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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, 2021
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, Massachusetts 02090
(Address of Principal Executive Offices) (Zip Code)
(781) 332-0700
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
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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, 2021 was 9,449,248.9,459,685.
CHASE CORPORATION
INDEX TO FORM 10-Q
For the Quarter Ended May 31,November 30, 2021
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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 | |
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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; itsour expectations as to legal proceedings; the effect of itsour market and product development efforts; expectations relating to the renewal of its credit facility; and expectations or plans relating to the implementation or realization of itsour strategic goals and future growth, including through potential future acquisitions and divestitures.acquisitions. Forward-looking statements may also include, among other things, statements relating to future sales, earnings, cash flow, results of operations, use of cash and other measures of financial performance, statements relating to future dividend payments, as well as the expected impact of the coronavirus disease 2019 (COVID-19) pandemic on the Company's businesses. Forward-looking statements may be identified through the use of words such as “believes,” “anticipates,” “may,” “should,” “will,” “plans,” “projects,” “expects,” “expectations,” “estimates,” “predicts,” “targets,” “forecasts,” “strategy,” and other words of similar meaning in connection with the discussion of future operating or financial performance. These statements are based on current expectations, estimates and projections about the industries in which the Company operates,we operate, and the beliefs and assumptions made by management. Because forward-looking statements relate to the future, they are subject to inherent risks, uncertainties and changes in circumstances that are difficult to predict. Accordingly, the Company’s actual results may differ materially from those contemplated by the forward-looking statements. Investors, therefore, are cautioned against relying on any of these forward-looking statements. They are neither statements of historical fact nor guarantees or assurances of future performance. Readers should refer to the discussions under “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 20202021 concerning certain factors that could cause our actual results to differ materially from the results anticipated in such forward-looking statements. These Risk Factors are hereby incorporated by reference into this Quarterly Report.
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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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| 2021 |
| 2020 |
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ASSETS | | | | | | | |
Current Assets | | | | | | | |
Cash and cash equivalents | | $ | 102,947 | | $ | 99,068 | |
Accounts receivable, less allowance for doubtful accounts and credit losses of $434 and $438 | | | 45,515 | | | 36,993 | |
Inventory | | | 38,395 | | | 39,058 | |
Prepaid expenses and other current assets | | | 2,616 | | | 2,470 | |
Prepaid income taxes | | | 5,018 | | | 231 | |
Total current assets | | | 194,491 | | | 177,820 | |
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Property, plant and equipment, less accumulated depreciation of $52,263 and $52,283 | | | 24,685 | | | 25,574 | |
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Other Assets | | | | | | | |
Goodwill | | | 98,457 | | | 82,402 | |
Intangible assets, less accumulated amortization of $88,593 and $78,351 | | | 50,617 | | | 41,200 | |
Cash surrender value of life insurance | | | 4,450 | | | 4,450 | |
Restricted investments | | | 2,038 | | | 1,619 | |
Deferred income taxes | | | 4,856 | | | 4,929 | |
Operating lease right-of-use asset (Note 8) | | | 9,787 | | | 8,821 | |
Other assets | | | 853 | | | 15 | |
Total assets | | $ | 390,234 | | $ | 346,830 | |
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LIABILITIES AND EQUITY | | | | | | | |
Current Liabilities | | | | | | | |
Accounts payable | | $ | 16,419 | | $ | 12,525 | |
Accrued payroll and other compensation | | | 6,619 | | | 5,751 | |
Accrued expenses | | | 4,159 | | | 4,867 | |
Total current liabilities | | | 27,197 | | | 23,143 | |
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Operating lease long-term liabilities (Note 8) | | | 7,601 | | | 6,395 | |
Deferred compensation | | | 2,045 | | | 1,629 | |
Accumulated pension obligation | | | 9,992 | | | 10,930 | |
Other liabilities | | | 2,939 | | | — | |
Deferred income taxes | | | 3,327 | | | — | |
Accrued income taxes | | | 1,847 | | | 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; 9,449,786 shares at May 31, 2021 and 9,439,082 shares at August 31, 2020 issued and outstanding | | | 946 | | | 944 | |
Additional paid-in capital | | | 18,596 | | | 16,674 | |
Accumulated other comprehensive loss | | | (9,262) | | | (13,092) | |
Retained earnings | | | 325,006 | | | 298,266 | |
Total equity | | | 335,286 | | | 302,792 | |
Total liabilities and equity | | $ | 390,234 | | $ | 346,830 | |
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| | November 30, | | August 31, | | ||
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ASSETS | | | | | | | |
Current Assets | | | | | | | |
Cash and cash equivalents | | $ | 124,234 | | $ | 119,429 | |
Accounts receivable, less allowances of $410 and $451 | | | 43,726 | | | 46,212 | |
Inventory | | | 47,075 | | | 41,217 | |
Prepaid expenses and other current assets | | | 3,808 | | | 2,851 | |
Prepaid income taxes and refunds due | | | 2,450 | | | 3,255 | |
Total current assets | | | 221,293 | | | 212,964 | |
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Property, plant and equipment, less accumulated depreciation of $51,227 and $50,666 | | | 23,752 | | | 24,267 | |
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Other Assets | | | | | | | |
Goodwill | | | 97,124 | | | 97,866 | |
Intangible assets, less accumulated amortization of $94,179 and $91,484 | | | 43,359 | | | 46,954 | |
Cash surrender value of life insurance | | | 4,450 | | | 4,450 | |
Restricted investments | | | 2,348 | | | 2,260 | |
Deferred income taxes | | | 5,110 | | | 5,265 | |
Operating lease right-of-use asset (Note 8) | | | 9,949 | | | 9,312 | |
Other assets | | | 1,145 | | | 821 | |
Total assets | | $ | 408,530 | | $ | 404,159 | |
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LIABILITIES AND EQUITY | | | | | | | |
Current Liabilities | | | | | | | |
Accounts payable | | $ | 17,427 | | $ | 19,575 | |
Accrued payroll and other compensation | | | 5,263 | | | 7,179 | |
Income taxes payable | | | 348 | | | 761 | |
Accrued expenses | | | 5,121 | | | 5,407 | |
Dividend payable | | | 9,460 | | | — | |
Total current liabilities | | | 37,619 | | | 32,922 | |
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Operating lease long-term liabilities (Note 8) | | | 7,841 | | | 7,202 | |
Deferred compensation | | | 2,355 | | | 2,267 | |
Accumulated pension obligation | | | 9,114 | | | 9,416 | |
Other liabilities | | | 2,888 | | | 2,537 | |
Deferred income taxes | | | 3,325 | | | 3,301 | |
Accrued income taxes | | | 2,113 | | | 2,190 | |
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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; 9,459,685 shares at November 30, 2021 and 9,447,905 shares at August 31, 2021 issued and outstanding | | | 947 | | | 946 | |
Additional paid-in capital | | | 19,733 | | | 18,959 | |
Accumulated other comprehensive loss | | | (13,301) | | | (11,210) | |
Retained earnings | | | 335,896 | | | 335,629 | |
Total equity | | | 343,275 | | | 344,324 | |
Total liabilities and equity | | $ | 408,530 | | $ | 404,159 | |
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See accompanying notes to the unaudited 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, | | | | | Three Months Ended November 30, | | | ||||||||||||
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Revenue | | | | | | | | | | | | | | | | | | | | | | | | |
Sales | | $ | 78,822 | | $ | 64,157 | | | $ | 212,533 | | $ | 194,540 | | | | | $ | 74,192 | | $ | 66,136 | | |
Royalties and commissions | | | 771 | | | 714 | | | | 2,683 | | | 2,715 | | | | | | 818 | | | 1,040 | | |
| | | 79,593 | | | 64,871 | | | | 215,216 | | | 197,255 | | | | | | 75,010 | | | 67,176 | | |
Costs and Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of products and services sold | | | 46,312 | | | 39,689 | | | | 126,832 | | | 122,138 | | | | | | 47,281 | | | 39,605 | | |
Selling, general and administrative expenses | | | 13,969 | | | 11,795 | | | | 38,560 | | | 37,025 | | | | | | 13,375 | | | 12,260 | | |
Research and product development costs | | | 957 | | | 958 | | | | 3,034 | | | 3,045 | | | | | | 993 | | | 1,051 | | |
Operations optimization costs (Note 15) | | | 22 | | | 268 | | | | 120 | | | 977 | | | | | | 59 | | | — | | |
Acquisition-related costs (Note 17) | | | — | | | 20 | | | | 128 | | | 153 | | | |||||||||
Gain on sale of real estate (Note 15) | | | — | | | (760) | | | | — | | | (760) | | | |||||||||
Loss (gain) on contingent consideration (Note 17) | | | 262 | | | — | | | | 995 | | | — | | | |||||||||
Loss on contingent consideration (Note 17) | | | | 475 | | | — | | | |||||||||||||||
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Operating income | | | 18,071 | | | 12,901 | | | | 45,547 | | | 34,677 | | | | | | 12,827 | | | 14,260 | | |
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Interest expense | | | (68) | | | (67) | | | | (204) | | | (178) | | | | | | (87) | | | (69) | | |
Other income (expense) | | | (260) | | | (307) | | | | (758) | | | (1,096) | | | | | | 377 | | | (214) | | |
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Income before income taxes | | | 17,743 | | | 12,527 | | | | 44,585 | | | 33,403 | | | | | | 13,117 | | | 13,977 | | |
