loss) on restricted investments, net of tax $25 | | | | | | | | | | | 70 | | | | | | 70 |
Net income | | | | | | | | | | | | | | 10,837 | | | 10,837 |
Balance at November 30, 2020 | | 9,446,281 | | $ | 945 | | $ | 17,264 | | $ | (12,809) | | $ | 301,546 | | $ | 306,946 |
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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
87
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 | | |
| | | | | | | | | |
| | | Three Months Ended November 30, | | | ||||
|
| | 2020 |
| 2019 |
|
| ||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | |
Net income | | | $ | 10,837 | | $ | 7,362 | | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | |
Depreciation | | | | 1,003 | | | 1,053 | | |
Amortization | | | | 3,071 | | | 2,914 | | |
Provision for allowance for doubtful accounts and credit losses | | | | 41 | | | 48 | | |
Stock-based compensation | | | | 817 | | | 714 | | |
Realized gain on restricted investments | | | | (5) | | | (5) | | |
Increase (decrease) from changes in assets and liabilities | | | | | | | | | |
Accounts receivable | | | | (1,253) | | | 2,193 | | |
Inventory | | | | 3,336 | | | 3,524 | | |
Prepaid expenses and other assets | | | | (1,239) | | | (520) | | |
Accounts payable | | | | (701) | | | 968 | | |
Accrued compensation and other expenses | | | | (1,285) | | | (2,266) | | |
Accrued income taxes | | | | (570) | | | 2,168 | | |
Net cash provided by operating activities | | | | 14,052 | | | 18,153 | | |
| | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | |
Purchases of property, plant and equipment | | | | (660) | | | (699) | | |
Payments for acquisitions | | | | (22,241) | | | — | | |
Changes in restricted investments | | | | (62) | | | (45) | | |
Net cash used in investing activities | | | | (22,963) | | | (744) | | |
| | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | |
Payments of taxes on stock options and restricted stock | | | | (226) | | | — | | |
Net cash used in financing activities | | | | (226) | | | — | | |
| | | | | | | | | |
(DECREASE) INCREASE IN CASH & CASH EQUIVALENTS | | | | (9,137) | | | 17,409 | | |
Effect of foreign exchange rates on cash | | | | 131 | | | 876 | | |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | | 99,068 | | | 47,771 | | |
CASH AND CASH EQUIVALENTS, END OF PERIOD | | | $ | 90,062 | | $ | 66,056 | | |
| | | | | | | | | |
Non-cash Investing and Financing Activities | | | | | | | | | |
Common stock received for payment of stock option exercises | | | $ | 40 | | $ | 123 | | |
Property, plant and equipment additions included in accounts payable | | | $ | 159 | | $ | 113 | | |
Annual cash dividend declared | | | $ | 7,557 | | $ | 7,539 | | |
See accompanying notes to the condensed consolidated financial statements
98
Note 1 — Basis of Financial Statement Presentation
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, 20192020 in conjunction with its 20192020 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,November 30, 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, 20192020 which are contained in the Company’s 20192020 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,November 30, 2020, and the results of its operations, comprehensive income, changes in equity and cash flows for the interim periods ended May 31,November 30, 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 (including ABchimie acquired September 1, 2020) 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($96) and ($451)501) for the three- and nine-monththree-month periods ended May 31,November 30, 2020 respectively, and $135 and ($281) for the three- and nine-month periods ended May 31, 2019, respectively.
Other Business Developments
On September 1, 2020 (the first day of fiscal 2021), the Company acquired all the capital stock of ABchimie for €18,654 (approximately $22,241 at the time of the transaction) net of cash acquired, subsequent to final working capital adjustment, excluding acquisition-related costs of $274 and with a potential earn out based on performance potentially worth an additional €7,000 (approximately $8,330 at the time of the transaction). ABchimie is a Corbelin, France headquartered solutions provider for the cleaning and the protection of electronic assemblies, with further formulation,
9
production, and research and development capabilities. The transaction was funded 100% with cash on hand. The financial results of the business were included in the Company's fiscal 2021 financial statements within the Adhesives, Sealants and Additives operating segment in the electronic and industrial coatings product line. The Company is currently in the process of finalizing purchase accounting, regarding a final allocation of the purchase price to tangible and identifiable intangible assets, including finalizing the recording of deferred taxes, assumed and anticipates completion within fiscal 2021. The ABchimie acquisition does not represent a significant business combination so pro forma financial information is not provided.
The Company’s second and thirdquarter of fiscal quarters2020 (prior year) saw the beginning of 2020 saw the global spread of the coronavirus pandemic (COVID-19), which subsequently grew to create significant volatility, uncertainty, and global economic disruption. During the third fiscal quarter,While the Company implemented changesremains profitable with sufficient cash on hand to continue to meet its cost structure designedshort- and long-term strategic objectives, COVID-19 continues to address market changes broughtimpact nearly all geographies served by the Company.Given the magnitude of the uncertainty that COVID-19 has broadly placed on global markets, the pandemic’s long-term effects on the Company’s results and demonstrate its commitmentthe Company’s ability to fiscal prudence: (a)maintain service levels cannot currently be estimated. The Company will continue to assess the Company made a targeted reduction in its global workforce, contemplated pre-pandemic but catalyzed by COVID-19, which resultedsituation and take the appropriate actions to ensure it is 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.strongest position possible.
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 expensenothing recognized in the second or thirdfirst quarter of fiscal quarters.2021. 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$499 in expense related to the move in the three-month and six-month periodsperiod ended February 29, 2020, respectively,November 30, 2019, having recognized $526 in expense during the second half of fiscal 2019. No costs were recognized in the three months ended May 31,November 30, 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 material2020. Significant changes during the nine months ended May 31, 2020 to the criticalthese 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") issuedadopting Accounting Standards Update ("ASU") No. 2016-03,2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which modifiesduring the measurement approach for credit lossesfirst quarter of fiscal 2021 are discussed within Note 2 — “Recent Accounting Standards” within this Current Quarterly Report 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 effectsForm 10-Q.
10
Note 2 — Recent Accounting Standards
Recently Adopted Accounting Pronouncements
In FebruaryMarch 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. The ASU applies to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The ASU provides optional expedients and exceptions for applying generally accepted accounting principles (GAAP) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The expedients and exceptions provided by the ASU do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022, except for hedging relationships existing as of December 31, 2022, that an entity has elected certain optional expedients for and that are retained through the end of the hedging relationship. The ASU is effective for all entities as of March 12, 2020 through December 31, 2022. Management does not expect ASU 2020-04 to have a material impact on the Company's consolidated financial statements and disclosures.
In June 2016, the FASB issued ASU No. 2016-02, “Leases2016-13, “Financial Instruments - Credit Losses (Topic 842).326): Measurement of Credit Losses on Financial Instruments,” Underwhich modifies the new guidance, lessees are required to recognize the followingmeasurement approach 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,credit losses on financial assets measured on a discounted basis; and (b) a right-of-use asset, which represents the lessee’s rightan amortized cost basis from an 'incurred loss' method to use, or control the use of, a specified asset for the lease term.an 'expected loss' method. In July 2018,November 2019, the FASB issued ASU 2018-11, “Leases (Topic 842) Targeted Improvements.2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is an accounting pronouncement that amends ASU 2016-13. This amendment provides clarity and improves the codification to ASU 2016-13. 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 standardpronouncements 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 isconcurrently effective for fiscal years beginning after December 15, 2018, with early adoption permitted, including adoption in an2019 and interim period.periods therein. 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 2018-022016-13 on September 1, 2020, using the modified retrospective transition method which resulted in no material impact on the first quartercondensed consolidated financial statements.
As a result of the adoption of ASU 2016-13, the Company has updated its critical accounting policy related to trade account receivables and allowances for credit losses as of November 30, 2020 from what was previously disclosed in our audited financial statements for the year endingended August 31, 2020 and has elected to reclassify the income tax effectsas follows:
All trade account receivables are reported net of allowances for credit losses. The allowances for credit losses represent management’s best estimate of the Tax Reform relatedcredit losses expected from our trade account receivables over the life of the underlying assets. Assets with similar risk characteristics are pooled together for determination of their current expected credit losses. The Company regularly perform detailed reviews of our pooled assets to evaluate the collectability of receivables based on a combination of past, current, and future financial and qualitative factors that may affect customers’ ability to pay. In circumstances where the Company is aware of a specific customer’s inability to meet its pension funding from accumulated other comprehensive lossfinancial obligations, a specific reserve is recorded against amounts due to retained earnings.reduce the recognized receivable to the amount reasonably expected to be collected.
12
Note 3 — Inventory
Inventory consisted of the following as of May 31,November 30, 2020 and August 31, 2019:2020:
| | | | | | | | | | | | | | |
| | | May 31, | | August 31, | | | November 30, | | August 31, | ||||
|
|
| 2020 |
| 2019 |
|
| 2020 |
| 2020 | ||||
Raw materials | | | $ | 19,074 | | $ | 20,325 | | | $ | 17,946 | | $ | 18,993 |
Work in process | | | | 7,660 | | | 8,748 | | | | 7,020 | | | 7,761 |
Finished goods | | | | 13,817 | | | 13,281 | | | | 10,996 | | | 12,304 |
Total Inventory | | | $ | 40,551 | | $ | 42,354 | | | $ | 35,962 | | $ | 39,058 |
1311
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, |
| | | Three Months Ended November 30, |
| ||||||||||||
|
| 2020 |
| 2019 |
| | 2020 |
| 2019 |
|
| | 2020 |
| 2019 |
| ||||||
| | | | | | | | | | | | | | | | | | | | | | |
Basic Earnings per Share | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Net income |
| $ | 9,908 |
| $ | 8,541 |
| | $ | 25,149 |
| $ | 22,637 | |
| | $ | 10,837 |
| $ | 7,362 | |
Less: Allocated to participating securities | | | 86 | | | 68 | | | | 201 | | | 177 | | | | | 78 | | | 54 | |
Net income available to common shareholders |
| $ | 9,822 |
| $ | 8,473 |
| | $ | 24,948 |
| $ | 22,460 | |
| | $ | 10,759 |
| $ | 7,308 | |
| | | | | | | | | | | | | | | | | | | | | | |
Basic weighted average shares outstanding | | | 9,363,559 | | | 9,337,436 | | | | 9,357,176 | | | 9,333,098 | | | | | 9,375,819 | | | 9,352,148 | |
Net income per share - Basic |
| $ | 1.05 |
| $ | 0.91 |
| | $ | 2.67 |
| $ | 2.41 | |
| | $ | 1.15 |
| $ | 0.78 | |
| | | | | | | | | | | | | | | | | | | | | | |
Diluted Earnings per Share | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Net income |
| $ | 9,908 |
| $ | 8,541 |
| | $ | 25,149 |
| $ | 22,637 | |
| | $ | 10,837 |
| $ | 7,362 | |
Less: Allocated to participating securities | | | 86 | | | 68 | | | | 201 | | | 177 | | | | | 78 | | | 54 | |
Net income available to common shareholders |
| $ | 9,822 |
| $ | 8,473 |
| | $ | 24,948 |
| $ | 22,460 | |
| | $ | 10,759 |
| $ | 7,308 | |
| | | | | | | | | | | | | | | | | | | | | | |
Basic weighted average shares outstanding | | | 9,363,559 | | | 9,337,436 | | | | 9,357,176 | | | 9,333,098 | | | | | 9,375,819 | | | 9,352,148 | |
Additional dilutive common stock equivalents | | | 65,704 | | | 41,474 | | | | 78,721 | | | 44,650 | | | | | 42,856 | | | 82,070 | |
Diluted weighted average shares outstanding | | | 9,429,263 | | | 9,378,910 | | | | 9,435,897 | | | 9,377,748 | | | | | 9,418,675 | | | 9,434,218 | |
Net income per share - Diluted |
| $ | 1.04 |
| $ | 0.90 |
| | $ | 2.64 |
| $ | 2.39 | |
| | $ | 1.14 |
| $ | 0.77 | |
Included in the calculation of dilutive common stock equivalents are the unvested portion of restricted stock and stock options. For the three- and nine-monththree-month periods ended May 31,November 30, 2020 and 2019, stock options to purchase 17,91391,275 and 11,8418,805 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.
1412
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 (a) a restricted stock grant of 7,386 shares in the aggregate (of which 3,697 included a performance-based vesting component and were, subject to adjustment as discussed below), with a vesting date of August 31, 2022, and (b) options to purchase 13,418 shares of common stock in the aggregate with an exercise price of $100.22 per share, vesting in three equal annual installments ending on August 31, 2022.
Based on the fiscal year 2020 financial results, 387 shares of restricted stock already granted under the 2020 LTIP were forfeited subsequent to the end of fiscal year 2020 in accordance with the performance measurement criteria. No further performance-based measurements apply to this award. Compensation expense for the 2020 LTIP awards is recognized on a ratable basis over the vesting period.
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.
In August 2020, the Board of Directors of the Company approved the fiscal year 2021 Long Term Incentive Plan (“2021 LTIP”) for the executive officers and other members of management. The 2021 LTIP is an equity-based plan with a grant date of September 1, 2020 and contains the following equity components:
Restricted Shares — (a) a performance and service-based restricted stock grant of 3,6973,798 shares in the aggregate, subject to adjustment based on fiscal 20202021 results, with a vesting date of August 31, 2022.2023. 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 3,6894,919 shares in the aggregate, with a vesting date of August 31, 2022.2023. Compensation expense is recognized on a ratable basis over the vesting period.
Stock options — options to purchase 13,41814,845 shares of common stock in the aggregate with an exercise price of $100.22$97.57 per share. The options will vest in three3 equal annual installments beginning on August 31, 20202021 and ending on August 31, 2022.2023. Of the options granted, 6,2185,391 options will expire on August 31, 2029,2030, and 7,2009,454 options will expire on September 1, 2029.2030. 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 secondfirst 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 432952 shares related to athe second quarter of fiscal 2020 grant was forfeited in conjunction with the termination of employment of a non-executive membermembers of management of the Company.
13
Note 6 — Segment Data and Foreign Operations
The Company is organized into three3 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 cleaners, and customized sealant and adhesive systems for electronics, polymeric microspheres, polyurethane dispersions and superabsorbent polymers. Beginning September 1, 2020, the Adhesives, Sealants and Additives segment includes the acquired operations of ABchimie, within the electronic and industrial coatings product line.
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.
1614
The following tables summarize information about the Company’s reportable segments:
| | | | | | | | | |
| | Three Months Ended November 30, | | | |||||
| | 2020 | |
| 2019 |
|
| ||
Revenue | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 30,071 | | | $ | 25,822 | | |
Industrial Tapes | | | 26,491 | | | | 30,124 | | |
Corrosion Protection and Waterproofing | | | 10,614 | | | | 10,856 | | |
Total | | $ | 67,176 | | | $ | 66,802 | | |
| | | | | | | | | |
Income before income taxes | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 9,979 | | | $ | 7,482 | | |
Industrial Tapes | | | 7,868 | | | | 6,637 | (a) | |
Corrosion Protection and Waterproofing | | | 4,086 | | | | 3,964 | | |
Total for reportable segments | | | 21,933 | | | | 18,083 | | |
Corporate and common costs | | | (7,956) | | | | (8,012) | (b) | |
Total | | $ | 13,977 | | | $ | 10,071 | | |
| | | | | | | | | |
Includes the following costs by segment: | | | | | | | | | |
Adhesives, Sealants and Additives | | | | | | | | | |
Interest | | $ | 30 | | | $ | 21 | | |
Depreciation | | | 242 | | | | 314 | | |
Amortization | | | 2,573 | | | | 2,337 | | |
| | | | | | | | | |
Industrial Tapes | | | | | | | | | |
Interest | | $ | 27 | | | $ | 25 | | |
Depreciation | | | 465 | | | | 401 | | |
Amortization | | | 386 | | | | 450 | | |
| | | | | | | | | |
Corrosion Protection and Waterproofing | | | | | | | | | |
Interest | | $ | 12 | | | $ | 9 | | |
Depreciation | | | 139 | | | | 154 | | |
Amortization | | | 112 | | | | 127 | | |
| | | | | | | | | | | | | | | | | |
| | 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 | | | | 2,341 | | | | 7,033 | | | | 7,020 | | |
| | | | | | | | | | | | | | | | | |
Industrial Tapes | | | | | | | | | | | | | | | | | |
Interest | | $ | 33 | | | $ | 38 | | | $ | 87 | | | $ | 193 | | |
Depreciation | | | 428 | | | | 410 | | | | 1,247 | | | | 1,304 | | |
Amortization | | | 450 | | | | 450 | | | | 1,350 | | | | 1,350 | | |
| | | | | | | | | | | | | | | | | |
Corrosion Protection and Waterproofing | | | | | | | | | | | | | | | | | |
Interest | | $ | 8 | | | $ | 19 | | | $ | 23 | | | $ | 92 | | |
Depreciation | | | 144 | | | | 161 | | | | 449 | | | | 500 | | |
Amortization | | | 108 | | | | 323 | | | | 341 | | | | 969 | | |
(a) | Includes |
Includes $150 of expense related to exploratory IT work performed to assess potential future upgrades to |
17
Total assets for the Company’s reportable segments as of May 31,November 30, 2020 and August 31, 20192020 were:
| | | | | | | | | | | | | | | ||
| | May 31, | | August 31, | | | | November 30, | | August 31, | | | ||||
|
| 2020 |
| 2019 |
|
| 2020 |
| 2020 |
| ||||||
Total Assets | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 134,353 | | $ | 135,583 | | | | $ | 152,412 | | $ | 129,457 | | |
Industrial Tapes | | | 70,489 | | | 77,085 | | | | | 68,962 | | | 71,229 | | |
Corrosion Protection and Waterproofing | | | 31,722 | | | 32,478 | | | | | 30,091 | | | 32,642 | | |
Total for reportable segments | | | 236,564 | | | 245,146 | | | | | 251,465 | | | 233,328 | | |
Corporate and common assets | | | 97,306 | | | 62,822 | | | | | 109,848 | | | 113,502 | | |
Total | | $ | 333,870 | | $ | 307,968 | | | | $ | 361,313 | | $ | 346,830 | | |
15
The Company’s products are sold worldwide. Revenue for the three-month and nine-month periodsperiod ended May 31,November 30, 2020 and 2019 werewas attributed to operations located in the following countries:
| | | | | | | | | |
| | Three Months Ended November 30, | | | |||||
| | 2020 | |
| 2019 | | | ||
Revenue | | | | | | | | | |
United States | | $ | 55,742 | | | $ | 58,361 | | |
United Kingdom | | | 6,027 | | | | 4,631 | | |
All other foreign (1) | | | 5,407 | | | | 3,810 | | |
Total | | $ | 67,176 | | | $ | 66,802 | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | |||||||
| | Three Months Ended May 31, | | | Nine Months Ended May 31, | | | |||||||||||||||||
| | 2020 |
| | 2019 | | | 2020 | |
| 2019 | | | |||||||||||
Revenue | | | | | | | | | | | | | | | | | | |||||||
United States | | $ | 56,177 | | | $ | 64,046 | | | $ | 171,774 | | | $ | 186,339 | | | |||||||
United Kingdom | | | 5,070 | | | | 4,502 | | | | 14,489 | | | | 12,946 | | | |||||||
All other foreign (1) | | | 3,624 | | | | 3,564 | | | | 10,992 | | | | 11,961 | | | |||||||
Total | | $ | 64,871 | | | $ | 72,112 | | | $ | 197,255 | | | $ | 211,246 | | | |||||||
| | | | | | | | | | | | | | | | | |
(1) | Comprises sales originated from the Company’s |
1816
As of May 31,November 30, 2020 and August 31, 20192020 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:
| | | | | | | | |
| | May 31, | | August 31, | | | ||
| | 2020 |
| 2019 | | | ||
Long-Lived Assets | | | | | | | | |
United States | | | | | | | | |
Property, plant and equipment, net | | $ | 23,509 | | $ | 24,993 | | |
Goodwill and Intangible assets, less accumulated amortization | | | 120,673 | | | 129,057 | | |
| | | | | | | | |
United Kingdom | | | | | | | | |
Property, plant and equipment, net | | | 2,246 | | | 2,493 | | |
Goodwill and Intangible assets, less accumulated amortization | | | 4,180 | | | 4,446 | | |
| | | | | | | | |
All other foreign | | | | | | | | |
Property, plant and equipment, net | | | 901 | | | 1,840 | | |
Goodwill and Intangible assets, less accumulated amortization | | | 1,194 | | | 1,187 | | |
| | | | | | | | |
Total | | | | | | | | |
Property, plant and equipment, net | | $ | 26,656 | | $ | 29,326 | | |
Goodwill and Intangible assets, less accumulated amortization | | $ | 126,047 | | $ | 134,690 | | |
| | | | | | | | |
| | November 30, | | August 31, | | | ||
| | 2020 |
| 2020 | | | ||
Long-Lived Assets | | | | | | | | |
United States | | | | | | | | |
Property, plant and equipment, net | | $ | 22,093 | | $ | 22,427 | | |
Goodwill and Intangible assets, less accumulated amortization | | | 115,261 | | | 117,930 | | |
| | | | | | | | |
United Kingdom | | | | | | | | |
Property, plant and equipment, net | | | 2,279 | | | 2,320 | | |
Goodwill and Intangible assets, less accumulated amortization | | | 4,275 | | | 4,403 | | |
| | | | | | | | |
All other foreign | | | | | | | | |
Property, plant and equipment, net | | | 1,105 | | | 827 | | |
Goodwill and Intangible assets, less accumulated amortization | | | 26,167 | | | 1,269 | | |
| | | | | | | | |
Total | | | | | | | | |
Property, plant and equipment, net | | $ | 25,477 | | $ | 25,574 | | |
Goodwill and Intangible assets, less accumulated amortization | | $ | 145,703 | | $ | 123,602 | | |
1917
Note 7 — Goodwill and Other Intangibles
The changes in the carrying value of goodwill were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| Adhesives, Sealants and Additives |
| Industrial Tapes |
| Corrosion Protection and Waterproofing |
| Consolidated |
|
| Adhesives, Sealants and Additives |
| Industrial Tapes |
| Corrosion Protection and Waterproofing |
| Consolidated |
| ||||||||
Balance at August 31, 2019 | | $ | 50,090 | | $ | 21,215 | | $ | 10,681 | | $ | 81,986 | | |||||||||||||
Balance at August 31, 2020 | | $ | 50,487 | | $ | 21,215 | | $ | 10,700 | | $ | 82,402 | | |||||||||||||
Acquisition of ABchimie | | | 13,055 | | | — | | | — | | | 13,055 | | |||||||||||||
Foreign currency translation adjustment | | | 55 | | | — | | | 3 | | | 58 | | | | 30 | | | — | | | (1) | | | 29 | |
Balance at May 31, 2020 | | $ | 50,145 | | $ | 21,215 | | $ | 10,684 | | $ | 82,044 | | |||||||||||||
Balance at November 30, 2020 | | $ | 63,572 | | $ | 21,215 | | $ | 10,699 | | $ | 95,486 | | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
The Company’s goodwill is allocated to each reporting unit based on the nature of the products manufactured by the respective business combinations that originally created the goodwill. The Company has identified a total of three3 reporting units, corresponding to its three3 operating segments, that are used to evaluate the possible impairment of goodwill. Goodwill impairment exists when the carrying value of goodwill exceeds its fair value. Assessments of possible impairment of goodwill are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. Additionally, testing for possible impairment of recorded goodwill and certain intangible asset balances is required annually. The amount and timing of any impairment charges based on these assessments require the estimation of future cash flows and the fair market value of the related assets based on management’s best estimates of certain key factors, including future selling prices and volumes; operating, raw material and energy costs; and various other projected operating and economic factors, including the anticipated future impact of thecoronavirus disease 2019 (COVID-19) pandemic. When testing, fair values of the reporting units and the related implied fair values of their respective goodwill are established using discounted cash flows. The Company evaluates the possible impairment of goodwill annually during the fourth quarter, and whenever events or circumstances indicate the carrying value of goodwill may not be recoverable.
During the three-month period ended February 28, 2019, the ordering patterns of the polyurethane dispersions reporting unit’s customers, especially those in the automotive industry, combined with a decrease in the reporting unit’s backlog of customer orders believed to be firm as of February 28, 2019, indicated that an impairment in the carrying value of the reporting unit might have occurred. The Company performed an impairment test on the indefinite-lived and long-lived assets related to the polyurethane dispersions reporting unit, now part of the Adhesives, Sealants and Additives operating segment and reporting unit (part of the former Industrial Materials segment during the second fiscal quarter of 2019), in accordance with ASC Topic 350, “Intangibles — Goodwill and Other” and ASC Topic 360, “Disclosure — Impairment or Disposal of Long-Lived Assets.” As a result of impairment testing, which included first testing long-lived assets other than goodwill for impairment under applicable guidance, the Company recorded a charge of $2,410 to loss on impairment of goodwill within the consolidated statement of operations during the quarter ended February 28, 2019. The polyurethane dispersions reporting unit’s fair value was determined based on the income approach (discounted cash flow method).
In fiscal 2017, the Company earlyhas adopted ASU No. 2017-04 “Intangibles - Goodwill and Other Topics (Topic 350): Simplifying the Test for Goodwill Impairment.” The Company assesses goodwill for impairment by comparing the fair value of the reporting unit to its carrying amount. If the fair value of a reporting unit is less than its carrying value, an impairment loss, limited to the amount of goodwill allocated to that reporting unit, is recorded.