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Income taxes (Note 14) | | | 3,454 | | | 2,619 | | | | 10,288 | | | 8,254 | | | | | | 3,390 | | | 3,140 | | |
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Net income | | $ | 14,289 | | $ | 9,908 | | | $ | 34,297 | | $ | 25,149 | | | | | $ | 9,727 | | $ | 10,837 | | |
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Net income available to common shareholders, per common and common equivalent share (Note 4) | | | | | | | | | | | | | | | | | | | | | | | | |
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Basic | | $ | 1.51 | | $ | 1.05 | | | $ | 3.63 | | $ | 2.67 | | | | | $ | 1.03 | | $ | 1.15 | | |
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Diluted | | $ | 1.50 | | $ | 1.04 | | | $ | 3.61 | | $ | 2.64 | | | | | $ | 1.02 | | $ | 1.14 | | |
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Weighted average shares outstanding | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 9,386,814 | | | 9,363,559 | | | | 9,381,433 | | | 9,357,176 | | | | | | 9,397,873 | | | 9,375,819 | | |
Diluted | | | 9,435,335 | | | 9,429,263 | | | | 9,426,879 | | | 9,435,897 | | | | | | 9,438,434 | | | 9,418,675 | | |
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Annual cash dividends declared per share | | | | | | | | | $ | 0.80 | | $ | 0.80 | | | | | $ | 1.00 | | $ | 0.80 | | |
See accompanying notes to the unaudited 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, | | | | | Three Months Ended November 30, | | | ||||||||||||
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Net income | | $ | 14,289 |
| $ | 9,908 | | $ | 34,297 | | $ | 25,149 | | | | | $ | 9,727 | | $ | 10,837 | | |
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Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | | |
Net unrealized gain on restricted investments, net of tax | | | 68 | | | 7 | | | 186 | | | 5 | | | |||||||||
Net unrealized gain (loss) on restricted investments, net of tax | | | | (30) | | | 70 | | | ||||||||||||||
Change in funded status of pension plans, net of tax | | | 124 | | | 185 | | | 371 | | | 444 | | | | | | 112 | | | 122 | | |
Foreign currency translation adjustment | | | 1,386 | | | (1,077) | | | 3,273 | | | 318 | | | | | | (2,173) | | | 91 | | |
Total other comprehensive income (loss) | | | 1,578 | | | (885) | | | 3,830 | | | 767 | | | | | | (2,091) | | | 283 | | |
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Comprehensive income | | $ | 15,867 | | $ | 9,023 | | $ | 38,127 | | $ | 25,916 | | | | | $ | 7,636 | | $ | 11,120 | | |
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See accompanying notes to the unaudited condensed consolidated financial statements
6
CHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
THREE MONTHS ENDED MAY 31,NOVEMBER 30, 2021 AND 2020
(UNAUDITED)
In thousands, except share and per share amounts
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| | | | | | | Additional | | Accumulated Other | | | | | Total | | | | | | | Additional | | Accumulated Other | | | | | Total | ||||||
| | Common Stock | | Paid-In | | Comprehensive | | Retained | | Stockholders' | | Common Stock | | Paid-In | | Comprehensive | | Retained | | Stockholders' | ||||||||||||||
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| Amount |
| Capital |
| Income (Loss) |
| Earnings |
| Equity |
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Earnings |
| Equity | ||||||||||
Balance at February 29, 2020 | | 9,448,620 | | $ | 945 | | $ | 15,882 | | $ | (14,060) | | $ | 279,350 | | $ | 282,117 | |||||||||||||||||
Balance at August 31, 2020 | | 9,439,082 | | $ | 944 | | $ | 16,674 | | $ | (13,092) | | $ | 298,266 | | $ | 302,792 | |||||||||||||||||
Restricted stock grants, net of forfeitures | | (432) | | | — | | | — | | | | | | | | | — | | 7,378 | | | 1 | | | (1) | | | | | | | | | — |
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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Balance at February 28, 2021 | | 9,448,371 | | $ | 946 | | $ | 17,721 | | $ | (10,840) | | $ | 310,717 | | $ | 318,544 | |||||||||||||||||
Amortization of restricted stock grants | | | | | | | | 600 | | | | | | | | | 600 | | | | | | | | 569 | | | | | | | | | 569 |
Amortization of stock option grants | | | | | | | | 195 | | | | | | | | | 195 | | | | | | | | 248 | | | | | | | | | 248 |
Exercise of stock options | | 2,149 | | | — | | | 166 | | | | | | | | | 166 | | 2,532 | | | — | | | 40 | | | | | | | | | 40 |
Common stock received for payment of stock option exercises | | (689) | | | — | | | (80) | | | | | | | | | (80) | | (386) | | | — | | | (40) | | | | | | | | | (40) |
Common stock retained to pay statutory minimum withholding taxes on common stock | | (45) | | | — | | | (6) | | | | | | | | | (6) | | (2,325) | | | — | | | (226) | | | | | | | | | (226) |
Change in funded status of pension plans, net of tax $41 | | | | | | | | | | | 124 | | | | | | 124 | |||||||||||||||||
Cash dividend declared, $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 | | | | | | | | | | | 1,386 | | | | | | 1,386 | | | | | | | | | | | 91 | | | | | | 91 |
Net unrealized gain (loss) on restricted investments, net of tax $24 | | | | | | | | | | | 68 | | | | | | 68 | |||||||||||||||||
Net unrealized gain (loss) on restricted investments, net of tax $25 | | | | | | | | | | | 70 | | | | | | 70 | |||||||||||||||||
Net income | | | | | | | | | | | | | | 14,289 | | | 14,289 | | | | | | | | | | | | | | 10,837 | | | 10,837 |
Balance at May 31, 2021 | | 9,449,786 | | $ | 946 | | $ | 18,596 | | $ | (9,262) | | $ | 325,006 | | $ | 335,286 | |||||||||||||||||
Balance at November 30, 2020 | | 9,446,281 | | $ | 945 | | $ | 17,264 | | $ | (12,809) | | $ | 301,546 | | $ | 306,946 | |||||||||||||||||
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Balance at August 31, 2021 | | 9,447,905 | | $ | 946 | | $ | 18,959 | | $ | (11,210) | | $ | 335,629 | | $ | 344,324 | |||||||||||||||||
Restricted stock grants, net of forfeitures | | 11,780 | | | 1 | | | (1) | | | | | | | | | — | |||||||||||||||||
Amortization of restricted stock grants | | | | | | | | 556 | | | | | | | | | 556 | |||||||||||||||||
Amortization of stock option grants | | | | | | | | 219 | | | | | | | | | 219 | |||||||||||||||||
Cash dividend declared, $1.00 per share | | | | | | | | | | | | | | (9,460) | | | (9,460) | |||||||||||||||||
Change in funded status of pension plans, net of tax $37 | | | | | | | | | | | 112 | | | | | | 112 | |||||||||||||||||
Foreign currency translation adjustment | | | | | | | | | | | (2,173) | | | | | | (2,173) | |||||||||||||||||
Net unrealized gain (loss) on restricted investments, net of tax ($10) | | | | | | | | | | | (30) | | | | | | (30) | |||||||||||||||||
Net income | | | | | | | | | | | | | | 9,727 | | | 9,727 | |||||||||||||||||
Balance at November 30, 2021 | | 9,459,685 | | $ | 947 | | $ | 19,733 | | $ | (13,301) | | $ | 335,896 | | $ | 343,275 | |||||||||||||||||
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See accompanying notes to the unaudited condensed consolidated financial statements
7
CHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
NINE MONTHS ENDED MAY 31, 2021 AND 2020
(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, 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 | | | | | | | | | | | (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 |
| | | | | | | | | | | | | | | | | |
Balance at August 31, 2020 | | 9,439,082 | | $ | 944 | | $ | 16,674 | | $ | (13,092) | | $ | 298,266 | | $ | 302,792 |
Restricted stock grants, net of forfeitures | | 10,693 | | | 2 | | | (2) | | | | | | | | | — |
Amortization of restricted stock grants | | | | | | | | 1,789 | | | | | | | | | 1,789 |
Amortization of stock option grants | | | | | | | | 420 | | | | | | | | | 420 |
Exercise of stock options | | 4,681 | | | — | | | 207 | | | | | | | | | 207 |
Common stock received for payment of stock option exercises | | (1,075) | | | — | | | (121) | | | | | | | | | (121) |
Common stock retained to pay statutory minimum withholding taxes on common stock | | (3,595) | | | — | | | (371) | | | | | | | | | (371) |
Cash dividend on common stock, $0.80 per share | | | | | | | | | | | | | | (7,557) | | | (7,557) |
Change in funded status of pension plans, net of tax $124 | | | | | | | | | | | 371 | | | | | | 371 |
Foreign currency translation adjustment | | | | | | | | | | | 3,273 | | | | | | 3,273 |
Net unrealized gain (loss) on restricted investments, net of tax $63 | | | | | | | | | | | 186 | | | | | | 186 |
Net income | | | | | | | | | | | | | | 34,297 | | | 34,297 |
Balance at May 31, 2021 | | 9,449,786 | | $ | 946 | | $ | 18,596 | | $ | (9,262) | | $ | 325,006 | | $ | 335,286 |
| | | | | | | | | | | | | | | | | |
See accompanying notes to the condensed consolidated financial statements
8
CHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
In thousands
| | | | | | | | | | | | | | | | | | |
| | | Nine Months Ended May 31, | | | | | Three Months Ended November 30, | | | ||||||||
|
| | 2021 |
| 2020 |
|
|
| | 2021 |
| 2020 |
|
| ||||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | | | | | | | | | | |
Net income | | | $ | 34,297 | | $ | 25,149 | | | | | $ | 9,727 | | $ | 10,837 | | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | | | | | | | | | | |
Gain on sale of real estate | | | | — | | | (760) | | | |||||||||
Loss on contingent consideration | | | | 475 | | | — | | | |||||||||
Depreciation | | | | 2,925 | | | 2,989 | | | | | | 877 | | | 1,003 | | |
Amortization | | | | 9,566 | | | 8,724 | | | | | | 3,125 | | | 3,071 | | |
Recovery of allowance for doubtful accounts and credit losses | | | | (8) | | | (307) | | | |||||||||
Provision (recovery) of allowance for doubtful accounts | | | | (40) | | | 41 | | | |||||||||
Stock-based compensation | | | | 2,209 | | | 2,373 | | | | | | 775 | | | 817 | | |
Realized gain on restricted investments | | | | (54) | | | (32) | | | | | | (7) | | | (5) | | |
Pension curtailment and settlement loss | | | | — | | | 75 | | | |||||||||
Deferred taxes | | | | — | | | (15) | | | | | | 34 | | | — | | |
Increase (decrease) from changes in assets and liabilities | | | | | | | | | | | | | | | | | | |