20
Intangible assets subject to amortization consisted of the following as of May 31,November 30, 2020 and August 31, 2019:2020:
| | | | | | | | | | | | |
| | Weighted Average | | Gross Carrying | | Accumulated | | Net Carrying | | |||
|
| Amortization Period |
| Value |
| Amortization |
| Value |
| |||
November 30, 2020 | | | | | | | | | | | | |
Patents and agreements | | 14.6 | years | $ | 1,760 | | $ | 1,708 | | $ | 52 | |
Formulas and technology | | 7.9 | years | | 10,965 | | | 9,292 | | | 1,673 | |
Trade names | | 5.9 | years | | 8,813 | | | 7,898 | | | 915 | |
Customer lists and relationships | | 9.3 | years | | 110,088 | | | 62,511 | | | 47,577 | |
| | | | $ | 131,626 | | $ | 81,409 | | $ | 50,217 | |
| | | | | | | | | | | | |
August 31, 2020 | | | | | | | | | | | | |
Patents and agreements | | 14.6 | years | $ | 1,760 | | $ | 1,705 | | $ | 55 | |
Formulas and technology | | 7.8 | years | | 10,250 | | | 9,121 | | | 1,129 | |
Trade names | | 5.8 | years | | 8,575 | | | 7,781 | | | 794 | |
Customer lists and relationships | | 9.1 | years | | 98,966 | | | 59,744 | | | 39,222 | |
| | | | $ | 119,551 | | $ | 78,351 | | $ | 41,200 | |
| | | | | | | | | | | | |
| | Weighted Average | | Gross Carrying | | Accumulated | | Net Carrying | | |||
|
| Amortization Period |
| Value |
| Amortization |
| Value |
| |||
May 31, 2020 | | | | | | | | | | | | |
Patents and agreements | | 14.6 | years | $ | 1,760 | | $ | 1,702 | | $ | 58 | |
Formulas and technology | | 7.8 | years | | 10,177 | | | 8,823 | | | 1,354 | |
Trade names | | 5.8 | years | | 8,514 | | | 7,608 | | | 906 | |
Customer lists and relationships | | 9.1 | years | | 98,267 | | | 56,582 | | | 41,685 | |
| | | | $ | 118,718 | | $ | 74,715 | | $ | 44,003 | |
| | | | | | | | | | | | |
August 31, 2019 | | | | | | | | | | | | |
Patents and agreements | | 14.6 | years | $ | 1,760 | | $ | 1,693 | | $ | 67 | |
Formulas and technology | | 7.8 | years | | 10,164 | | | 7,969 | | | 2,195 | |
Trade names | | 5.8 | years | | 8,503 | | | 7,261 | | | 1,242 | |
Customer lists and relationships | | 9.1 | years | | 98,139 | | | 48,939 | | | 49,200 | |
| | | | $ | 118,566 | | $ | 65,862 | | $ | 52,704 | |
18
Aggregate amortization expense related to intangible assets for the ninethree months ended May 31,November 30, 2020 and 2019 was $8,724$3,071 and $9,339$2,914 respectively. Estimated amortization expense for the remainder of fiscal year 20202021 and for the next five years is as follows:
| | | | | | | | |
Years ending August 31, |
| | | |
| | | |
2020 (remaining 3 months) | | $ | 2,837 | | ||||
2021 | | | 11,031 |
| ||||
2021 (remaining 9 months) | | $ | 9,129 | | ||||
2022 | | | 10,024 | | | | 11,161 |
|
2023 | | | 6,768 | | | | 7,893 | |
2024 | | | 5,659 | | | | 6,686 | |
2025 | | | 5,552 | | | | 5,086 | |
2026 | | | 4,291 | |
Note 8 — Leases
Effective September 1, 2019 (the start of fiscal 2020), the Company adopted ASU 2016-02, Leases (Topic 842), using the modified retrospective approach and utilizing the effective date as its date of initial application. As a result, prior periods are presented in accordance with the previous guidance in ASC 840, Leases (“ASC 840”). The Company has elected to apply the ‘package‘package of practical expedients’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.
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use (ROU) assets and short-term and long-term lease liabilities, as applicable. The Company does not have any financing leases that are material in nature.
Operating lease liabilities and their corresponding right-of-use assets are initially recorded based on the present value of lease payments over the expected remaining lease term. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Company believes it could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment.
The Company has elected not to recognize leases with an original term of one year or less on the balance sheet. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company will renew.
21
The following table presents the right-of-use asset and short-term and long-term lease liabilities amounts recorded on the condensed consolidated balance sheet as of MayNovember 30, 2020 and August 31, 2020:
| | | | | | |
| | November 30, | | August 31, | ||
| | 2020 | | 2020 | ||
Assets |
| | |
| | |
Operating lease right-of-use asset | | $ | 8,751 | | $ | 8,821 |
| | | | | | |
Liabilities | | | | | | |
Current (accrued expense) | | $ | 1,754 | | $ | 1,865 |
Operating lease long-term liabilities | | | 6,427 | | | 6,395 |
Total lease liability | | $ | 8,181 | | $ | 8,260 |
| | | | | | |
| | | |
| | May 31, | |
| | 2020 | |
Assets |
| | |
Operating lease right-of-use asset | | $ | 8,658 |
| | | |
Liabilities | | | |
Current (accrued expense) | | $ | 1,965 |
Operating lease long-term liabilities | | | 6,157 |
Total lease liability | | $ | 8,122 |
| | | |
19
Lease cost
The components of lease costs for the three and nine months ended May 31,November 30, 2020 and 2019 are as follows:
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | Three Months Ended November 30, | | ||||||
| | May 31, 2020 | | May 31, 2020 | | 2020 | | 2019 | | ||||
| | | | | | | | | | | | | |
Operating lease cost (a) | | $ | 952 | | $ | 2,802 | | $ | 951 | | $ | 931 | |
(a) | Includes short-term leases and variable lease costs (e.g. common area maintenance), which are immaterial. |
Maturity of lease liability
The maturity of the Company's lease liabilities at May 31,November 30, 2020 was as follows:
| | | |
| | Future Operating | |
Year ending August 31, |
| Lease Payments | |
2020 (remaining 3 months) | | $ | 681 |
2021 | | | 1,977 |
2022 | | | 1,333 |
2023 | | | 1,179 |
2024 | | | 1,193 |
2025 and thereafter | | | 2,598 |
Less: Interest | | | (839) |
Present value of lease liabilities | | $ | 8,122 |
| | | |
| | Future Operating | |
Year ending August 31, |
| Lease Payments | |
2021 (remaining 9 months) | | $ | 1,545 |
2022 | | | 1,560 |
2023 | | | 1,405 |
2024 | | | 1,419 |
2025 | | | 1,349 |
2026 and thereafter | | | 1,631 |
Less: Interest | | | (728) |
Present value of lease liabilities | | $ | 8,181 |
The weighted average remaining lease term and discount rates are as follows:
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| | 2020 | | 2020 | | ||
Lease Term and Discount Rate |
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Weighted average remaining lease term (years) | | | | | | | |
Operating leases | | | 5.5 | | | 5.5 | |
Weighted average discount rate (percentage) | | | | | | | |
Operating leases | | | 3.1 | % | | 3.1 | % |
2220
Other Information
Supplemental cash flow information related to leases is as follows:
| | | | | | | | | |
| | Nine Months Ended | | Three Months Ended November 30, | |||||
| | May 31, 2020 | | 2020 | | 2019 | |||
| | | | | | | | | |
Operating cash outflows from operating leases | | $ | 1,818 | | $ | 603 | | $ | 607 |
Total cash paid for amounts included in the measurement of lease liabilities | | $ | 1,818 | | $ | 603 | | $ | 607 |
Minimum lease payments under operating leases prior to adoption of ASU 2016-02 were as follows:
| | | | |
| | Future Operating | | |
Year ending August 31, |
| Lease Payments |
| |
2020 | | $ | 2,468 | |
2021 | | | 2,059 | |
2022 | | | 1,371 | |
2023 | | | 1,187 | |
2024 | | | 1,200 | |
2025 and thereafter | | | 2,608 | |
Total future minimum lease payments | | $ | 10,893 | |
Note 9 — Revenue from Contracts with Customers
The Company accounts for revenue in accordance with ASC 606, “Revenue from Contracts with Customers.” This revenue is generated from the manufacture of specialty chemical products including coatings, linings, adhesives, sealants, specialty tapes, polymers and laminates. Certain of these manufactured products can incorporate customer-owned materials. The Company also recognizes, to a lesser extent, revenue through royalties and commissions from licensed manufacturers and from providing custom manufacturing-related services. The Company’s revenue recognition policies require the Company to make significant judgments and estimates. In applying the Company’s revenue recognition policy, determinations must be made as to when control of products passes to the Company’s customers, which can be either at a point in time or over time based on contractual terms with customers. Revenue is generally recognized at a point in time when control passes upon either shipment to or receipt by the customer of the Company’s products, while revenue is generally recognized over time when control of the Company’s products transfers to customers during the manufacturing process.The Company analyzes several factors, including but not limited to, the nature of the products being sold and contractual terms and conditions in contracts with customers to help the Company make such judgments about revenue recognition.
2321
Contract Balances
The Company’s contract assets primarily relate to unbilled revenue for products currently in production at the Company’s facilities and which incorporate customer-owned material. Revenue is recognized in advance of billing to the customer in these specific circumstances, whereas billing is typically performed at the time of shipment to or receipt by the customer.
Contract assets are included in prepaid expenses and other current assets on the Company’s condensed consolidated balance sheet. The following table presents contract assets by reportable operating segment as of May 31,November 30, 2020 and August 31, 2019:2020:
| | | | | | |
| | May 31, | | August 31, | ||
|
| 2020 |
| 2019 | ||
Contract Assets | | | | | | |
Adhesives, Sealants and Additives | | $ | 35 | | $ | 42 |
Industrial Tapes | | | 46 | | | 26 |
Corrosion Protection and Waterproofing | | | 183 | | | 79 |
Total | | $ | 264 | | $ | 147 |
| | | | | | |
| | November 30, | | August 31, | ||
|
| 2020 |
| 2020 | ||
Contract Assets | | | | | | |
Adhesives, Sealants and Additives | | $ | 19 | | $ | 20 |
Industrial Tapes | | | 79 | | | 21 |
Corrosion Protection and Waterproofing | | | 112 | | | 41 |
Total | | $ | 210 | | $ | 82 |
The Company did not0t have any contract liabilities as of May 31,November 30, 2020 and August 31, 2019.2020.
24
Disaggregated Revenue
The Company disaggregates revenue from customers by geographic region, as it believes this disclosure best depicts how the nature, amount, timing and uncertainty of the Company's revenue and cash flows are affected by economic factors. Disaggregated revenue by geographical region for the three and nine months ended May 31,November 30, 2020 and 2019 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, 2020 | | Three Months Ended November 30, 2020 | ||||||||||||||||||||||||
| | Adhesives, Sealants | | Industrial | | | Corrosion Protection | | | Consolidated | | Adhesives, Sealants | | Industrial | | | Corrosion Protection | | | Consolidated | ||||||||
| | and Additives |
| Tapes | | | and Waterproofing | | | Revenue | | and Additives |
| Tapes | | | and Waterproofing | | | Revenue | ||||||||
Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
North America | | $ | 15,094 | | $ | 28,137 | | | $ | 7,635 | | | $ | 50,866 | | $ | 18,385 | | $ | 23,305 | | | $ | 8,485 | | | $ | 50,175 |
Asia | | | 4,541 | | | 2,239 | | | | 1,737 | | | | 8,517 | | | 6,329 | | | 1,681 | | | | 1,450 | | | | 9,460 |
Europe | | | 3,201 | | | 840 | | | | 750 | | | | 4,791 | | | 5,206 | | | 1,013 | | | | 647 | | | | 6,866 |
All other foreign | | | 86 | | | 536 | | | | 75 | | | | 697 | | | 151 | | | 492 | | | | 32 | | | | 675 |
Total Revenue | | $ | 22,922 | | $ | 31,752 | | | $ | 10,197 | | | $ | 64,871 | | $ | 30,071 | | $ | 26,491 | | | $ | 10,614 | | | $ | 67,176 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended May 31, 2020 | | Three Months Ended November 30, 2019 | ||||||||||||||||||||||||
| | Adhesives, Sealants | | Industrial | | | Corrosion Protection | | | Consolidated | | Adhesives, Sealants | | Industrial | | | Corrosion Protection | | | Consolidated | ||||||||
| | and Additives |
| Tapes | | | and Waterproofing | | | Revenue | | and Additives |
| Tapes | | | and Waterproofing | | | Revenue | ||||||||
Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
North America | | $ | 49,135 | | $ | 81,811 | | | $ | 25,323 | | | $ | 156,269 | | $ | 17,706 | | $ | 27,013 | | | $ | 8,756 | | | $ | 53,475 |
Asia | | | 13,268 | | | 5,642 | | | | 4,419 | | | | 23,329 | | | 4,443 | | | 1,691 | | | | 1,090 | | | | 7,224 |
Europe | | | 10,422 | | | 2,386 | | | | 2,201 | | | | 15,009 | | | 3,579 | | | 741 | | | | 951 | | | | 5,271 |
All other foreign | | | 359 | | | 2,092 | | | | 197 | | | | 2,648 | | | 94 | | | 679 | | | | 59 | | | | 832 |
Total Revenue | | $ | 73,184 | | $ | 91,931 | | | $ | 32,140 | | | $ | 197,255 | | $ | 25,822 | | $ | 30,124 | | | $ | 10,856 | | | $ | 66,802 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, 2019 | ||||||||||||||||||||||||||
| | Adhesives, Sealants | | Industrial | | | Corrosion Protection | | | Consolidated | ||||||||||||||||||
| | and Additives |
| Tapes | | | and Waterproofing | | | Revenue | ||||||||||||||||||
Revenue | | | | | | | | | | | | | | | ||||||||||||||
North America | | $ | 17,436 | | $ | 31,691 | | | $ | 9,764 | | | $ | 58,891 | ||||||||||||||
Asia | | | 4,898 | | | 1,303 | | | | 1,851 | | | | 8,052 | ||||||||||||||
Europe | | | 3,522 | | | 561 | | | | 644 | | | | 4,727 | ||||||||||||||
All other foreign | | | 153 | | | 149 | | | | 140 | | | | 442 | ||||||||||||||
Total Revenue | | $ | 26,009 | | $ | 33,704 | | | $ | 12,399 | | | $ | 72,112 | ||||||||||||||
| | | | | | | | | | | | | | | ||||||||||||||
| | Nine Months Ended May 31, 2019 | ||||||||||||||||||||||||||
| | Adhesives, Sealants | | Industrial | | | Corrosion Protection | | | Consolidated | ||||||||||||||||||
| | and Additives |
| Tapes | | | and Waterproofing | | | Revenue | ||||||||||||||||||
Revenue | | | | | | | | | | | | | | | ||||||||||||||
North America | | $ | 53,549 | | $ | 89,672 | | | $ | 26,968 | | | $ | 170,189 | ||||||||||||||
Asia | | | 14,808 | | | 5,217 | | | | 5,123 | | | | 25,148 | ||||||||||||||
Europe | | | 10,078 | | | 2,101 | | | | 1,794 | | | | 13,973 | ||||||||||||||
All other foreign | | | 379 | | | 1,334 | | | | 223 | | | | 1,936 | ||||||||||||||
Total Revenue | | $ | 78,814 | | $ | 98,324 | | | $ | 34,108 | | | $ | 211,246 | ||||||||||||||
| | | | | | | | | | | | | | |
2522
Note 10 — Commitments and Contingencies
The Company is involved from time to time in litigation incidental to the conduct of its business. Although the Company does not expect that the outcome in any of these matters, individually or collectively, will have a material adverse effect on its financial condition, results of operations or cash flows, litigation is inherently unpredictable. Therefore, judgments could be rendered, or settlements agreed to that could adversely affect the Company’s operating results or cash flows in a particular period. The Company routinely assesses all its litigation and threatened litigation as to the probability of ultimately incurring a liability and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable.
Note 11 — Pensions and Other Postretirement Benefits
The components of net periodic benefit cost for the three and nine months ended May 31,November 30, 2020 and 2019 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | | Nine Months Ended May 31, | | | | Three Months Ended November 30, | | ||||||||||||||
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| 2020 |
| 2019 |
| | 2020 |
| 2019 |
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| 2020 |
| 2019 |
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Components of net periodic benefit cost | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 74 | | $ | 67 | | | $ | 221 | | $ | 213 | | | | $ | 92 | | $ | 73 | | | |
Interest cost | | | 112 | | | 172 | | | | 338 | | | 528 | | | | | 85 | | | 113 | | | |
Expected return on plan assets | | | (98) | | | (104) | | | | (294) | | | (325) | | | | | (98) | | | (98) | | | |
Amortization of prior service cost | | | 1 | | | 1 | | | | 3 | | | 3 | | | | | 1 | | | 1 | | | |
Amortization of accumulated loss | | | 174 | | | 112 | | | | 522 | | | 349 | | | | | 164 | | | 174 | | | |
Curtailment and settlement loss | | | 75 | | | 11 | | | | 75 | | | 484 | | | |||||||||
Net periodic benefit cost | | $ | 338 | | $ | 259 | | | $ | 865 | | $ | 1,252 | | | | $ | 244 | | $ | 263 | | | |
When funding is required, the Company’s policy is to contribute amounts that are deductible for federal income tax purposes. The Company has made contributions of $1,170$392 in the ninethree months ended May 31,November 30, 2020 to fund its obligations under its pension plans, and plans to make the necessary contributions over the remainder of fiscal 20202021 to ensure the qualified plans continueplan continues to be adequately funded given the current market conditions, including conditions related to the coronavirus disease 2019 (COVID-19) pandemic. The Company made contributions of $1,177$392 in the ninethree months ended May 31,November 30, 2019.
2623
Note 12 — Fair Value Measurements
The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability (exit price) in an orderly transaction between market participants at the measurement date. The Company uses a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values. These tiers are: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company utilizes the best available information in measuring fair value. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The financial assets classified as Level 1 and Level 2 as of May 31,November 30, 2020 and August 31, 20192020 represent investments that are restricted for use in nonqualified retirement savings plans for certain key employees and directors.
The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of May 31,November 30, 2020 and August 31, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Fair value measurement category | | | | | | | | Fair value measurement category | | ||||||||||||||
| | | | | | | Quoted prices | | Significant other | | Significant | | | | | | | | Quoted prices | | Significant other | | Significant | | ||||||
| | Fair value | | | | | in active markets | | observable inputs | | unobservable inputs | | | Fair value | | | | | in active markets | | observable inputs | | unobservable inputs | | ||||||
|
| measurement date |
| Total |
| (Level 1) |
| (Level 2) |
| (Level 3) |
|
| measurement date |
| Total |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||||||
Assets: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Restricted investments | | May 31, 2020 | | $ | 1,413 | | $ | 1,213 | | $ | 200 | | $ | — | | | November 30, 2020 | | $ | 1,780 | | $ | 1,544 | | $ | 236 | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Restricted investments | | August 31, 2019 | | $ | 1,260 | | $ | 1,091 | | $ | 169 | | $ | — | | | August 31, 2020 | | $ | 1,619 | | $ | 1,395 | | $ | 224 | | $ | — | |
The following table presents the fair value of the Company’s long-term debt (including any current portion of long-term debt) as of May 31,November 30, 2020 and August 31, 2019,2020, which is recorded at its carrying value:
| | | | | | | | | | | | | | | |
| | | | | | | Fair value measurement category | | |||||||
| | | | | | | Quoted prices | | Significant other | | Significant | | |||
| | Fair value | | | | | in active markets | | observable inputs | | unobservable inputs | | |||
|
| measurement date |
| Total |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| ||||
Liabilities: | | | | | | | | | | | | | | | |
Long-term debt | |
| | $ | — | | $ | — | | $ | — | | $ | — | |
| | | | | | | | | | | | | | | |
Long-term debt | | August 31, | | $ | — | | $ | — | | $ | — | | $ | — | |
The long-term debt had no0 outstanding balance as of May 31,November 30, 2020 and August 31, 2019.2020. The carrying value of the long-term debt approximates its fair value, as the interest rate is set based on the movement of the underlying market rates. See Note 16 to the condensed consolidated financial statements for additional information on long-term debt.
2724
Note 13 — Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income (loss), net of tax, were as follows:
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| | | | | Change in Funded | | Foreign Currency | | | | | ||
| | Restricted | | Status of | | Translation | | | | | |||
|
| Investments |
| Pension Plans |
| Adjustment |
| Total |
| ||||
Balance at August 31, 2019 | | $ | 154 | | $ | (6,271) | | $ | (8,207) | | $ | (14,324) | |
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Other comprehensive gains (losses) before reclassifications (1) | | | 45 | | | — | | | 1,537 | | | 1,582 | |
Reclassifications to net income of previously deferred (gains) losses (2) | | | (4) | | | 131 | | | — | | | 127 | |
Other comprehensive income (loss) | | | 41 | | | 131 | | | 1,537 | | | 1,709 | |
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Adoption of ASU 2018-02 | | | — | | | (1,388) | | | — | | | (1,388) | |
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Balance at November 30, 2019 | | $ | 195 | | $ | (7,528) | | $ | (6,670) | | $ | (14,003) | |
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Balance at August 31, 2020 | | $ | 269 | | $ | (8,317) | | $ | (5,044) | | $ | (13,092) | |
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Other comprehensive gains (losses) before reclassifications (3) | | | 74 | | | — | | | 91 | | | 165 | |
Reclassifications to net income of previously deferred (gains) losses (4) | | | (4) | | | 122 | | | — | | | 118 | |
Other comprehensive income (loss) | | | 70 | | | 122 | | | 91 | | | 283 | |
| | | | | | | | | | | | | |
Balance at November 30, 2020 | | $ | 339 | | $ | (8,195) | | $ | (4,953) | | $ | (12,809) | |
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| | | | | Change in Funded | | Foreign Currency | | | | | ||
| | Restricted | | Status of | | Translation | | | | | |||
|
| Investments |
| Pension Plans |
| Adjustment |
| Total |
| ||||
Balance at August 31, 2018 | | $ | 126 | | $ | (5,796) | | $ | (6,666) | | $ | (12,336) | |
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Other comprehensive gains (losses) before reclassifications (1) | | | (12) | | | — | | | (956) | | | (968) | |
Reclassifications to net income of previously deferred (gains) losses (2) | | | (1) | | | 618 | | | — | | | 617 | |
Other comprehensive income (loss) | | | (13) | | | 618 | | | (956) | | | (351) | |
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Balance at May 31, 2019 | | $ | 113 | | $ | (5,178) | | $ | (7,622) | | $ | (12,687) | |
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Balance at August 31, 2019 | | $ | 154 | | $ | (6,271) | | $ | (8,207) | | $ | (14,324) | |
Other comprehensive gains (losses) before reclassifications (3) | | | 29 | | | — | | | 318 | | | 347 | |
Reclassifications to net income of previously deferred (gains) losses (4) | | | (24) | | | 444 | | | — | | | 420 | |
Other comprehensive income (loss) | | | 5 | | | 444 | | | 318 | | | 767 | |
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Adoption of ASU 2018-02 (5) | | | — | | | (1,388) | | | — | | | (1,388) | |
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Balance at May 31, 2020 | | $ | 159 | | $ | (7,215) | | $ | (7,889) | | $ | (14,945) | |
(1) | Net of tax |
(2) | Net of tax expense of $1, tax benefit of |
(3) | Net of tax benefit of |
(4) | Net of tax expense of |
The following table summarizes the reclassifications from accumulated other comprehensive income (loss) to the unaudited condensed consolidated statements of income:
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| | | | | | | | | | | | ||||||||
| | | | | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive | | | | |||||||||||
| | | | | Income (Loss) into Income | | | | |||||||||||
| | | | | Three Months Ended May 31, | | | Nine Months Ended May 31, | | Location of Gain (Loss) Reclassified from Accumulated | | ||||||||
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| 2019 |
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| 2020 |
| 2019 |
| Other Comprehensive Income (Loss) into Income |
| ||||
Gains on Restricted Investments: | | | | | | | | | | | | | | | | | | | |
Realized loss (gain) on sale of restricted investments | | | | | $ | (4) | | $ | (6) | | | $ | (32) | | $ | (2) | | Selling, general and administrative expenses | |
Tax expense (benefit) | | | | | | 1 | | | 2 | | | | 8 | | | 1 | | | |
Gain net of tax | | | | | $ | (3) | | $ | (4) | | | $ | (24) | | $ | (1) | | | |
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Loss on Funded Pension Plan adjustments: | | | | | | | | | | | | | | | | | | | |
Amortization of prior pension service costs and unrecognized losses | | | | | $ | 175 | | $ | 114 | | | $ | 525 | | $ | 352 | | Other income (expense) | |
Settlement and curtailment loss | | | | | | 75 | | | 11 | | | | 75 | | | 484 | | Other income (expense) | |
Tax expense (benefit) | | | | | | (65) | | | (34) | | | | (156) | | | (218) | | | |
Loss net of tax | | | | | $ | 185 | | $ | 91 | | | $ | 444 | | $ | 618 | | | |
| | | | | | | | | | | | | | | | | | | |
Total net loss reclassified for the period | | | | | $ | 182 | | $ | 87 | | | $ | 420 | | $ | 617 | | | |
| | | | | | | | | | | | |
| | | | Amount of Gain (Loss) Reclassified from | | | | | ||||
| | | | Accumulated Other Comprehensive Income | | | | | ||||
| | | | (Loss) into Income | | | | | ||||
| | | | Three Months Ended November 30, | | | Location of Gain (Loss) Reclassified from Accumulated | | ||||
|
|
| | 2020 |
| 2019 |
|
| Other Comprehensive Income (Loss) into Income |
| ||
Gains on Restricted Investments: | | | | | | | | | | | | |
Realized loss (gain) on sale of restricted investments | | | | $ | (5) | | $ | (5) | | | Selling, general and administrative expenses | |
Tax expense (benefit) | | | | | 1 | | | 1 | | | | |
Gain net of tax | | | | $ | (4) | | $ | (4) | | | | |
| | | | | | | | | | | | |
Loss on Funded Pension Plan adjustments: | | | | | | | | | | | | |
Amortization of prior pension service costs and unrecognized losses | | | | $ | 165 | | $ | 175 | | | Other income (expense) | |
Tax expense (benefit) | | | | | (43) | | | (44) | | | | |
Loss net of tax | | | | $ | 122 | | $ | 131 | | | | |
| | | | | | | | | | | | |
Total net loss reclassified for the period | | | | $ | 118 | | $ | 127 | | | | |
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Note 14 — Assets HeldIncome Taxes
For the three months ended November 30, 2020 and 2019, the Company recorded income taxes of $3,140 and $2,709 on income before income taxes of $13,977 and $10,071, respectively. The effective tax rate for Salethe three months ended November 30, 2020 and 2019 was 22.5% and 26.9%, respectively.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act impacted the U.S. statutory Federal tax rate that the Company will be subject to going forward, reducing it from 35% to 21%. The Company applied this U.S. statutory Federal rate of 21% for both the quarters ended November 30, 2020 and 2019.
During the quarter ended November 30, 2018 (the first quarter of fiscal 2019), the Company began recognizing an additional component of total Federal tax expense, the tax on Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Act, which became applicable to the Company in fiscal 2019. The Company elected to account for GILTI as a period cost, and therefore included GILTI expense in the effective tax rate calculation. This provision did not have a material effect on the effective tax rate for the quarters ended November 30, 2020 and 2019.
The Company periodically reviews long-lived assets against its plansconcluded that the Base Erosion and Anti Abuse Tax (“BEAT”) provision of the Tax Act, which also became applicable to retain or ultimately dispose of these assets. If the Company decidesin fiscal 2019, had no effect on its effective tax rate for the quarters ended November 30, 2020 and 2019. Additionally, the Company is deferring the application of Foreign-Derived Intangible Income (“FDII”) for the current period, in anticipation of further guidance and the establishment of industry standards by the U.S. Treasury Department and trade associations.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to dispose of an asset and commitsthe COVID-19 pandemic. The CARES Act, among other things, included a technical correction to a plan to actively market and sell the asset, itTax Act which will be moved to assets heldallow accelerated deductions for sale.qualified improvement property. The Company analyzes market conditions each reporting period, and, if applicable, records additional impairments due to declines in market values of like assets. The fair valueis currently evaluating the impact of the asset is determined by observable inputs such as appraisals and pricesCARES Act, but at present does not expect that the qualified improvement property correction or other provisions of comparable assets in active markets for assets like the Company's. Gains are not recognized until the assets are sold.