Accounts receivable | | | | (6,946) | | | 3,656 | | | | | | 2,272 | | | (1,253) | | |
Inventory | | | | 2,062 | | | 1,835 | | | | | | (6,021) | | | 3,336 | | |
Prepaid expenses and other assets | | | | (260) | | | (154) | | | | | | (1,331) | | | (1,239) | | |
Accounts payable | | | | 3,049 | | | (183) | | | | | | (2,024) | | | (701) | | |
Accrued compensation and other expenses | | | | 1,044 | | | (1,263) | | | | | | (2,254) | | | (1,285) | | |
Accrued income taxes | | | | (4,884) | | | 578 | | | | | | 295 | | | (570) | | |
Net cash provided by operating activities | | | | 43,000 | | | 42,665 | | | | | | 5,903 | | | 14,052 | | |
| | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | |
Purchases of property, plant and equipment | | | | (1,749) | | | (1,044) | | | | | | (496) | | | (660) | | |
Payments for acquisitions | | | | (31,238) | | | — | | | | | | — | | | (22,241) | | |
Proceeds from sale of real estate | | | | — | | | 1,810 | | | |||||||||
Changes in restricted investments | | | | (119) | | | (115) | | | | | | (121) | | | (62) | | |
Net cash (used in) provided by investing activities | | | | (33,106) | | | 651 | | | |||||||||
Net cash used in investing activities | | | | (617) | | | (22,963) | | | |||||||||
| | | | | | | | | | | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | |
Dividend paid | | | | (7,557) | | | (7,539) | | | |||||||||
Proceeds from exercise of common stock options | | | | 86 | | | — | | | |||||||||
Payments of taxes on stock options and restricted stock | | | | (371) | | | (484) | | | | | | — | | | (226) | | |
Net cash used in financing activities | | | | (7,842) | | | (8,023) | | | | | | — | | | (226) | | |
| | | | | | | | | | | | | | | | | | |
INCREASE IN CASH & CASH EQUIVALENTS | | | | 2,052 | | | 35,293 | | | | | | 5,286 | | | (9,137) | | |
Effect of foreign exchange rates on cash | | | | 1,827 | | | 195 | | | | | | (481) | | | 131 | | |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | | 99,068 | | | 47,771 | | | | | | 119,429 | | | 99,068 | | |
CASH AND CASH EQUIVALENTS, END OF PERIOD | | | $ | 102,947 | | $ | 83,259 | | | | | $ | 124,234 | | $ | 90,062 | | |
| | | | | | | | | | | | | | | | | | |
Non-cash Investing and Financing Activities | | | | | | | | | | | | | | | | | | |
Common stock received for payment of stock option exercises | | | $ | 121 | | $ | 123 | | | | | $ | — | | $ | 40 | | |
Property, plant and equipment additions included in accounts payable | | | $ | 141 | | $ | 236 | | | | | $ | 207 | | $ | 159 | | |
Annual cash dividend declared | | | $ | 9,460 | | $ | 7,557 | | |
See accompanying notes to the unaudited condensed consolidated financial statements
98
CHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In thousands, except share and per share amounts
Note 1 — Basis of Financial Statement Presentation
Description of Business
Chase Corporation (the “Company,” “Chase,” “we,” or “us”), a global specialty chemicals company founded in 1946, is a leading manufacturer of protective materials for high-reliability applications across diverse market sectors. The Company’s strategy is to maximize the performance of its core businesses and brands while seeking future opportunities through strategic acquisitions. Through investments in facilities, systems and organizational consolidation, the Company seeks to improve performance and gain economies of scale.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting, and instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Therefore, they do not include all information and footnote disclosures necessary for a complete presentation of Chase Corporation’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The year-end condensed balance sheet was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. Chase Corporation filed audited consolidated financial statements which included all information and notes necessary for such a complete presentation for the three years ended August 31, 20202021 in conjunction with its 20202021 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, 2021 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, 20202021 which are contained in the Company’s 20202021 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, 2021, and the results of its operations, comprehensive income, changes in equity and cash flows for the interim periods ended May 31,November 30, 2021 and 2020.
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 ($241)$241 and ($678)96) for the three- and nine-monththree-month periods ended May 31,November 30, 2021 respectively, and $155 and ($451) for the three- and nine-month periods ended May 31, 2020, respectively.
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Other Business Developments
During the first quarter of fiscal 2022, Chase took steps to prepare for the future relocation of its Corporate Headquarters to a new location also located within Westwood, MA. The move, part of the Company’s ongoing consolidation and optimization initiative, takes advantage of the new work from home hybrid realities of many of Chase’s corporate employees and is expected to provide future operational cost savings. The facility will also house research and development operations currently performed at the existing Westwood, MA location as well as those currently housed in our Woburn, MA location. Operations optimization costs of $59 related to the planned relocation were expensed in the first quarter. The relocation to the new Corporate Headquarters is anticipated to be completed during the second fiscal quarter of 2022.
During the third quarter of fiscal 2021, Chase announced to the employees at its Woburn, MA location that its adhesives systems operations, part of the Adhesive,Adhesives, Sealants and Additives segment’s electronic and industrial coatings product line, would be consolidating into the Company’s existing O'Hara Township, PA location. This rationalization and consolidation initiative-related announcementinitiative aligns with the second quarter of fiscal 2021 announcement of the Company’s plan to move its sealant systems production from Newark, CA to its location in Hickory, NC, described in more detail below. Chase Corporation obtained both the adhesive and sealants systems as part of its fiscal 2017 acquisition of the operations of Resin Designs. NoNaN expense was recognized related to thisthe adhesive systems initiative during the thirdfirst quarter of fiscal quarter,2022, with the majority of future costs now anticipated to occur in the firstsecond half of fiscal 2022.
On February 5, 2021, the Company acquired certain assets of Emerging Technologies, Inc. (“ETi”), a superabsorbent polymers solutions provider, located in Greensboro, NC. The business was acquired for a purchase price of $9,997 comprising $8,997 paid on February 5, 2021 and an accrual of $1,000 to be paid out up to eighteen months after purchase, subsequent to final working capital adjustments, and excluding acquisition-related costs. As part of this transaction, Chase acquired substantially all working capital and fixed assets of the business and entered a multi-year lease at ETi’s existing location. The Company expensed $128 of acquisition-related costs during the three-month period ended February 28,fiscal 2021 associated with this acquisition.acquisition (but with 0 expense recognized in the first quarter of fiscal 2021). The purchase was funded with available cash on hand. ETi is a solutions provider and formulator of absorbent polymers for use in the packaging, recreational, consumer, and sanitation markets. The acquisition broadens the Company’s superabsorbent polymers product offerings and formulation capabilities while expanding its market reach. The Company is currently in the process of finalizingfinalized purchase accounting regarding a final allocationduring the first quarter of the purchase pricefiscal 2022, with no significant change to tangible and identifiable intangible assets assumed, and anticipates completion within fiscal 2021.amounts initially recorded. Since the effective date of the acquisition, the financial results of ETi’s acquired operations have been included in the Company’s financial statements within the functional additives product line, contained within the Adhesives, Sealants and Additives operating segment. See Note 17 to the condensed consolidated financial statements for additional information on the acquisition of the assets and operations of ETi.
During the second quarter of fiscal 2021, Chase began moving the sealant systems operations, part of the Adhesive,Adhesives, Sealants and Additives segment’s electronic and industrial coatings product line, from its Newark, CA 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. The sealant systems operations and Newark, CA location came to Chase Corporation as part of the fiscal 2017 acquisition of the operations of Resin Designs, and the Company’s lease there terminatesterminated in the current fiscal year.2021. The Company recognized $22 and $120$977 in expense related to the move during the prior fiscal year ended August 31, 2021 (but with 0 expense recognized in the three-monthfirst quarter of fiscal 2021). This project is now substantively completed, and nine-month periods ended May 31, 2021.0 expense was recognized in the first quarter of fiscal 2022. Any future costs related to this move are not anticipated to be significant to the consolidated financial statements.
10
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 totaling $274 recognized in fiscal 2020 (with $20 and $153 recognized in the three and nine months ended May 31, 2020, respectively) 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 protection of electronic assemblies, with further formulation, production, and research and development capabilities. The transaction was funded with cash on hand. TheSince the effective date of the acquisition, the financial results of the business werehave been 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.See Note 17 to the condensed consolidated financial statements for additional information on the acquisition of ABchimie.
11
The Company’s second quarter of fiscal 2020 (prior year) saw the beginning of the global spread of the coronavirus pandemic (COVID-19), which subsequently grew to create significant volatility, uncertainty, and global economic disruption. While the Company remains profitable with sufficient cash on hand to continue to meet its short- and long-term strategic objectives, COVID-19 continues to impact nearly all geographies served by the Company to varying degrees.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 the Company’s ability to maintain service levels cannot currently be estimated. The Company will continue to assess the situation and take the appropriate actions to address the impact of COVID-19 on its operations.
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 nine months of fiscal 2020, with nothing recognized in the first nine months of fiscal 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 from 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 $559 in expense related to the move in the six-month period ended February 29, 2020, having recognized $526 in expense during the second half of fiscal 2019. This project is now substantively complete, and no costs were recognized in the second half of fiscal 2020 or in the nine months ended May 31, 2021, and any future costs related to this move are not anticipated to be significant to the condensed consolidated financial statements.
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, 2020. Significant changes to these accounting policies as a result of adopting Accounting Standards Update ("ASU") No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” during the first quarter of fiscal 2021 are discussed within2021. See Note 2 — “Recent Accounting Standards” within this Current Quarterly Report on Form 10-Q.of the condensed consolidated financial statementsfor a discussion of the effects of recently issued accounting pronouncements.
1211
Note 2 — Recent Accounting Standards
Recently Adopted Accounting Pronouncements
In March 2020, the FinancialThe Company’s significant accounting policies are detailed in Note 1 – “Summary of Significant Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-04, “Reference Rate Reform (Topic 848): FacilitationPolicies” within Item 8 of the Effects of Reference Rate ReformCompany’s Annual Report 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 for which an entity has elected certain optional expedients 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. ASU 2020-04 has not had, and the Company does not expect it to have in future periods, a material impact on the Company's condensed consolidated financial statements and disclosures.
In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” which modifies the measurement approach for credit losses on financial assets measured on an amortized cost basis from an 'incurred loss' method to an 'expected loss' method. In November 2019, the FASB issued ASU 2019-11, “Codification Improvements to Topic 326, Financial Instruments – Credit Losses.” ASU 2019-11 is an accounting pronouncement that amends ASU 2016-13. This amendment provides clarity and improves the codification to ASU 2016-13. The pronouncements are concurrently effective for fiscal years beginning after December 15, 2019 and interim periods therein. The Company adopted ASU 2016-13 on September 1, 2020, using the modified retrospective transition method which resulted in no material impact on the condensed 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 effective September 1, 2020 from the critical accounting policies previously disclosed in our audited financial statementsForm 10-K for the year ended August 31, 2020 as 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 credit 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.2021. The Company regularly performs detailed reviewsdid not adopt any new accounting pronouncements in the first quarter 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 financial obligations, a specific reserve is recorded against amounts due to reduce the recognized receivable to the amount reasonably expected to be collected.fiscal 2022.
Note 3 — Inventory
Inventory consisted of the following as of May 31,November 30, 2021 and August 31, 2020:2021:
| | | | | | | |
| | | May 31, | | August 31, | ||
|
|
| 2021 |
| 2020 | ||
Raw materials | | | $ | 21,534 | | $ | 18,993 |
Work in process | | | | 6,017 | | | 7,761 |
Finished goods | | | | 10,844 | | | 12,304 |
Total Inventory | | | $ | 38,395 | | $ | 39,058 |
| | | | | | | |
| | | November 30, | | August 31, | ||
|
|
| 2021 |
| 2021 | ||
Raw materials | | | $ | 28,080 | | $ | 24,055 |
Work in process | | | | 6,631 | | | 5,928 |
Finished goods | | | | 12,364 | | | 11,234 |
Total Inventory | | | $ | 47,075 | | $ | 41,217 |
1312
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, |
| |||||||||||||
|
| 2021 |
| 2020 |
| | 2021 |
| 2020 |
|
| | 2021 |
| 2020 |
| ||||||
| | | | | | | | | | | | | | | | | | | | | | |
Basic Earnings per Share | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Net income |
| $ | 14,289 |
| $ | 9,908 |
| | $ | 34,297 |
| $ | 25,149 | |
| | $ | 9,727 |
| $ | 10,837 | |
Less: Allocated to participating securities | | | 94 | | | 86 | | | | 239 | | | 201 | | | | 64 | | | 78 | | |
Net income available to common shareholders |
| $ | 14,195 |
| $ | 9,822 |
| | $ | 34,058 |
| $ | 24,948 | |
| | $ | 9,663 |
| $ | 10,759 | |
| | | | | | | | | | | | | | | | | | | | | | |
Basic weighted average shares outstanding | | | 9,386,814 | | | 9,363,559 | | | | 9,381,433 | | | 9,357,176 | | | | 9,397,873 | | | 9,375,819 | | |
Net income per share - Basic |
| $ | 1.51 |
| $ | 1.05 |
| | $ | 3.63 |
| $ | 2.67 | |
| | $ | 1.03 |
| $ | 1.15 | |
| | | | | | | | | | | | | | | | | | | | | | |
Diluted Earnings per Share | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | |
Net income |
| $ | 14,289 |
| $ | 9,908 |
| | $ | 34,297 |
| $ | 25,149 | |
| | $ | 9,727 |
| $ | 10,837 | |
Less: Allocated to participating securities | | | 94 | | | 86 | | | | 239 | | | 201 | | | | 64 | | | 78 | | |
Net income available to common shareholders |
| $ | 14,195 |
| $ | 9,822 |
| | $ | 34,058 |
| $ | 24,948 | |
| | $ | 9,663 |
| $ | 10,759 | |
| | | | | | | | | | | | | | | | | | | | | | |
Basic weighted average shares outstanding | | | 9,386,814 | | | 9,363,559 | | | | 9,381,433 | | | 9,357,176 | | | | 9,397,873 | | | 9,375,819 | | |
Additional dilutive common stock equivalents | | | 48,521 | | | 65,704 | | | | 45,446 | | | 78,721 | | | | 40,561 | | | 42,856 | | |
Diluted weighted average shares outstanding | | | 9,435,335 | | | 9,429,263 | | | | 9,426,879 | | | 9,435,897 | | | | 9,438,434 | | | 9,418,675 | | |
Net income per share - Diluted |
| $ | 1.50 |
| $ | 1.04 |
| | $ | 3.61 |
| $ | 2.64 | |
| | $ | 1.02 |
| $ | 1.14 | |
Included in the calculation of dilutive common stock equivalents are the unvested portion of restricted stock and stock options. For the three-month and nine-month periods ended May 31,November 30, 2021 and 2020, stock options to purchase 17,94772,690 and 59,346 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-month and nine-month periods ended May 31, 2020, stock options to purchase 17,913 and 11,84191,275 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.
1413
Note 5 — Stock-Based Compensation
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 following 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 initially containedcontains (a) a restricted stock grant of 8,717 shares in the aggregate (of which 3,798 included a performance-based vesting component and were subject to adjustment as discussed below), with a vesting date of August 31, 2023, and (b) options to purchase 14,845 shares of common stock in the aggregate with an exercise price of $97.57 per share, vesting in 3 equal annual installments ending on August 31, 2023.
Based on the fiscal year 2021 results, 2,633 additional shares of restricted stock were earned and granted subsequent to the end of fiscal year 2021 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 2021, the Board of Directors of the Company approved the fiscal year 2022 Long Term Incentive Plan (“2022 LTIP”) for executive officers and other members of management. The 2022 LTIP is an equity-based plan with a grant date of September 1, 2021 and contains the following equity components:
Restricted Shares — (a) a performance and service-based restricted stock grant of 3,7983,304 shares in the aggregate, subject to adjustment based on fiscal 20212022 results, with a vesting date of August 31, 2023.2024. 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 4,9196,280 shares in the aggregate, with a vesting date of August 31, 2023.2024. Compensation expense is recognized on a ratable basis over the vesting period.
Stock optionsOptions — options to purchase 14,84512,942 shares of common stock in the aggregate with an exercise price of $97.57$114.50 per share. The options will vest in 3 equal annual installments beginning on August 31, 20212022 and ending on August 31, 2023. Of the options granted, 5,3912024. The options will expire on August 31, 2030, and 9,454 options will expire on September 1, 2030.ten years after the grant date. Compensation expense is recognized over the period of the award consistent with the vesting terms.
In the first quarter of 2021,fiscal 2022, restricted stock in the amount of 952437 shares related to thea second quarter of fiscal 2020 grant was forfeited in conjunction with the termination of employment of a non-executive membersmember of management of the Company.
In December 2020, restricted stock in the amount of 110 shares were granted to certain non-employee members of the board of directors in relation to their service on the board. These shares vested during the second fiscal quarter of 2021.
In January 2021, restricted stock in the amount of 4,409 shares and options to purchase 18,129 shares of common stock were forfeited in conjunction with the termination without cause of a now former executive of the Company. Options to purchase an additional 306 shares of common stock were forfeited in April 2021 related to this same termination.
1514
In February 2021,a performance and service-based restricted stock grant totaling 521 shares, a time-vesting restricted stock grant in the amount of 261 shares and options to purchase 749 shares of common stock with an exercise price of $104.04 per share were granted in conjunction with the appointment of a new executive of the Company. The restricted shares and stock options vest on the same terms as those granted under the 2021 LTIP in September 2020. Compensation expense is recognized over the period of the award consistent with the vesting terms.
In February 2021, as part of their standard compensation for board service, non-employee members of the Board received a total grant of 4,525 shares of restricted stock for service for the period from January 31, 2021 through January 31, 2022. 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 February 2021, restricted stock in the amount of 2,306 shares were granted to a consultant of the Company, with a two-year vesting term including continued service requirements. Compensation expense is recognized over the period of the award consistent with the vesting terms.