Assets held for sale as of May 31, 2020 and August 31, 2019 were:
| | | | | | |
| | | | | | |
| May 31, 2020 | | August 31, 2019 |
| ||
Pawtucket, RI - Property, plant and equipment | $ | — | | $ | 1,050 | |
Randolph, MA - Property | | 14 | | | 14 | |
Total | $ | 14 | | $ | 1,064 | |
The Company completed the sale of its Pawtucket, RI location to a third-party in April 2020, for net proceeds totaling $1,810.This transaction resultedCARES Act would result in a gain of $760 which was recorded during the third quarter of fiscal 2020. See Note 15 to the condensed consolidated financial statements for additional informationmaterial tax benefit in future periods. The CARES Act had no material effect on the Pawtucket, RI location assets held as of August 31, 2019.effective tax rate for fiscal 2021 or 2020.
Note 15 — Operations Optimization Costs
COVID-19 Related Cost Structure Changes
During the third fiscal quarter of 2020, the Company implemented changes in its cost structure designed to address market changes brought on, in part, by COVID-19. These changes included a targeted reduction of approximately 4.5% of the Company’s global workforce. This reduction, which was contemplated pre-pandemic but catalyzed by COVID-19, resulted in the recognition of $183 in severance costs during the third quarter of 2020. The reduction in force, which impacted operations in the Blawnox, PA, Hickory, NC, Lenoir, NC, Evanston, IL, Oxford, MA and Westwood, MA facilities, was effective May 7, 2020.
IT Studies Related to the Upgrade of the Company’s Worldwide ERP System
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 its facilities rationalization and consolidation initiative. The Company recognized $150 in expense related to these services in the first quarter of fiscal 2020, with no expensenothing recognized in the second or thirdfirst quarter of fiscal quarters.2021. Given the ongoing nature of the review, an estimate of future costs, including those that may be capitalized, cannot currently be determined.
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Relocation of Pulling and Detection Manufacturing to Hickory, NC
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$499 in expense related to the move in the three-month and six-month periodsperiod ended February 29,November 30, 2019, respectively, having recognized $526 in expense during the second half of fiscal 2019. NoNaN costs were recognized in the three months ended May 31,November 30, 2020, and future costs related to this move are not anticipated to be significant to the condensed consolidated financial statements.
Closure and Sale
26
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 April 2020, for net proceeds totaling $1,810.This transaction resulted in a gain of $760 which was recorded during the third quarter of fiscal 2020. 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.
Note 16 — Long-Term Debt
On December 15, 2016, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America, acting as administrative agent, and with participation from Citizens Bank and JPMorgan Chase Bank (collectively with Bank of America, the “Lenders”). The Credit Agreement is initially an all-revolving credit facility with a borrowing capacity of $150,000, which can be increased by an additional $50,000 at the request of the Company and the individual or collective option of any of the Lenders.The facility matures December 15, 2021. The Credit Agreement contains customary affirmative and negative covenants that, among other things, restrict the Company’s ability to incur additional indebtedness and require lender approval for acquisitions by the Company and its subsidiaries over a certain size. It also requires the Company to maintain certain financial ratios on a consolidated basis, including a consolidated net leverage ratio (as defined in the facility) of no more than 3.25 to 1.00, and a consolidated fixed charge coverage ratio (as defined in the facility) of at least 1.25 to 1.00. The Company was in compliancecompliant with its debt covenants as of May 31,November 30, 2020. The Credit Agreement is guaranteed by all of Chase’s direct and indirect domestic subsidiaries, which collectively had a carrying value of $259,615$247,352 at May 31,November 30, 2020. The Company entered into the Credit Agreement both to refinance its previously existing term loan and revolving line of credit, and to provide for additional liquidity to finance potential acquisitions, working capital, capital expenditures, and for other general corporate purposes.
The applicable interest rate for the revolver portion of the Credit Agreement (the “Revolving Facility”) and any Term Loan (defined below) is based on the effective London Interbank Offered Rate (LIBOR) plus an additional amount in the range of 1.00% to 1.75%, depending on the consolidated net leverage ratio of Chase and its subsidiaries. At May 31,November 30, 2020, there was no0 outstanding principal balance, and therefore no0 applicable interest rate. The Credit Agreement has a five-year term with interest payments due at the end of the applicable LIBOR period (but in no event less frequently than the three-month anniversary of the commencement of such LIBOR period) and principal payment due at the expiration of the agreement, December 15, 2021. In addition, the Company may elect a base rate option for all or a portion of the Revolving Facility, in which case interest payments shall be due with respect to such portion of the Revolving Facility on the last business day of each quarter.
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Subject to certain conditions set forth in the Credit Agreement, the Company may elect to convert all or a portion of the outstanding Revolving Facility into a term loan (each, a “Term Loan”), which shall be payable quarterly in equal installments sufficient to amortize the original principal amount of such Term Loan on a seven year amortization schedule; provided, however, that the final principal repayment installment shall be repaid on December 15, 2021 and in any event shall be in an amount equal to the aggregate principal amount of all Term Loans outstanding on such date. Prepayment is allowed by the Credit Agreement at any time during the term of the agreement, subject to customary notice requirements.
In December 2017 (fiscal 2018), the Company utilized $65,000 of the Credit Agreement to finance the majority of the acquisition cost of Zappa Stewart. The Company paid down $40,000 of the outstanding balance in fiscal 2018, and made additional principal payments of $10,000, $9,000 and $6,000 in the first, second and third quarters of fiscal 2019, respectively, resulting in an outstanding balance of $0 at August 31, 20192020 and May 31,November 30, 2020.
Note 17 — Income Taxes– Acquisitions
For the three months ended May 31,Acquisition of ABchimie
On September 1, 2020 and 2019,(first day of fiscal 2021), the Company recorded income taxesacquired all the capital stock of $2,619ABchimie for €18,654 (approximately $22,241 at the time of the transaction) net of cash acquired, subsequent to final working capital adjustment, excluding acquisition-related costs of $274 and $3,647with a potential earn out based on income before income taxesperformance potentially worth an additional €7,000 (approximately $8,330 at the time of $12,527 and $12,188, respectively. For the nine months ended May 31, 2020 and 2019, the Company recorded income taxes of $8,254 and $8,291 on income before income taxes of $33,403 and $30,928, respectively. The effective tax rate for the three months ended May 31, 2020 and 2019 was 20.9% and 29.9%, respectively. The effective tax rate for the nine months ended May 31, 2020 and 2019 was 24.7% and 26.8%, respectively.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act impacted the U.S. statutory Federal tax rate that the Company will be subject to going forward, reducing it from 35% to 21%transaction). The Company applied this U.S. statutory Federal rate of 21% for both the quarters and nine-month periods ended May 31, 2020 and 2019.
During the quarter endedaccrued $933 at November 30, 2018 (the first quarter of fiscal 2019), the Company began recognizing an additional component of total Federal tax expense, the tax on Global Intangible Low-Taxed Income (“GILTI”) provision2020 within Other liabilities related to its current estimate of the Tax Act, which became applicableearn out. ABchimie is a Corbelin, France headquartered solutions provider for the cleaning and the protection of electronic assemblies, with further formulation, production, and research and development capabilities. The transaction was funded 100% with cash on hand. The
27
financial results of the business are included in the Company's fiscal 2021 financial statements within the Adhesives, Sealants and Additives operating segment in the electronic and industrial coatings product line. The Company is currently in the process of finalizing purchase accounting, regarding a final allocation of the purchase price to tangible and identifiable intangible assets assumed, including finalizing the recording of deferred taxes, and anticipates completion within fiscal 2021. The ABchimie acquisition does not represent a significant business combination so pro forma financial information is not provided.
The excess of the purchase price over the net tangible and intangible assets acquired resulted in goodwill of $13,055 that is largely attributable to the Company in fiscal 2019. The Company electedsynergies and economies of scale from combining the operations, technologies and research and development capabilities of ABchimie and Chase, particularly as it pertains to account for GILTI as a period cost,the expansion of the Company's product and therefore included GILTI expenseservice offerings, the established workforce and marketing efforts. A portion of this goodwill is deductible in the effectiveU.S. for calculation of GILTI period costs, but with none deductible for French income tax rate calculation. This provision did not have a material effect on the effective tax rate for the quarters and nine-month periods ended May 31, 2020 and 2019.purposes.
The Company concluded that the Base Erosion and Anti Abuse Tax (“BEAT”) provision of the Tax Act, which also became applicable to the Company in fiscal 2019, had no effect on its effective tax rate for the first three quarters of fiscal year 2020 and 2019. Additionally, the Company is deferring the application of Foreign-Derived Intangible Income (“FDII”) for the current period, in anticipation of further guidance and the establishment of industry standards by the U.S. Treasury Department and trade associations.
31
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion provides an analysis of the Company’s financial condition and results of operations and should be read in conjunction with the Condensed Consolidated Financial Statements and notes thereto included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the Company’s Annual Report on Form 10-K filed for the fiscal year ended August 31, 2019.2020.
Overview
With a focus on operationalRevenue, operating income and financial discipline, Chase Corporation increased its relative gross marginsnet income for both the three and nine months ended May 31, 2020 overfirst quarter of fiscal 2021 all exceeded prior year results. These relative margin increases were achieved despite a business environment dominated byresults, as the volatility, uncertainty and global economic disruption resultingcurrent period benefited from organic growth in the coronavirus pandemic (COVID-19). Domestic and international top-line headwinds attributable to the pandemic affected all three of the Company’s operating segments, with the Adhesive,Adhesives, Sealants and Additives segment, further aided by revenue and margin generated by the acquired ABchimie business. With our higher margin Adhesives, Sealants and Additives segment netting sales gains over the prior year, it offset volume decline in our Industrial Tapes segments’ results being typically dependent on broader economic conditions and the Corrosion Protection and Waterproofing segment being principally comprised of project-oriented product offerings. Relativesegments, resulting in a favorable sales mix for the period. This favorable sales mix, along with continued operational efficiency gains resulted in the relative and nominal increase in our gross margin gains attainedfor the period. While the global economic disruptions caused by the Company during bothcoronavirus pandemic (COVID-19) continued in the current quarter and year-to-date period came as a result of: (a) operational consolidation efforts, which allowed the Company to efficiently operate in fewer domestic facilities, achieving economies of scale and further leveraging the Company’s skilled and dedicated workforce; (b) an improved sales mix resulting, in part, from the planned exit from providing low-margin transitional toll manufacturing services, completed during the secondfirst quarter of fiscal 2020; and (c) sales and supply chain management efforts, which have allowed2021, the Company to retain price increases obtained insaw volume into foreign markets, including both Asia and Europe, improve over the prior year when there were elevated raw material costs.
As an extension of the Company’s pre-existing facility consolidation and rationalization initiative, the Company implemented certain changes in its cost structure designed to address market dynamics brought by COVID-19 during the third fiscal quarter. These included: (a) a targeted 4.5% reduction in the Company’s global workforce, contemplated pre-pandemic but catalyzed by COVID-19; and (b) the institution of a temporary 20% reduction in the base salaries of named executive officers and select members of senior management, as well as the cash compensation of the non-employee members of the Board. The Company remains profitable with adequate cash on hand and further availability via its untapped revolving credit facility to continue to meet its short- and long-term strategic objectives, and implemented the aforementioned expense reductions as a demonstration of fiscal prudence. Chase Corporation is a supplier of several essential industries, providing products to critical industries such as healthcare, utilities, infrastructure and telecommunications, and in the second and third fiscal quarters successfully maintained business continuity for the Company’s global customers. As of May 31, 2020, all the Company’s facilities are operational, with only two facilities, Pune, India and Newark, CA, having experienced prior temporary closures due to separate general government orders. However, given the magnitude of uncertainty that COVID-19 broadly placed on global markets, the long-term effects of the pandemic on results and the Company’s ability to maintain current service levels cannot currently be estimated. The Company will continue to assess the situation and take the appropriate actions going forward to maintain the Company in the strongest position possible.
In the thirdfirst fiscal quarter of(which itself was not impacted by COVID-19).
On September 1, 2020, the Company completed the salepurchase of its Pawtucket, RI locationABchimie, a Corbelin, France headquartered solutions provider for a net gain. Also during the quarter,cleaning and the administrative functions basedprotection of electronic assemblies, with additional formulation, production, and research and development capabilities, funded with cash on hand.This acquisition, which proved immediately accretive in the Pawtucket, RI location were moved intocurrent quarter, broadens our electronics coatings product portfolio within the Company’sAdhesives, Sealants, and Additives reporting segment with high performance, environmentally-friendly technologies that are complementary to our existing Westwood, MA location. During the second fiscal quarter of 2020, the relocation of the Company’s pulling and detection product line production operations from the Granite Falls, NC facility to the existing Hickory, NC facility was completed. The Industrial Tapes segment, which benefitted from both the Pawtucket, RI and Granite Falls, NC consolidations showed improved gross profit margin as a percentage of revenue for both the quarter and year-to-date period.offerings.
NetWhile net cash provided by operating activities exceededwas lower than in the first ninethree months of the prior year, with the Company’s cash position continuingremained healthy, with cash flow from operations offsetting the positive trend seen in the latter halfmajority of the prior fiscal year followingcost to acquire ABchimie during the full payoff of its outstanding debt.period. The Company held no outstanding balance on its $150,000,000 revolving credit facility as of May 31,November 30, 2020. The revolving credit facility allows for the Company to pay down debt with excess cash, while retaining access to immediate liquidity to fund future accretive activities, including mergers and acquisitions, as identified.