Note 6 — Segment Data and Foreign Operations
The Company is organized into 3 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.
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 and beginning February 5, 2021, the acquired operations of ETi, within the functional additives product line.
The Industrial Tapes segment features wire and cable materials, specialty tapes and other laminated and coated products. The segment derives its competitive advantage through its proven chemistries, its 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.
1615
The following tables summarize information about the Company’s reportable segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | | Nine Months Ended May 31, | | | | Three Months Ended November 30, | | | |||||||||||||||
|
| 2021 |
| | 2020 | | | 2021 | |
| 2020 |
|
| | 2021 | |
| 2020 |
|
| ||||||
Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 33,861 | | | $ | 22,922 | | | $ | 95,507 | | | $ | 73,184 | | | | $ | 31,049 | | | $ | 30,071 | | |
Industrial Tapes | | | 32,249 | | | | 31,752 | | | | 87,085 | | | | 91,931 | | | | | 32,761 | | | | 26,491 | | |
Corrosion Protection and Waterproofing | | | 13,483 | | | | 10,197 | | | | 32,624 | | | | 32,140 | | | | | 11,200 | | | | 10,614 | | |
Total | | $ | 79,593 | | | $ | 64,871 | | | $ | 215,216 | | | $ | 197,255 | | | | $ | 75,010 | | | $ | 67,176 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 10,982 | (a) | | $ | 6,704 | | | $ | 31,098 | (c) | | $ | 20,936 | | | | $ | 7,597 | (a) | | $ | 9,979 | | |
Industrial Tapes | | | 10,945 | | | | 9,011 | | | | 27,273 | | | | 24,050 | (e) | | | | 9,290 | | | | 7,868 | | |
Corrosion Protection and Waterproofing | | | 5,098 | | | | 4,149 | | | | 11,599 | | | | 12,240 | | | | | 4,446 | | | | 4,086 | | |
Total for reportable segments | | | 27,025 | | | | 19,864 | | | | 69,970 | | | | 57,226 | | | | | 21,333 | | | | 21,933 | | |
Corporate and common costs | | | (9,282) | | | | (7,337) | (b) | | | (25,385) | (d) | | | (23,823) | (f) | | | | (8,216) | (b) | | | (7,956) | | |
Total | | $ | 17,743 | | | $ | 12,527 | | | $ | 44,585 | | | $ | 33,403 | | | | $ | 13,117 | | | $ | 13,977 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Includes the following costs by segment: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest | | $ | 25 | | | $ | 26 | | | $ | 79 | | | $ | 68 | | | | $ | 35 | | | $ | 30 | | |
Depreciation | | | 255 | | | | 199 | | | | 744 | | | | 791 | | | | | 243 | | | | 242 | | |
Amortization | | | 2,715 | | | | 2,340 | | | | 7,931 | | | | 7,033 | | | | | 2,740 | | | | 2,573 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Industrial Tapes | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest | | $ | 15 | | | $ | 33 | | | $ | 57 | | | $ | 87 | | | | $ | 35 | | | $ | 27 | | |
Depreciation | | | 412 | | | | 428 | | | | 1,305 | | | | 1,247 | | | | | 410 | | | | 465 | | |
Amortization | | | 387 | | | | 450 | | | | 1,160 | | | | 1,350 | | | | | 384 | | | | 386 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Corrosion Protection and Waterproofing | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest | | $ | 28 | | | $ | 8 | | | $ | 68 | | | $ | 23 | | | | $ | 17 | | | $ | 12 | | |
Depreciation | | | 157 | | | | 144 | | | | 432 | | | | 449 | | | | | 118 | | | | 139 | | |
Amortization | | | 274 | | | | 108 | | | | 475 | | | | 341 | | | | | 1 | | | | 112 | | |
(a) |
(b) | Includes |
1716
Total assets for the Company’s reportable segments as of May 31,November 30, 2021 and August 31, 20202021 were:
| | | | | | | | | | | | | | | ||
| | May 31, | | August 31, | | | | November 30, | | August 31, | | | ||||
|
| 2021 |
| 2020 |
|
| 2021 |
| 2021 |
| ||||||
Total Assets | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 166,085 | | $ | 129,457 | | | | $ | 157,926 | | $ | 161,968 | | |
Industrial Tapes | | | 70,036 | | | 71,229 | | | | | 73,956 | | | 72,301 | | |
Corrosion Protection and Waterproofing | | | 30,744 | | | 32,642 | | | | | 31,601 | | | 31,067 | | |
Total for reportable segments | | | 266,865 | | | 233,328 | | | | | 263,483 | | | 265,336 | | |
Corporate and common assets | | | 123,369 | | | 113,502 | | | | | 145,047 | | | 138,823 | | |
Total | | $ | 390,234 | | $ | 346,830 | | | | $ | 408,530 | | $ | 404,159 | | |
The Company’s products are sold worldwide. Revenue for the three- and nine-monththree-month periods ended May 31,November 30, 2021 and 2020 was attributed to operations located in the following countries:
| | | | | | | | | | | | | | | | | | | | | | | | |||
| | Three Months Ended May 31, | | | Nine Months Ended May 31, | | | Three Months Ended November 30, | | | ||||||||||||||||
| | 2021 |
| | 2020 | | | 2021 | |
| 2020 | | | 2021 | |
| 2020 | | | |||||||
Revenue | | | | | | | | | | | | | | | | | | | | | | | | |||
United States | | $ | 67,264 | | | $ | 56,177 | | $ | 178,635 | | | $ | 171,774 | | | $ | 65,053 | | | $ | 55,742 | | | ||
United Kingdom | | | 6,184 | | | | 5,070 | | | 19,208 | | | | 14,489 | | | | 4,594 | | | | 6,027 | | | ||
All other foreign (1) | | | 6,145 | | | | 3,624 | | | 17,373 | | | | 10,992 | | | | 5,363 | | | | 5,407 | | | ||
Total | | $ | 79,593 | | | $ | 64,871 | | $ | 215,216 | | | $ | 197,255 | | | $ | 75,010 | | | $ | 67,176 | | | ||
| | | | | | | | | | | | | | | | | | | | | | | |
(1) | Comprises sales originated from the Company’s French locations, |
As of MayNovember 30, 2021 and August 31, 2021 and 2020 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, | | | | November 30, | | August 31, | | | ||||
| | 2021 |
| 2020 | | | | 2021 |
| 2021 | | | ||||
Long-Lived Assets | | | | | | | | | | | | | | | ||
United States | | | | | | | | | | | | | | | | |
Property, plant and equipment, net | | $ | 21,199 | | $ | 22,427 | | | | $ | 20,621 | | $ | 20,990 | | |
Goodwill and Intangible assets, less accumulated amortization | | | 118,789 | | | 117,930 | | | | | 113,081 | | | 115,936 | | |
| | | | | | | | | | | | | | | | |
United Kingdom | | | | | | | | | | | | | | | | |
Property, plant and equipment, net | | | 2,352 | | | 2,320 | | | | | 2,037 | | | 2,174 | | |
Goodwill and Intangible assets, less accumulated amortization | | | 4,192 | | | 4,403 | | | | | 3,781 | | | 3,905 | | |
| | | | | | | | | | | | | | | | |
All other foreign | | | | | | | | | | | | | | | | |
Property, plant and equipment, net | | | 1,134 | | | 827 | | | | | 1,094 | | | 1,103 | | |
Goodwill and Intangible assets, less accumulated amortization | | | 26,093 | | | 1,269 | | | | | 23,621 | | | 24,979 | | |
| | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | | | | | | |
Property, plant and equipment, net | | $ | 24,685 | | $ | 25,574 | | | | $ | 23,752 | | $ | 24,267 | | |
Goodwill and Intangible assets, less accumulated amortization | | $ | 149,074 | | $ | 123,602 | | | | $ | 140,483 | | $ | 144,820 | | |
1817
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, 2020 | | $ | 50,487 | | $ | 21,215 | | $ | 10,700 | | $ | 82,402 | | |||||||||||||
Acquisition of ABchimie | | | 13,055 | | | — | | | — | | | 13,055 | | |||||||||||||
Acquisition of Emerging Technologies, Inc. | | | 2,451 | | | — | | | — | | | 2,451 | | |||||||||||||
Balance at August 31, 2021 | | $ | 65,945 | | $ | 21,215 | | $ | 10,706 | | $ | 97,866 | | |||||||||||||
Foreign currency translation adjustment | | | 536 | | | — | | | 13 | | | 549 | | | | (734) | | | — | | | (8) | | | (742) | |
Balance at May 31, 2021 | | $ | 66,529 | | $ | 21,215 | | $ | 10,713 | | $ | 98,457 | | |||||||||||||
Balance at November 30, 2021 | | $ | 65,211 | | $ | 21,215 | | $ | 10,698 | | $ | 97,124 | | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 3 reporting units, corresponding to its 3 operating segments, that are used to evaluate the possible impairment of goodwill. 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 the coronavirus 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.
The Company has 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.