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Our current credit facility is set to mature in December 2021, and the Company expects to renew this facility prior to its expiration to maintain our ability to support our strategic initiatives.
Revenue from the Adhesives, Sealants and Additives segment decreasedincreased for the thirdfirst quarter and year-to-date period versus the prior year. Sales volume within the electronic and industrial coatings product line decreased in North American,increased driven by European and Asian markets which is attributable toshowing recovery and the effectsinorganic growth provided by the acquired operations of the COVID-19 pandemic on the already strained automotive and industrial markets.ABchimie. The Company’s specialty chemical intermediatesfunctional additives product line sales, which have a North American concentration, experienced a volume drop for both the thirdfirst quarter and year-to-date period, as compared to the prior year.
Net sales28
Sales decreased in the Industrial Tapes segment for both the quarter and year-to-date period ended May 31,November 30, 2020 as compared to the prior year, with the cable materials, specialty products, pulling and cabledetection and electronic materials product lines driving the top-line remission. A primary driver in the sales reduction inThe cable materials, specialty products, and pulling and detection product lines all have a North American concentration, with the specialty products product line wassales reduction further impacted by the Company’s planned exit from providing low margin transitional toll manufacturing servicesto the common purchaser of the structural composites rod and fiber optical cable components businesses with sales tapering in the first quarter of fiscal 2020 and fully ending in the second quarter.quarter of the prior year. The Company’s electronic materials product line, which sells nearly exclusively to Asian markets, achieved sales growth oversaw the lowest reduction for the segment as compared to the prior year third quarter, which drove its year-to-date revenue over the prior year mark. The pulling and detection product line continued its strong fiscal 2020 sales trend, improving over both the prior year quarter and first nine months, with sales momentum in the North American utility and telecommunication markets.quarter.
The Company’s Corrosion Protection and Waterproofing segment’s sales decreased compared to the prior year for the third quarter, bringing its total sales in the first nine months of fiscal 2020 below the prior year.quarter. The building envelope, pipeline coatings and building envelopebridge and highway product lines sales were unfavorable to both the thirdfirst quarter and year-to-date periods of the prior year. The Company’s bridge and highway products were able to surpass the prior year third quarter, with the period marking the beginning of the construction season in many of the domestic markets it serves, but remained unfavorable to the prior year on a year-to-date basis. Third quarter revenue results inPartially offsetting these declines, the coating and lining systems product line were unfavorablesales volume compared favorably to the prior year, but the product line continues to surpass the prior year-to-date period, with sales focusedgrowing both domestically and internationally.
Chase Corporation’s balance sheet remained strongat May 31,November 30, 2020, with cash on hand of $83,259,000,$90,062,000, a current ratio of 7.05.8 and no outstanding principal balance owed on the Company’s $150,000,000 revolving credit facility.
3329
Chase Corporation has three reportable operating segments as summarized below:
| | | | |
Segment |
| Product Lines |
| Manufacturing Focus and Products |
Adhesives, Sealants and Additives | | Electronic and Industrial Coatings | | Protective coatings, including moisture protective coatings and cleaning chemistries, and customized sealant and adhesive systems for electronics; polyurethane dispersions, polymeric microspheres and superabsorbent polymers. |
Industrial Tapes | | Cable Materials Specialty Products Pulling and Detection Electronic Materials | | Protective tape and coating products and services, including insulating and conducting materials for wire and cable manufacturers; laminated durable papers, packaging and industrial laminate products and 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. |
Corrosion Protection and Waterproofing | | Coating and Lining Systems Pipeline Coatings Building Envelope Bridge and Highway | | Protective coatings and tape products, including coating and lining systems for use in liquid storage and containment applications; protective coatings for pipeline and general construction 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. |
(1) | Formerly referred to as the specialty chemical intermediates product line |
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Results of Operations
Revenue and Income before Income Taxes by Segment were as follows (dollars in thousands):
| | | | | | | | | | | | |
| | | |
| % of |
| |
| % of |
| ||
| | | Three Months Ended | | Total | | Three Months Ended | | Total |
| ||
|
| | November 30, 2020 |
| Revenue |
| November 30, 2019 |
| Revenue | | ||
| | | | | | | | | | | | |
Revenue | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | | $ | 30,071 | | 45 | % | $ | 25,822 | | 39 | % |
Industrial Tapes | | | | 26,491 | | 39 | % | | 30,124 | | 45 | % |
Corrosion Protection and Waterproofing | | |
| 10,614 | | 16 | % |
| 10,856 | | 16 | % |
Total | | | $ | 67,176 | | | | $ | 66,802 | | | |
| | | | | | | | | | | | |
| | |
| | % of | | | | | % of | | |
| | | Three Months Ended | | Segment | | Three Months Ended | | Segment | | ||
| | | November 30, 2020 | | Revenue | | November 30, 2019 | | Revenue | | ||
Income before income taxes | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | | $ | 9,979 | | 33 | % | $ | 7,482 | | 29 | % |
Industrial Tapes | | | | 7,868 | | 30 | % | | 6,637 | (a) | 22 | % |
Corrosion Protection and Waterproofing | | |
| 4,086 | | 38 | % |
| 3,964 | | 37 | % |
Total for reportable segments | | |
| 21,933 | | 33 | % |
| 18,083 | | 27 | % |
Corporate and Common Costs | | |
| (7,956) | | | |
| (8,012) | (b) | | |
Total | | | $ | 13,977 | | 21 | % | $ | 10,071 | | 15 | % |
| | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | |
| % of |
| |
| % of |
| | |
| % of |
| |
| % of |
| ||||
| | Three Months Ended | | Total | | Three Months Ended | | Total | | | Nine Months Ended | | Total | | Nine Months Ended | | Total |
| ||||
|
| May 31, 2020 |
| Revenue |
| May 31, 2019 |
| Revenue |
| | May 31, 2020 |
| Revenue |
| May 31, 2019 |
| Revenue | | ||||
| | | | | | | | | | | | | | | | | | | | | | |
Revenue | | | | | | | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 22,922 | | 35 | % | $ | 26,009 | | 36 | % | | $ | 73,184 | | 37 | % | $ | 78,814 | | 37 | % |
Industrial Tapes | | | 31,752 | | 49 | % | | 33,704 | | 47 | % | | | 91,931 | | 47 | % | | 98,324 | | 47 | % |
Corrosion Protection and Waterproofing | |
| 10,197 | | 16 | % |
| 12,399 | | 17 | % | |
| 32,140 | | 16 | % |
| 34,108 | | 16 | % |
Total | | $ | 64,871 | | | | $ | 72,112 | | | | | $ | 197,255 | | | | $ | 211,246 | | | |
| | | | | | | | | | | | | | | | | | | | | | |
| | | | % of | |
| | | % of | | |
| | % of | | | | | % of | | ||
| | Three Months Ended | | Segment | | Three Months Ended | | Segment | | | Nine Months Ended | | Segment | | Nine Months Ended | | Segment | | ||||
| | May 31, 2020 | | Revenue | | May 31, 2019 | | Revenue | | | May 31, 2020 | | Revenue | | May 31, 2019 | | Revenue | | ||||
Income before income taxes | | | | | | | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 6,704 | | 29 | % | $ | 7,509 | | 29 | % | | $ | 20,936 | | 29 | % | $ | 20,530 | (f) | 26 | % |
Industrial Tapes | | | 9,011 | | 28 | % | | 6,929 | (b) | 21 | % | | | 24,050 | (d) | 26 | % | | 20,980 | (g) | 21 | % |
Corrosion Protection and Waterproofing | |
| 4,149 | | 41 | % |
| 4,817 | | 39 | % | |
| 12,240 | | 38 | % |
| 11,667 | | 34 | % |
Total for reportable segments | |
| 19,864 | | 31 | % |
| 19,255 | | 27 | % | |
| 57,226 | | 29 | % |
| 53,177 | | 25 | % |
Corporate and Common Costs | |
| (7,337) | (a) | | |
| (7,067) | (c) | | | |
| (23,823) | (e) | | |
| (22,249) | (h) | | |
Total | | $ | 12,527 | | 19 | % | $ | 12,188 | | 17 | % | | $ | 33,403 | | 17 | % | $ | 30,928 | | 15 | % |
(a) | Includes |
Includes $150 of expense related to exploratory IT work performed to assess potential future upgrades to |
Total Revenue
Total revenue decreased $7,241,000increased $374,000 or 10%1% to $64,871,000$67,176,000 for the quarter ended May 31,November 30, 2020, compared to $72,112,000$66,802,000 in the same quarter of the prior year. Total revenue decreased $13,991,000 or 7% to $197,255,000 in the fiscal year-to-date period compared to $211,246,000 in the same period in fiscal 2019.
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Revenue in the Company’s Adhesives, Sealants and Additives segment decreased $3,087,000increased $4,249,000 or 12% and $5,630,000 or 7%16% in the current quarter and year-to-date period, respectively.quarter. The decreasesincrease in revenue from the Adhesives, Sealants and Additives segment in fiscal 2020for the current quarter and year-to-date period, respectively, werewas primarily due tothe electronic and industrial coatings product line’s $2,503,000$4,561,000 organic and $4,944,000 sales volume-driven decreases. North American, European, and Asian automotive and industrial weakness, exacerbated by COVID-19, affected sales ininorganic increase. The operations of ABchimie, acquired on the third quarter and year-to-date period, including the royalty received from the Company’s licensed manufacturer in Asia. Also contributingfirst day of fiscal 2021 proved immediately accretive to results, while strong organic gains were seen internationally. Negatively impacting the segment’s sales decline were decreaseswas a decrease in revenue from the specialty chemical intermediatesNorth American focused functional additives product line totaling $584,000 and $686,000$312,000 in the current quarter and year-to-date period, respectively.quarter.
Revenue in the Industrial Tapes segment decreased $1,952,000$3,633,000 or 6% and $6,393,000 or 7%12% in the current quarter and year-to-date period, respectively.quarter. The decreasesdecrease in revenue for the segment werewas primarily due tothe following for the current quarter and year-to-date period, respectively:quarter: (a) a sales volume demand decrease of $2,123,000 and $4,466,000$2,466,000 from the North American focused cable materials product line;line, with both COVID-19 and the exposure of some of its products to oil and gas markets negatively impacting results; (b) a revenue reduction of $1,338,000 and $3,772,000$709,000 for the specialty products product line, as the Company ended its arrangement to provide low-margin transitional toll manufacturing services in the second quarter of fiscal 2020. Offsetting2020 (prior year); (c) a year-over-year reduction in sales volume of $390,000 in the overall sales decreases for the current quarterpulling and year-to-date period, respectively, were (a) entirelydetection tapes product line; and (d) a volume-driven sales increasesdecline of $962,000 and $381,000 in$68,000 for the electronic materials product line, which has a near exclusivelynearly exclusive Asian end-market and which rebounded in the third quarter; and (b) the pulling and detection tapes product line achieving predominately volume-driven revenue growth of $547,000 and $1,464,000, with sales primarily into the North American telecommunication and utility industries.end-market.
Compared to the prior year thirdfirst quarter, and year-to-date period, revenue from the Corrosion Protection and Waterproofing segment decreased $2,202,000$242,000 or 18% and $1,968,000 or 6%, respectively.2%. The segment’s sales decreasesdecrease in the current quarter and year-to-date period werewas predominantly driven by: (a) the building envelope product line’s sales decline of $537,000; (b) the pipeline coatings product line’s $905,000 and $1,169,000 decreases,$172,000 decrease, with sales declines most acutely seencentered in the Company’s North American operations and believed attributable to a net decrease in worldwide
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oil and gas prices experienced most acutely overprices; and (c) the third fiscal quarter of 2020;bridge and (b) the building envelopehighway product line’s $128,000 year-over-year sales declines of $888,000 and $984,000.volume reduction. The Company’s coating and lining systems product line was down $939,000 for the quarter but remained favorable for the year-to-date period by $636,000. The bridge and highway product lines saw a third quarter revenue increase of $530,000sales increased $595,000 over the prior year, quarter but fell short of the prior year-to-date mark by $451,000.with gains seen in both domestic and international sales.
Cost of Products and Services Sold
Cost of products and services sold decreased $6,717,000$2,178,000 or 14%5% to $39,689,000$39,605,000 for the quarter ended May 31,November 30, 2020, compared to $46,406,000$41,783,000 in the prior year quarter. Cost of products and services sold decreased $14,056,000 or 10% to $122,138,000 in the first nine months of fiscal 2020, compared to $136,194,000 in the comparative year-to-date period.
The following table summarizes the cost of products and services sold as a percentage of revenue for each of Chase Corporation’s reportable operating segments:
| | | | | | | | | | | | | | | | | | | | ||
| | | Three Months Ended May 31, | Nine Months Ended May 31, | | | | | Three Months Ended November 30, | | | ||||||||||
Cost of products and services sold | |
| 2020 |
| 2019 |
| | 2020 |
| 2019 | | |
| |
| 2020 |
| 2019 | | |
|
Adhesives, Sealants and Additives | | | 57 | % | 58 | % | | 57 | % | 58 | % | | | | | 55 | % | 56 | % | | |
Industrial Tapes | | | 67 | | 73 | | | 68 | | 73 | | | | | | 65 | | 71 | | | |
Corrosion Protection and Waterproofing | | | 54 | | 56 | | | 55 | | 57 | | | | | | 55 | | 55 | | | |
Total Company | | | 61 | % | 64 | % | | 62 | % | 64 | % | | | | | 59 | % | 63 | % | | |
Cost of products and services sold in the Adhesives, Sealants and Additives segment was $13,044,000 and $41,831,000$16,613,000 in the current quarter and year-to-date periods compared to $15,016,000 and $45,339,000$14,532,000 in the comparable periodsperiod in the prior year. Cost of products and services sold in the Industrial Tapes segment was $21,118,000 and $62,640,000$17,117,000 in the current quarter and year-to-date periods compared to $24,499,000 and $71,343,000$21,319,000 in the comparable periodsperiod in the prior year. Cost of products and services sold in the Corrosion Protection and Waterproofing segment was $5,527,000 and $17,667,000$5,875,000 for the quarter and year-to-date period ended May 31,November 30, 2020, compared to $6,891,000 and $19,512 ,000$5,932,000 in the same periodsperiod of the prior year.
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As a percentage of revenue, cost of products and services sold was reduced for allboth the Adhesives, Sealants and Additives and Industrial Tapes segments and comparative periods.held steady for the Corrosion Protection and Waterproofing segment as compared to the prior year first quarter. These relative gross margin improvements were primarily due to: (a) production efficiencies recognized in the current quarter and year-to-date periods, most acutely seen at the Oxford, MA and Lenoir, NC locations following the consolidation of the former Pawtucket, RI cable materials plant, and benefiting the Industrial Tapes segment; (b) more favorable sales mix especially in the Industrial Tapes segments, as lower margin products and offerings constituted a comparatively lower portion of total sales; and (c) the full period effects of price increases the Company instituted during fiscal 2019 (prior year) to address inflation(b) production and operational efficiencies recognized in raw material costs seen during that period, and which the Company retained during the current periodquarter, inclusive of more favorable raw material pricing.those gained in part through the facility rationalization and consolidation initiative.
With the composition of the Company’s finished goods and the markets it serves, the costs of certain commodities (including petroleum-based solvents, films, yarns, polymers and nonwovens, aluminum and copper foils, specialty papers, and various resins, adhesives and inks) directly and indirectly affect both the purchase price of the raw materials and market demand for its product offerings. The Company diligently monitors raw materials and commodities pricing across all its product lines in its efforts to preserve margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $478,000$362,000 or 4%3% to $12,773,000$12,260,000 for the quarter ended May 31,November 30, 2020 compared to $13,251,000$12,622,000 in the prior year quarter. Selling, general and administrative expenses increased $524,000 or 1% to $40,223,000 in the fiscal year-to-date period compared to $39,699,000 in the same period in fiscal 2019. As a percentage of revenue, selling, general and administrative expenses represented 20%18% for both the current year thirdfirst quarter, and fiscal year-to-date period, compared to 18% and 19% for the same respective periodsperiod in the prior year.
Research and Product Development Costs
Research and Product Development Costs increased $33,000 or 3% to $1,051,000 during the first quarter of fiscal 2021, compared to $1,018,000 in fiscal 2020. Research and development stayed relatively consistent from fiscal 2021 to 2020 as the Company continued focused development work on strategic product lines.
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Operations Optimization Costs
During the third fiscal quarters of 2020, Company implemented changes in its cost structure designed to address market changes brought on, in part, by COVID-19. These changes included a targeted reduction of approximately 4.5% of the Company’s global workforce. This reduction, which was contemplated pre-pandemic but catalyzed by COVID-19, resulted in the recognition of $183,000 in severance costs during the third quarter of 2020. The reduction in force, which impacted operations in the Blawnox, PA, Hickory, NC, Lenoir, NC, Evanston, IL, Oxford, Ma and Westwood, MA facilities, was effective May 2020.
During the first quarter of fiscal 2020 (prior year), 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 Company’s facilities rationalization and consolidation initiative. The Company recognized $150,000 in expense related to these services in the first quarter of fiscal 2020. Given the ongoing nature of the review, an estimate of future costs, including costs that could 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 2020.2020 (prior year). The Company recognized $60,000 and $559,000$499,000 in expense related to the move in the three-month and six-month periodsperiod ended February 29, 2020, respectively,November 30, 2019, having recognized $526,000 in expense during the second half of fiscal 2019. No costs were recognized in the three months ended May 31, 2020, and futureFuture costs related to this move are not anticipated to be significant to the condensed consolidated financial statements.
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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 $1,272,000 related to the closure. The Company also recognized $260,000 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 April 2020, for net proceeds totaling $1,810,000. This transaction resulted in a gain of $760,000 which was recorded during the third quarter of fiscal 2020. Also, during the third quarter of fiscal 2020, the Company recognized $85,000 in final Pawtucket, RI transition and exit costs, with no further costs related to this initiative anticipated in future periods.
Loss on Impairment of Goodwill
The ordering patterns of the polyurethane dispersions reporting unit’s customers during the three-month period ended February 28, 2019, especially those in the automotive industry, combined with a decrease in the reporting unit’s backlog of customer orders believed to be firm as of February 28, 2019 indicated an impairment in the carrying value of the reporting unit might have occurred. As such, the Company performed an impairment test on the long-lived assets related to the polyurethane dispersions reporting unit, part of the Adhesives, Sealants and Additives operating segment, in accordance with ASC Topic 350, “Intangibles — Goodwill and Other” and ASC Topic 360, “Disclosure — Impairment or Disposal of Long-Lived Assets.” As a result of impairment testing, which included first testing long-lived assets other than goodwill for impairment under applicable guidance, the Company recorded a charge of $2,410,000 to loss on impairment of goodwill within the condensed consolidated statement of operations during the quarter ended February 28, 2019.
Interest Expense
Interest expense decreased $24,000increased $14,000 or 26%25% to $67,000$69,000 for the quarter ended May 31,November 30, 2020 compared to $91,000$55,000 in the prior year thirdfirst quarter. Interest expense decreased $279,000 or 61% to $178,000As the Company had no outstanding balance on its revolving debt facility for the fiscal year-to-date period compared to $457,000 in the same period in fiscal 2019. The decrease inboth periods, interest expense in the current quarter and year-to-date period is primarily the result of the decreased average outstanding balance of the Company’s revolving debt facility.has remained relatively low.
In fiscal 2018,following a $65,000,000 draw on the facility in December 2017 to fund a substantial portion of the Company’s acquisition of Zappa Stewart, the Company made $40,000,000 in payments against the principal. In the first, second and third quarters of fiscal 2019, Chase made additional $10,000,000, $9,000,000 and $6,000,000 principal payments, respectively, paying off the outstanding balance in full as of May 31, 2019 (third quarter of the prior year)fiscal 2019).
Gain on Sale
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In April 2020, the Company finalized the sale of its Pawtucket, RI location for net proceeds of $1,810,000. This transaction resulted in a gain of $760,000 which was recorded during the quarter ended May 31, 2020.
Other Income (Expense)
Other income (expense) was an expense of $307,000$214,000 in the quarter ended May 31,November 30, 2020 compared to an income of $17,000 in the same period in the prior year, a change of $324,000. Other income (expense) was an expense of $1,096,000 for the fiscal year-to-date period compared to an expense of $1,105,000$604,000 in the same period in the prior year, a decrease of $9,000.$390,000. Other income (expense) primarily includes foreign exchange gains (losses) caused by changes in exchange rates on transactions or balances denominated in currencies other than the functional currency of the Company’s subsidiaries, non-service cost components of periodic pension expense (including pension-related settlement costs due to the timing of lump-sum distributions), interest income, rental income and other receipts that are not classified as trade, royalties or commissions.
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$96,000, as compared to a $501,000 foreign exchange loss seen in the first quarter of fiscal 2020.
Income Taxes
The effective tax rates for the third quarter and the nine-month period ended May 31,November 30, 2020 were 20.9% and 24.7, respectively, and 29.9% and 26.8%was 22.5%, compared to 26.9% for the third quarter and the nine-month period ended May 31, 2019, respectively.November 30, 2019.
The current and prior year effective tax rates were most prominently affected by the passage of the Tax Cuts and Jobs Act (the “Tax Act”) in December 2017. For fiscal 20202021 and 2019,2020, the Company is utilizing the 21% Federal tax rate enacted by the Tax Act. Please see Note 1714 — “Income Taxes” to the Condensed Consolidated Financial Statements for further discussion of the effects of the Tax Act. The current quarter benefited from a discrete item, and barring further discrete items during fiscal 2021, the effective tax rate is anticipated to increase to a normalized level for the full fiscal year period.
Net Income
Net income increased $1,367,000$3,475,000 or 16%47% to $9,908,000$10,837,000 in the quarter ended May 31,November 30, 2020 compared to $8,541,000$7,362,000 in the prior year thirdfirst quarter. Net income increased $2,512,000 or 11% to $25,149,000 in the nine months ended May 31, 2020 compared to $22,637,000 in the same period in the prior year. The increase in net income in the third fiscal quarter was primarily due to lower selling, general and administrative expense, the gain on sale of the Pawtucket, RI location and a more favorable income tax rate. The increase in net income in the first nine months of fiscal 2020quarter was primarily due to a nonrecurring impairment higher sales and an improved relative margin, aided by the immediately accretive results of goodwill charge recognized inABchimie, acquired by the prior year, the gainCompany on sale of the Pawtucket, RI location, a lower pension expense in the current period and a more favorable income tax rate.September 1, 2020.
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Other Important Performance Measures
The Company believes that EBITDA, Adjusted EBITDA and Free Cash Flow are useful performance measures. They are used by the Company’s executive management team to measure operating performance, to allocate resources, to evaluate the effectiveness of the Company’s business strategies and to communicate with the Board of Directors concerning financial performance. The Company believes EBITDA, Adjusted EBITDA and Free Cash Flow are also useful to investors. EBITDA is useful in comparing the core operations of the business from period to period by removing the impact of the Company’s capital structure (through interest expense), asset base (through depreciation and amortization) and tax rate, and in evaluating operating performance relative to others in the industry. Adjusted EBITDA allows for comparison to the Company’s performance in prior periods without the effect of items that, by their nature, tend to obscure the Company’s core operating results due to the potential variability across periods based on their timing, frequency and magnitude. Free Cash Flow provides a means for measuring the cash generated from operations that is available for mandatory obligations, including interest payments and debt repayment, and discretionary investment opportunities such as funding acquisitions, product and market development and paying dividends. As a result, management believes these metrics, which are commonly used by financial analysts and others in the industries in which the Company operates, enhance the ability of investors to analyze trends in the Company’s business and evaluate the Company’s performance relative to peer companies and the past performance of the Company itself. EBITDA, Adjusted EBITDA and Free Cash Flow are non-U.S. GAAP financial measures.
Chase Corporation defines EBITDA as net income before interest expense from borrowings, income tax expense, depreciation expense from fixed assets, and amortization expense from intangible assets. The Company defines Adjusted EBITDA as EBITDA excluding costs and (gains) losses related to the Company’s acquisitions and divestitures, costs of products sold related to inventory step-up to fair value, settlement (gains) losses resulting from lump-sum distributions to participants from the Company’s defined benefit plans, operations optimization costs, impairment losses on long-lived assets, and other significant items. The Company defines Free Cash Flow as net cash provided by operating activities less purchases of property, plant and equipment.
The use of EBITDA, Adjusted EBITDA and Free Cash Flow has limitations and these performance measures should not be considered in isolation from, or as an alternative to, U.S. GAAP measures such as net income and net cash provided by operating activities. None of these measures should be interpreted as representing the residual cash flow of the Company available solely for discretionary expenditures or to invest in the growth of the business, since it may have certain non-discretionary expenditures that are not deducted from these measures, including scheduled principal and (in the case of Free Cash Flow) interest payments on outstanding debt. The Company’s measurement of EBITDA, Adjusted EBITDA and Free Cash Flow may not be comparable to similarly-titled measures used by other companies.
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The following table provides a reconciliation of net income, the most directly comparable financial measure presented in accordance with U.S. GAAP, to EBITDA and Adjusted EBITDA for the periods presented (dollars in thousands):
| | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | | Nine Months Ended May 31, | | | ||||||||
|
| 2020 |
| 2019 | | | 2020 |
| 2019 |
|
| ||||
Net income | | $ | 9,908 | | $ | 8,541 | | | $ | 25,149 | | $ | 22,637 | | |
Interest expense | | | 67 | | | 91 | | | | 178 | | | 457 | | |
Income taxes | | | 2,619 | | | 3,647 | | | | 8,254 | | | 8,291 | | |
Depreciation expense | | | 948 | | | 1,143 | | | | 2,989 | | | 3,634 | | |
Amortization expense | | | 2,898 | | | 3,114 | | | | 8,724 | | | 9,339 | | |
EBITDA | | $ | 16,440 | | $ | 16,536 | | | $ | 45,294 | | $ | 44,358 | | |
Operations optimization costs (a) | | | 268 | | | 193 | | | | 977 | | | 453 | | |
Gain on sale of real estate (b) | | | (760) | | | — | | | | (760) | | | — | | |
Pension settlement costs (c) | | | 75 | | | 11 | | | | 75 | | | 484 | | |
Loss on impairment of goodwill (d) | | | — | | | — | | | | — | | | 2,410 | | |
Adjusted EBITDA | | $ | 16,023 | | $ | 16,740 | | | $ | 45,586 | | $ | 47,705 | | |
The following table provides a reconciliation of net cash provided by operating activities, the most directly comparable financial measure presented in accordance with U.S. GAAP, to Free Cash Flow for the periods presented (dollars in thousands):
| | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | | Nine Months Ended May 31, | | | ||||||||
|
| 2020 |
| 2019 | | | 2020 |
| 2019 |
|
| ||||
Net cash provided by operating activities | | $ | 15,204 | | $ | 12,972 | | | $ | 42,665 | | $ | 30,275 | | |
Purchases of property, plant and equipment | | | (217) | | | (537) | | | | (1,044) | | | (1,841) | | |
Free Cash Flow | | $ | 14,987 | | $ | 12,435 | | | $ | 41,621 | | $ | 28,434 | | |
| | | | | | | | | | | | | | | |
Liquidity and Sources of Capital
The Company’s overall cash and cash equivalents balance increased $35,488,000decreased $9,006,000 to $83,259,000$90,062,000 at May 31,November 30, 2020, from $47,771,000$99,068,000 at August 31, 2019.2020. The increaseddecreased cash balance is primarily attributable to $22,241,000 in cash utilized to acquire ABchimie on September 1, 2020, net of cash provided by operations of $42,665,000, partially netted against a $7,539,000 dividend paid in December 2019.$14,052,000. Of the above-noted amounts, $19,494,000$23,492,000 and $17,235,000$42,615,000 were held outside the United States by Chase Corporation and its foreign subsidiaries as of May 31,November 30, 2020 and August 31, 2019,2020, respectively. Given the Company’s cash position and borrowing capability in the United States and the potential for increased investment and acquisitions in foreign jurisdictions (as evidenced by the recent acquisition of ABchimie), prior to the second quarter of fiscal 2018 the Company did not have a history of repatriating a significant portion of its foreign cash. With the passage of the Tax Cuts and Jobs Act (the “Tax Act”) in the second fiscal quarter of 2018, significant changes in the Internal Revenue Code were enacted, changing the U.S. taxable nature of previously unrepatriated foreign earnings. Following the passage of the Tax Act, the Company repatriated $10,499,000 in U.K. foreign earnings in fiscal 2018 and $17,230,000 in fiscal 2019. No additional amounts were repatriated in fiscal year 2020 and the first nine monthsfiscal quarter of fiscal year 2020.2021. Please see Note 1714 — “Income Taxes” to the Condensed Consolidated Financial Statements for further discussion of the effects of the Tax Act.