Intangible assets subject to amortization consisted of the following as of May 31,November 30, 2021 and August 31, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Weighted Average | | Gross Carrying | | Accumulated | | Net Carrying | | | Weighted Average | | Gross Carrying | | Accumulated | | Net Carrying | | ||||||
|
| Amortization Period |
| Value |
| Amortization |
| Value |
|
| Amortization Period |
| Value |
| Amortization |
| Value |
| ||||||
May 31, 2021 | | | | | | | | | | | | | ||||||||||||
November 30, 2021 | | | | | | | | | | | | | ||||||||||||
Patents and agreements | | 14.6 | years | $ | 1,760 | | $ | 1,713 | | $ | 47 | | | 14.6 | years | $ | 1,760 | | $ | 1,717 | | $ | 43 | |
Formulas and technology | | 7.9 | years | | 11,042 | | | 9,654 | | | 1,388 | | | 7.8 | years | | 10,924 | | | 9,881 | | | 1,043 | |
Trade names | | 5.9 | years | | 8,871 | | | 8,191 | | | 680 | | | 5.9 | years | | 8,799 | | | 8,373 | | | 426 | |
Customer lists and relationships | | 9.2 | years | | 117,537 | | | 69,035 | | | 48,502 | | | 9.1 | years | | 116,055 | | | 74,208 | | | 41,847 | |
| | | | $ | 139,210 | | $ | 88,593 | | $ | 50,617 | | | | | $ | 137,538 | | $ | 94,179 | | $ | 43,359 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
August 31, 2020 | | | | | | | | | | | | | ||||||||||||
August 31, 2021 | | | | | | | | | | | | | ||||||||||||
Patents and agreements | | 14.6 | years | $ | 1,760 | | $ | 1,705 | | $ | 55 | | | 14.6 | years | $ | 1,760 | | $ | 1,715 | | $ | 45 | |
Formulas and technology | | 7.8 | years | | 10,250 | | | 9,121 | | | 1,129 | | | 7.9 | years | | 10,987 | | | 9,769 | | | 1,218 | |
Trade names | | 5.8 | years | | 8,575 | | | 7,781 | | | 794 | | | 5.9 | years | | 8,836 | | | 8,285 | | | 551 | |
Customer lists and relationships | | 9.1 | years | | 98,966 | | | 59,744 | | | 39,222 | | | 9.2 | years | | 116,855 | | | 71,715 | | | 45,140 | |
| | | | $ | 119,551 | | $ | 78,351 | | $ | 41,200 | | | | | $ | 138,438 | | $ | 91,484 | | $ | 46,954 | |
1918
Aggregate amortization expense related to intangible assets for the ninethree months ended May 31,November 30, 2021 and 2020 was $9,566$3,125 and $8,724$3,071 respectively. Estimated amortization expense for the remainder of fiscal year 20212022 and for the next five years is as follows:
| | | | | | | | |
Years ending August 31, |
| | | |
| | | |
2021 (remaining 3 months) | | $ | 3,335 | | ||||
2022 | | | 11,862 |
| ||||
2022 (remaining 9 months) | | $ | 8,658 |
| ||||
2023 | | | 8,746 | | | | 8,660 | |
2024 | | | 7,538 | | | | 7,453 | |
2025 | | | 5,939 | | | | 5,853 | |
2026 | | | 5,144 | | | | 5,055 | |
2027 | | | 2,508 | |
Note 8 — Leases
Effective September 1, 2019 (the start of fiscal 2020), theThe Company adoptedaccounts for leases in accordance to ASU 2016-02, Leases (Topic 842), using the modified retrospective approach and utilizing the effective date as its date of initial application. 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.
. 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.
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 May 31,November 30, 2021 and August 31, 2020:2021:
| | | | | | | | | | | | |
| | May 31, | | August 31, | | November 30, | | August 31, | ||||
| | 2021 | | 2020 | | 2021 | | 2021 | ||||
Assets |
| | |
| | |
| | |
| | |
Operating lease right-of-use asset | | $ | 9,787 | | $ | 8,821 | | $ | 9,949 | | $ | 9,312 |
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Current (accrued expense) | | $ | 1,584 | | $ | 1,865 | ||||||
Current (accrued expenses) | | $ | 1,520 | | $ | 1,515 | ||||||
Operating lease long-term liabilities | | | 7,601 | | | 6,395 | | | 7,841 | | | 7,202 |
Total lease liability | | $ | 9,185 | | $ | 8,260 | | $ | 9,361 | | $ | 8,717 |
| | | | | | | | | | | | |
2019
Lease cost
The components of lease costs for the three and nine months ended May 31,November 30, 2021 and 2020 are as follows:
| | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | Nine Months Ended May 31, | | Three Months Ended November 30, | | ||||||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | | 2021 | | 2020 | | ||||||
| | | | | | | | | | | | | | | | | | | |
Operating lease cost (a) | | $ | 911 | | $ | 952 | | $ | 2,833 | | $ | 2,802 | | $ | 828 | | $ | 951 | |
(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, 2021 was as follows:
| | | | | | |
| | Future Operating | | Future Operating | ||
Year ending August 31, |
| Lease Payments |
| Lease Payments | ||
2021 (remaining 3 months) | | $ | 469 | |||
2022 | | | 1,718 | |||
2022 (remaining 9 months) | | | 1,361 | |||
2023 | | | 1,564 | | | 1,695 |
2024 | | | 1,487 | | | 1,620 |
2025 | | | 1,326 | | | 1,462 |
2026 and thereafter | | | 3,380 | |||
2026 | | | 1,189 | |||
2027 and thereafter | | | 2,999 | |||
Less: Interest | | | (759) | | | (965) |
Present value of lease liabilities | | $ | 9,185 | | $ | 9,361 |
The weighted average remaining lease term and discount rates are as follows:
| | | | | | | | | | | | | | |
| | May 31, | | August 31, | | | November 30, | | August 31, | | ||||
| | 2021 | | 2020 | | | 2021 | | 2021 | | ||||
Lease Term and Discount Rate |
| | |
| | | |
| | |
| | | |
Weighted average remaining lease term (years) | | | | | | | | | | | | | | |
Operating leases | | | 7.0 | | | 5.5 | | | | 7.1 | | | 6.8 | |
Weighted average discount rate (percentage) | | | | | | | | | | | | | | |
Operating leases | | | 3.1 | % | | 3.1 | % | | | 2.8 | % | | 3.1 | % |
Other Information
Supplemental cash flow information related to leases is as follows:
| | | | | | | | | | | | |
| | Nine Months Ended May 31, | | Three Months Ended November 30, | ||||||||
| | 2021 | | 2020 | | 2021 | | 2020 | ||||
| | | | | | | | | | | | |
Operating cash outflows from operating leases | | $ | 1,797 | | $ | 1,818 | | $ | 476 | | $ | 603 |
Total cash paid for amounts included in the measurement of lease liabilities | | $ | 1,797 | | $ | 1,818 | | $ | 476 | | $ | 603 |
2120
Note 9 — Revenue from Contracts with Customers
The Company accounts for revenue in accordance with ASC 606, “Revenue from Contracts with Customers.” ThisThe Company’s 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.
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, 2021 and August 31, 2020:2021:
| | | | | | | | | | | | |
| | May 31, | | August 31, | | November 30, | | August 31, | ||||
|
| 2021 |
| 2020 |
| 2021 |
| 2021 | ||||
Contract Assets | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 13 | | $ | 20 | | $ | 26 | | $ | 21 |
Industrial Tapes | | | 46 | | | 21 | | | 13 | | | 82 |
Corrosion Protection and Waterproofing | | | 86 | | | 41 | | | 60 | | | 25 |
Total | | $ | 145 | | $ | 82 | | $ | 99 | | $ | 128 |
The Company did 0t have any contract liabilities as of May 31,November 30, 2021 and August 31, 2020.2021.
2221
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, 2021 and 2020 was as follows:
| | | | | | | | | | | | | | | ||||||||||||||
| | Three Months Ended May 31, 2021 | ||||||||||||||||||||||||||
| | Adhesives, Sealants | | Industrial | | | Corrosion Protection | | | Consolidated | ||||||||||||||||||
| | and Additives |
| Tapes | | | and Waterproofing | | | Revenue | ||||||||||||||||||
Revenue | | | | | | | | | | | | | | | ||||||||||||||
North America | | $ | 20,497 | | $ | 28,620 | | | $ | 11,631 | | | $ | 60,748 | ||||||||||||||
Asia | | | 7,030 | | | 2,019 | | | | 1,023 | | | | 10,072 | ||||||||||||||
Europe | | | 6,167 | | | 1,009 | | | | 746 | | | | 7,922 | ||||||||||||||
All other foreign | | | 167 | | | 601 | | | | 83 | | | | 851 | ||||||||||||||
Total Revenue | | $ | 33,861 | | $ | 32,249 | | | $ | 13,483 | | | $ | 79,593 | ||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended May 31, 2021 | | Three Months Ended November 30, 2021 | ||||||||||||||||||||||||
| | 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 | | $ | 56,606 | | $ | 76,429 | | | $ | 27,062 | | | $ | 160,097 | | $ | 20,095 | | $ | 29,634 | | | $ | 9,377 | | | $ | 59,106 |
Asia | | | 21,958 | | | 5,855 | | | | 3,592 | | | | 31,405 | | | 5,970 | | | 1,798 | | | | 890 | | | | 8,658 |
Europe | | | 16,497 | | | 3,061 | | | | 1,823 | | | | 21,381 | | | 4,796 | | | 912 | | | | 915 | | | | 6,623 |
All other foreign | | | 446 | | | 1,740 | | | | 147 | | | | 2,333 | | | 188 | | | 417 | | | | 18 | | | | 623 |
Total Revenue | | $ | 95,507 | | $ | 87,085 | | | $ | 32,624 | | | $ | 215,216 | | $ | 31,049 | | $ | 32,761 | | | $ | 11,200 | | | $ | 75,010 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 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 | ||||||||||||||||||||||||||
| | Adhesives, Sealants | | Industrial | | | Corrosion Protection | | | Consolidated | ||||||||||||||||||
| | and Additives |
| Tapes | | | and Waterproofing | | | Revenue | ||||||||||||||||||
Revenue | | | | | | | | | | | | | | | ||||||||||||||
North America | | $ | 49,135 | | $ | 81,811 | | | $ | 25,323 | | | $ | 156,269 | ||||||||||||||
Asia | | | 13,268 | | | 5,642 | | | | 4,419 | | | | 23,329 | ||||||||||||||
Europe | | | 10,422 | | | 2,386 | | | | 2,201 | | | | 15,009 | ||||||||||||||
All other foreign | | | 359 | | | 2,092 | | | | 197 | | | | 2,648 | ||||||||||||||
Total Revenue | | $ | 73,184 | | $ | 91,931 | | | $ | 32,140 | | | $ | 197,255 | ||||||||||||||
| | | | | | | | | | | | | | |
2322
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, 2021 and 2020 were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | | Nine Months Ended May 31, | | | | Three Months Ended November 30, | | | | ||||||||||||
|
| 2021 |
| 2020 |
| | 2021 |
| 2020 |
|
|
| 2021 |
| 2020 |
| |
| ||||||
Components of net periodic benefit cost | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 91 | | $ | 74 | | | $ | 274 | | $ | 221 | | | | $ | 95 | | $ | 92 | | | |
Interest cost | | | 86 | | | 112 | | | | 256 | | | 338 | | | | | 96 | | | 85 | | | |
Expected return on plan assets | | | (97) | | | (98) | | | | (293) | | | (294) | | | | | (103) | | | (98) | | | |
Amortization of prior service cost | | | 1 | | | 1 | | | | 3 | | | 3 | | | | | 1 | | | 1 | | | |
Amortization of accumulated loss | | | 164 | | | 174 | | | | 492 | | | 522 | | | | | 148 | | | 164 | | | |
Curtailment and settlement loss | | | — | | | 75 | | | | — | | | 75 | | | |||||||||
Net periodic benefit cost | | $ | 245 | | $ | 338 | | | $ | 732 | | $ | 865 | | | | $ | 237 | | $ | 244 | | | |
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 $1,174391 in the ninethree months ended May 31,November 30, 2021 to fund its obligations under its pension plans, and plans to make the necessary contributions over the remainder of fiscal 20212022 to ensure the qualified plan 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 $1,170$392 in the ninethree months ended May 31,November 30, 2020.
2423
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, 2021 and August 31, 20202021 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, 2021 and August 31, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 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, 2021 | | $ | 2,038 | | $ | 1,796 | | $ | 242 | | $ | — | | | November 30, 2021 | | $ | 2,348 | | $ | 2,120 | | $ | 228 | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Restricted investments | | August 31, 2020 | | $ | 1,619 | | $ | 1,395 | | $ | 224 | | $ | — | | | August 31, 2021 | | $ | 2,260 | | $ | 2,016 | | $ | 244 | | $ | — | |
The following table presents the fair value of the Company’s liabilities that are accounted for at fair value on a recurring basis as of May 31,November 30, 2021 and August 31, 2020:2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 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) |
| ||||||||
Liabilities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt | | May 31, 2021 | | $ | — | | $ | — | | $ | — | | $ | — | | | November 30, 2021 | | $ | — | | $ | — | | $ | — | | $ | — | |
Contingent consideration | | May 31, 2021 | | $ | 1,939 | | $ | — | | $ | — | | $ | 1,939 | | | November 30, 2021 | | $ | 2,888 | | $ | — | | $ | — | | $ | 2,888 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt | | August 31, 2020 | | $ | — | | $ | — | | $ | — | | $ | — | | | August 31, 2021 | | $ | — | | $ | — | | $ | — | | $ | — | |
Contingent consideration | | August 31, 2020 | | $ | — | | $ | — | | $ | — | | $ | — | | | August 31, 2021 | | $ | 2,537 | | $ | — | | $ | — | | $ | 2,537 | |
The long-term debt (including any current portion of long-term debt) had 0 outstanding balance as of May 31,November 30, 2021 and August 31, 2020.2021. 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.
In connection with accounting for the ABchimie acquisition on September 1, 2020, the Company recorded a contingent consideration liability included within Other liabilities on the condensed consolidated balance sheet of €780€780 (approximately $928) on the acquisition date, representing the fair value of contingent consideration payable upon the achievement of a performance-based target. The contingent consideration liability was valued using a Monte Carlo simulation model in an option pricing framework based on key inputs that are not all observable in the market, which represents a Level 3 measurement within the fair value hierarchy. The Company assesses the fair value of the contingent consideration liability at each reporting period. Any subsequent changes in the estimated fair value of the liability are reflected in Loss (gain) on contingent consideration on the condensed consolidated statement of operations until the liability is settled. As of May 31,November 30, 2021, the liability increased to $1,939$2,888 predominantly due to changes in non-market data assumptions as well as a shorter period to the payment date. See Note 17 to the condensed consolidated financial statements for additional information on the acquisition of ABchimie.
2524
Note 13 — Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income (loss), net of tax, were as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | Change in Funded | | Foreign Currency | | | | | | | | | Change in Funded | | Foreign Currency | | | | | ||||
| | Restricted | | Status of | | Translation | | | | | | Restricted | | Status of | | Translation | | | | | ||||||
|
| Investments |
| Pension Plans |
| Adjustment |
| Total |
|
| Investments |
| Pension Plans |
| Adjustment |
| Total |
| ||||||||
Balance at August 31, 2019 | | $ | 154 | | $ | (6,271) | | $ | (8,207) | | $ | (14,324) | | |||||||||||||
Balance at August 31, 2020 | | $ | 269 | | $ | (8,317) | | $ | (5,044) | | $ | (13,092) | | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive gains (losses) before reclassifications (1) | | | 29 | | | — | | | 318 | | | 347 | | | | 74 | | | — | | | 91 | | | 165 | |
Reclassifications to net income of previously deferred (gains) losses (2) | | | (24) | | | 444 | | | — | | | 420 | | | | (4) | | | 122 | | | — | | | 118 | |
Other comprehensive income (loss) | | | 5 | | | 444 | | | 318 | | | 767 | | | | 70 | | | 122 | | | 91 | | | 283 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Adoption of ASU 2018-02 | | | — | | | (1,388) | | | — | | | (1,388) | | |||||||||||||
| | | | | | | | | | | | | | |||||||||||||
Balance at May 31, 2020 | | $ | 159 | | $ | (7,215) | | $ | (7,889) | | $ | (14,945) | | |||||||||||||
Balance at November 30, 2020 | | $ | 339 | | $ | (8,195) | | $ | (4,953) | | $ | (12,809) | | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at August 31, 2020 | | $ | 269 | | $ | (8,317) | | $ | (5,044) | | $ | (13,092) | | |||||||||||||
Balance at August 31, 2021 | | $ | 518 | | $ | (7,979) | | $ | (3,749) | | $ | (11,210) | | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive gains (losses) before reclassifications (3) | | | 226 | | | — | | | 3,273 | | | 3,499 | | | | (25) | | | — | | | (2,173) | | | (2,198) | |
Reclassifications to net income of previously deferred (gains) losses (4) | | | (40) | | | 371 | | | — | | | 331 | | | | (5) | | | 112 | | | — | | | 107 | |
Other comprehensive income (loss) | | | 186 | | | 371 | | | 3,273 | | | 3,830 | | | | (30) | | | 112 | | | (2,173) | | | (2,091) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at May 31, 2021 | | $ | 455 | | $ | (7,946) | | $ | (1,771) | | $ | (9,262) | | |||||||||||||
Balance at November 30, 2021 | | $ | 488 | | $ | (7,867) | | $ | (5,922) | | $ | (13,301) | |
(1) | Net of tax benefit of |
(2) | Net of tax expense of |
(3) | Net of tax benefit of |
(4) | Net of tax expense of |
26
The following table summarizes the reclassifications from accumulated other comprehensive income (loss) to the unaudited condensed consolidated statements of income:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
| | | | | | | | | | | | | | Amount of Gain (Loss) Reclassified from | | | | | |||||||||||||
| | | | | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive | | | | | | | Accumulated Other Comprehensive Income | | | | | |||||||||||||||
| | | | | Income (Loss) into Income | | | | | | | (Loss) into Income | | | | | |||||||||||||||
| | | | | Three Months Ended May 31, | | | Nine Months Ended May 31, | | Location of Gain (Loss) Reclassified from Accumulated | | | | | Three Months Ended November 30, | | | Location of Gain (Loss) Reclassified from Accumulated | | ||||||||||||
|
|
|
| | 2021 |
| 2020 |
|
| 2021 |
| 2020 | | Other Comprehensive Income (Loss) into Income |
|
|
| | 2021 |
| 2020 |
| | Other Comprehensive Income (Loss) into Income |
| ||||||
Gains on Restricted Investments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |||
Realized loss (gain) on sale of restricted investments | | | | | $ | (5) | | $ | (4) | | | $ | (54) | | $ | (32) | | Selling, general and administrative expenses | | | | | $ | (7) | | $ | (5) | | | Selling, general and administrative expenses | |
Tax expense (benefit) | | | | | | 1 | | | 1 | | | | 14 | | | 8 | | | | | | | | 2 | | | 1 | | | | |
Gain net of tax | | | | | $ | (4) | | $ | (3) | | $ | (40) | | $ | (24) | | | | | | | $ | (5) | | $ | (4) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
Loss on Funded Pension Plan adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
Amortization of prior pension service costs and unrecognized losses | | | | | | 165 | | 175 | | | | 495 | | 525 | | Other income (expense) | | | | | $ | 149 | | $ | 165 | | | Other income (expense) | | ||
Settlement and curtailment loss | | | | | | — | | 75 | | | | — | | 75 | | Other income (expense) | | ||||||||||||||
Tax expense (benefit) | | | | | | (41) | | | (65) | | | | (124) | | | (156) | | | | | | | | (37) | | | (43) | | | | |
Loss net of tax | | | | | $ | 124 | | $ | 185 | | $ | 371 | | $ | 444 | | | | | | | $ | 112 | | $ | 122 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total net loss reclassified for the period | | | | | $ | 120 | | $ | 182 | | $ | 331 | | $ | 420 | | | | | | | $ | 107 | | $ | 118 | | | | |
2725
Note 14 — Income Taxes
For the three and nine months ended May 31,November 30, 2021 and 2020, the Company’s recognized effective tax rate was 19.5%25.8% and 23.1%, respectively. For the three and nine months ended May 31, 2020, the Company’s recognized and effective tax rate was 20.9% and 24.7%22.5%, respectively.