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Cash flow provided by operations was $42,665,000$14,052,000 in the first ninethree months of fiscal year 20202021 compared to $30,275,000$18,153,000 in the same period in the prior year. Cash provided by operations during the current period was primarily related to operating income. PositivelyNegatively impacting the cash flow from operations was an increase in accounts receivable and prepaid expenses, partially offset by a decrease in accounts receivable, as the Company had lower sales in the third quartervolume of the current year.inventory on hand.
The ratio of current assets to current liabilities was 7.05.8 as of May 31,November 30, 2020 compared to 6.07.7 as of August 31, 2019.2020. The ratio increaseddecreased over the first ninethree months of fiscal 20202021 primarily as a result of the net increase in cash and cash equivalents.declaration of the dividend payable.
Cash flow provided byused in investing activities of $651,000$22,963,000 was largely due to the net cash received for the saleon hand purchase of the Pawtucket, RI facility, partially offset byABchimie and cash spent on capital purchases of machinery and equipment in fiscal 2020.2021.
Cash flow used in financing activities of $8,023,000$226,000 was primarily duerelated to paymentpayments of the annual dividendtaxes on restricted stock vested in December 2019.fiscal 2021.
On November 13, 2019,12, 2020, Chase Corporation announced a cash dividend of $0.80 per share (totaling $7,539,000)$7,557,000). The dividend was paid on December 4, 20197, 2020 (the second quarter of fiscal 2020)2021) to shareholders of record on November 26, 2019.27, 2020.
On December 15, 2016, the Company entered an Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America, acting as administrative agent, and with participation from Citizens Bank and JPMorgan Chase Bank (collectively with Bank of America, the “Lenders”). The Credit Agreement is initially an all-revolving credit facility with a borrowing capacity of $150,000,000, which can be increased by an additional $50,000,000 at the request of the Company and the individual or collective option of any of the Lenders. The facility matures December 15, 2021. The Credit Agreement contains customary affirmative and negative covenants that, among other things, restrict the ability to incur additional indebtedness and require lender approval for acquisitions by the Company and its subsidiaries over a certain size. It also requires the Company to maintain certain financial ratios on a consolidated basis, including a consolidated net leverage ratio (as defined in the facility) of no more than 3.25 to 1.00, and a consolidated fixed charge coverage ratio (as defined in the facility) of at least 1.25 to 1.00. The Company was in compliancecompliant with the debt covenants as of May 31,November 30, 2020. The applicable interest rate for the Credit Agreement is based on the effective LIBOR plus an additional amount in the range of 1.00% to 1.75%, depending on the consolidated net leverage ratioor, at the Company’s option, at the bank’s base lending rate. At May 31,November 30, 2020, there was no outstanding principal balance, and as such no applicable interest rate.The Company expects to renew this facility prior to its expiration to maintain our ability to support our strategic initiatives.
The Company has several ongoing capital projects, as well as its facility rationalization and consolidation initiative, which are important to its long-term strategic goals. Machinery and equipment may be added as needed to increase capacity or enhance operating efficiencies in the Company’s production facilities.
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The Company may acquire companies or other assets in future periods which are complementary to the existing business. The acquisition of ABchimie included a potential earnout based on performance of up to an additional €7,000,000 (approximately $8,330,000 at the time of the transaction), which we expect to pay with cash on hand if the applicable conditions are met. The Company believes that its existing resources, including cash on hand and the Credit Agreement, together with cash generated from operations and additional bank borrowings, will be sufficient to fund the its cash flow requirements through at least the next twelve months. However, there can be no assurance that additional financing, if needed, will be available on favorable terms, if at all.
To the extent that interest rates increase in future periods, the Company will assess the impact of these higher interest rates on the financial and cash flow projections of its potential acquisitions.
The Company has no significant off-balance sheet arrangements.
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Contractual Obligations
Please refer to Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 20192020 for a complete discussion of its contractual obligations.
Recent Accounting Standards
Please see Note 2— “Recent Accounting Standards” to the Condensed Consolidated Financial Statements for a discussion of the effects of recently issued and recently adopted accounting pronouncements.
Critical Accounting Policies
Chase Corporation’s financial statements are prepared in accordance with accounting principles generally accepted in the United States. To apply these principles, the Company must make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. In many instances, the Company reasonably could have used different accounting estimates and, in other instances, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from the Company’s estimates. To the extent that there are material differences between these estimates and actual results, the Company’s financial condition or results of operations will be affected. The Company bases its estimates and judgments on historical experience and other assumptions that it believes to be reasonable at the time and under the circumstances, and it evaluates these estimates and judgments on an ongoing basis. The Company refers to accounting estimates and judgments of this type as critical accounting policies, judgments, and estimates. ManagementOther than changes which came as a result of adopting ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which is discussed within Note 2 — “Recent Accounting Standards” of the Condensed Consolidated Financial Statements contained herein, management believes that there have been no material changes during the ninethree months ended May 31,November 30, 2020 to the critical accounting policies reported in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’sour Annual Report on Form 10-K for the fiscal year ended August 31, 2019.2020.
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Item 3 — Quantitative and Qualitative Disclosures about Market Risk
Chase Corporation limits the amount of credit exposure to any one issuer. At May 31,November 30, 2020, other than the Company’s restricted investments (which are restricted for use in non-qualified retirement savings plans for certain key employees and members of the Board of Directors), all of its funds were either in demand deposit accounts or investment instruments that meet high credit quality standards, such as money market funds, government securities, or commercial paper.
Chase Corporation’s U.S. operations have limited currency exposure since substantially all transactions are denominated in U.S. dollars. However, the Company’s European and Asian operations are subject to currency exchange fluctuations. The Company continues to review its policies and procedures to control this exposure while maintaining the benefit from these operations and sales not denominated in U.S. dollars. The effect of an immediate hypothetical 10% change in the exchange rate between the British pound and the U.S. dollar would not have a material direct effect on the Company’s overall liquidity. As of May 31,November 30, 2020, the Company had cash balances in the following foreign currencies (with USD equivalents, dollars in thousands):
| | | | | | | | | | | | |
Currency Code |
| Currency Name |
| USD Equivalent at May 31, 2020 |
|
| Currency Name |
| USD Equivalent at November 30, 2020 |
| ||
GBP |
| British Pound | | $ | 11,148 | |
| British Pound | | $ | 11,903 | |
EUR |
| Euro | | $ | 4,086 | |
| Euro | | $ | 5,160 | |
CAD |
| Canadian Dollar | | $ | 1,498 | |
| Canadian Dollar | | $ | 1,630 | |
INR |
| Indian Rupee | | $ | 398 | | ||||||
CNY |
| Chinese Yuan | | $ | 389 | |
| Chinese Yuan | | $ | 356 | |
INR |
| Indian Rupee | | $ | 344 | | ||||||
| | | | | | | | | | | | |
The Company will continue to review its current cash balances denominated in foreign currency considering current tax guidelines, including the impact of the Tax Act to the U.S. Internal Revenue Code, working capital requirements, infrastructure improvements and potential acquisitions.
The Company recognized a foreign currency translation gain for the ninethree months ended May 31,November 30, 2020 in the amount of $318,000$91,000 related to Chase Corporation’s European and Indian operations, which is recorded in other comprehensive income (loss) within its Statement of Equity and Statement of Comprehensive Income. The Company does not have or utilize any derivative financial instruments.
The Company pays interest on its outstanding long-term debt at interest rates that fluctuate based upon changes in various base interest rates. There was no outstanding balance of long-term debt at May 31, 2020 (having been paid in full during the third fiscal quarter of 2019).November 30, 2020. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Sources of Capital,” together with Note 12 — “Fair Value Measurements” and Note 16 — “Long-Term Debt” to the Condensed Consolidated Financial Statements for additional information regarding the Company’s outstanding long-term debt. An immediate hypothetical 10% change in variable interest rates would not have a material direct effect on the Company’s Condensed Consolidated Financial Statements.
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Item 4 — Controls and Procedures
Evaluation of disclosure controls and procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in Chase Corporation’s reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company carries out a variety of ongoing procedures under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of its disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that its disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.
Changes in internal control over financial reporting
ThereDuring the quarter ended November 30, 2020, the Company: (a) made modifications to existing internal controls in relation to its adoption of ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments;” and (b) initiated the process of implementing financial internal controls on the operations associated with ABchimie, acquired in September 2020. Other than the foregoing, there have not been any changes in the Company’s internal control over financial reporting during the third quarter of fiscalended November 30, 2020 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
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The Company is involved from time to time in litigation incidental to the conduct of its business. Although the Company does not expect that the outcome in any of these matters, individually or collectively, will have a material adverse effect on its financial condition, results of operations or cash flows, litigation is inherently unpredictable. Therefore, judgments could be rendered, or settlements agreed to, that could adversely affect the Company’s operating results or cash flows in a particular period. The Company routinely assesses all its litigation and threatened litigation as to the probability of ultimately incurring a liability and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable.
In additionPlease refer to the other information set forth in this report, you should carefully consider the risk set forth below and the risk factors described in Part I, Item 1A of the Company’sin our Annual Report on Form 10-K for the fiscal year ended August 31, 2019,2020 for a complete discussion of the risk factors which could materially affect itsour business, financial condition or future results. The risk described below, and the risks described in Chase Corporation’s 2019 Annual Report on Form 10-K are not the only risks the Company faces. Additional risks and uncertainties not currently known to Chase Corporation or that it currently deems to be immaterial also may materially and adversely affect its business, financial condition, or operating results.
The Company’s results of operations have been adversely affected and could in the future be materially adversely impacted by the coronavirus disease 2019 (COVID-19) pandemic.
The global spread of the coronavirus disease 2019 (COVID-19) pandemic has created significant volatility, uncertainty and economic disruption. The Company has already experienced lower sales in certain product lines and certain markets as a result of the economic disruption, and it has initiated cost-saving measures, including a targeted reduction of approximately 4.5% of the Company’s global workforce, in response to the uncertainties associated with the scope and duration of the pandemic. The extent to which the COVID-19 pandemic impacts the Company’s business, operations and financial results in future periods will depend on numerous evolving factors that it may not be able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in response to the pandemic; the impact of the pandemic on economic activity and actions taken in response; the effect on its customers’ demand for its goods and services and its vendors ability to supply it with raw materials; its ability to sell and provide goods and services, including as a result of travel restrictions and people working from home; the ability of its customers to pay for goods and services; and any closures of its customers’ offices and facilities. Customers may also slow down decision-making, delay planned work or seek to terminate existing agreements.
Further, the effects of the pandemic may also increase the Company’s cost of capital or make additional capital, including the refinancing of its credit facility, more difficult or available only on terms less favorable to it. A sustained downturn may also result in the carrying value of the Company’s goodwill or other intangible assets exceeding their fair value, which may require it to recognize an impairment to those assets. A sustained downturn in the financial markets and asset values may have the effect of increasing the Company’s pension funding obligations in order to ensure that its qualified pension plans continue to be adequately funded, which may divert cash flow from other uses. The effects of the pandemic, including remote working arrangements for employees, may also impact the Company’s financial reporting systems and internal control over financial reporting, including its ability to ensure information required to be disclosed in its reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.
Any of these events could cause or contribute to the risks and uncertainties enumerated in the Annual Report and could materially adversely affect the Company’s business, financial condition, results of operations and/or stock price.
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Exhibit | | Description |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
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| | Cover Page Interactive Data File (formatted as Inline XBRL |
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*Furnished, not filed
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Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| Chase Corporation | |
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Dated: | By: | /s/ Adam P. Chase |
| | Adam P. Chase |
| | President and Chief Executive Officer |
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Dated: | By: | /s/ Christian J. Talma |
| | Christian J. Talma |
| | Treasurer and Chief Financial Officer |
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