The Company has applied the U.S. statutory Federal rate of 21%, enacted as part of the Tax Cuts and Jobs Act (the “Tax Act”) in December 2017, for both the quarters and nine-month periods ended May 31,November 30, 2021 and 2020.2020 (with the prior year first quarter benefiting from a discrete item that did not repeat in the current fiscal year first quarter).
During the quarter ended November 30, 2018 (the first quarter of fiscal 2019),In addition, the Company began recognizingalso recognizes 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 and nine-monththree-month periods ended May 31,November 30, 2021 and 2020. Additionally, 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 nine-monththree-month periods ended May 31,November 30, 2021 and 2020.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, included a technical correction to the Tax Act which will allow accelerated deductions for qualified improvement property. The Company is currently evaluatinghas evaluated the impact of the CARES Act, butand at present does not expect that the qualified improvement property correction or other provisions of the CARES Act will result in a material tax benefit in future periods. The CARES Act had no material effect on the effective tax rate for the first ninethree months of fiscal 2021 or 2020.November 30, 2021.
In July 2020, the United States Internal Revenue Service (“IRS”) released final regulations (TD 9901) that ease documentation standards and provide greater flexibility for taxpayers claiming the deduction for Foreign-Derived Intangible Income (“FDII”). During both the three and nine months ended May 31,November 30, 2021, FDII had a favorable impact on the Company’s effective tax rate included an FDII deduction benefit of $1,696. Also during the three and nine months ended May 31, 2021, the Company favorably resolved multiple uncertain tax positions and established international management fee charges which resulted in $933 of tax benefit and $1,229 of tax expense, respectively.rate.
0Note 15 — Operations Optimization Costs
Relocation of Chase Corporate Headquarters
During the first quarter of fiscal 2022, Chase took steps to prepare for the future relocation of its Corporate Headquarters to a new location also located within Westwood, MA. The move, part of the Company’s ongoing consolidation and optimization initiative, takes advantage of the new work from home hybrid realities of many of Chase’s corporate employees and is expected to provide future operational cost savings. The facility will also house research and development operations currently performed at the existing Westwood, MA location as well as those currently housed in our Woburn, MA location. Operations optimization costs of $59 related to the planned relocation were expensed in the first quarter. The relocation to the new Corporate Headquarters is anticipated to be completed during the second fiscal quarter of 2022.
Relocation of Adhesives Systems Manufacturing to O'Hara Township, PA
During the third quarter of fiscal 2021, Chase announced to the employees at its Woburn, MA location that its adhesives systems operations, part of the Adhesives, Sealants and Additives segment’s electronic and industrial coatings product line, would be consolidating into the Company’s existing O'Hara Township, PA location. This rationalization and consolidation initiative-related announcementinitiative aligns with the second quarter of fiscal 2021 announcement of the Company’s plan to move its sealant systems production from Newark, CA to its location in Hickory, NC, described in more detail below. Chase Corporation obtained both the adhesive and sealants systems as part of its fiscal 2017 acquisition of the operations of Resin Designs. NoNaN expense was recognized related to thisthe adhesive systems initiative during the thirdfirst quarter of fiscal quarter,2022, with the majority of future costs now anticipated to occur in the firstsecond half of fiscal 2022.
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Relocation of Sealants Systems Manufacturing to Hickory, NC
During the second quarter of fiscal 2021, Chase began moving the sealant systems operations, part of the Adhesives, Sealants and Additives segment’s electronic and industrial coatings product line, from its Newark, CA 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. The sealant systems operations and Newark, CA location came to Chase Corporation as part of the fiscal 2017 acquisition of the operations of Resin Designs, and the Company’s lease there terminatesterminated in the current fiscal year.2021. The Company recognized $22 and $120$977 in expense related to the move in the three-month and nine-month periods, respectively, ended May 31, 2021.
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COVID-19 Related Cost Structure Changes
During the third fiscal quarter of 2020 (prior year), 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 reductionprior fiscal year ended August 31, 2021 (but with 0 expense recognized 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 nine months of fiscal 2020, with nothing recognized in the first nine months of fiscal 2021. Given the ongoing nature of the review, an estimate of future costs, including those that may be capitalized, cannot currently be determined.
Relocation of Pulling and Detection Manufacturing to Hickory, NC
During the third quarter of fiscal 2019, Chase began moving the pulling and detection operations from 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 $559 in expense related to the move in the six-month period ended February 29, 2020, having recognized $526 in expense during the second half of fiscal 2019.2021). This project is now substantively complete,completed, and 0 costs wereexpense was recognized induring the second halffirst quarter of fiscal 2020 or the nine months ended May 31, 2021, and any2022. Any future costs related to this move are not anticipated to be significant to the condensed consolidated financial statements.
Closure and Sale of Pawtucket, RI Facility
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. 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.
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Note 16 — Long-Term Debt
On December 15, 2016,July 27, 2021 (the fourth quarter of fiscal 2021), the Company entered into anthe Second Amended and Restated Credit Agreement (the “Credit“New Credit Agreement”) withby and among the Company (the “Chase Borrower”), NEPTCO Incorporated (“NEPTCO”), the guarantor subsidiaries party thereto, the financial institutions party thereto as Lenders, and Bank of America, actingN.A., as administrative agent, and with participation from CitizensWells Fargo Bank, N.A., PNC Bank, N.A. and JPMorgan Chase Bank, (collectively with Bank of America, the “Lenders”).N.A. The New Credit Agreement was entered into to amend, restate and extend the Company’s preexisting Amended and Restated Credit Agreement (the “Prior Credit Agreement”), which previously had a maturity date of December 15, 2021 and is discussed in more detail below, and to provide for additional liquidity to finance acquisitions, working capital and capital expenditures, and for other general corporate purposes. Under the New Credit Agreement, Chase obtained an all-revolvingincreased revolving credit facilityloan (the “New Revolving Facility”), with a borrowing capacity of $150,000, which can be increasedcapabilities not to exceed $200,000 at any time, with the ability to request an increase in this amount by an additional $50,000$100,000 at the request of the Company and the individual or collective option of any of the Lenders.The facility matures December 15, 2021 (the second quarter of fiscal 2022). 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, 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 compliant with its debt covenants as of May 31, 2021. The Credit Agreement is guaranteed by all of Chase’s direct and indirect domestic subsidiaries, which collectively had a carrying value of $271,705 at May 31, 2021. 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”)New Revolving Facility and anyNew Term Loan (defined below) is based on the effective London Interbank Offered Rate (LIBOR) plus an additional amount in thea range of 1.00% to 1.75%, depending on the consolidated net leverage ratio of Chase and its subsidiaries. At May 31,November 30, 2021, there was 0 outstanding principal balance, and thereforeas such, 0 applicable interest rate.
The New 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.July 27, 2026. The New Credit Agreement contains provisions that may replace LIBOR as the benchmark index under certain circumstances. In addition, the Company may elect a base rate option for all or a portion of the New Revolving Facility, in which case interest payments shall be due with respect to such portion of the New Revolving Facility on the last business day of each quarter.
Subject to certain conditions set forth in the New Credit Agreement, the Company may elect to convert all or a portion of the outstanding New Revolving Facility into a new term loan twice during the term of the New Revolving Facility (each, a “Term“New Term Loan”, and collectively with the New Revolving Facility, the “New Credit Facility”), which New Term Loan shall be payable quarterly in equal installments sufficient to amortize the original principal amount of such Term Loan on a seventen year amortization schedule; provided, however,schedule.
The outstanding balance on the New Credit Facility is guaranteed by all of Chase’s direct and indirect domestic subsidiaries, which collectively had a carrying value of approximately $284,249 at November 30, 2021. The New Credit Facility is subject to restrictive covenants under the New Credit Agreement, and financial covenants that require Chase and its subsidiaries to maintain certain financial ratios on a consolidated basis, including a consolidated net leverage ratio of 3.25 to 1.00 and a consolidated interest coverage ratio of 3.50 to 1.00 (both defined in the final principal repayment installment shall be repaid on December 15, 2021 andNew Credit Agreement). Chase Corporation was in any event shall be in an amount equalcompliance with the debt covenants as of November 30, 2021. The New Credit Agreement also places certain Lender-approval requirements as to the aggregate principal amountsize of all Term Loans outstanding on such date.permitted acquisitions which may be entered into by the Company and its subsidiaries, and allows for a temporary step-up in the allowed consolidated leverage ratio for the four fiscal quarters ending after certain designated acquisitions. Prepayment is allowed by the New Credit Agreement at any time during the term of the agreement, subject to customary notice requirements.requirements and the payment of customary LIBOR breakage fees.
The Prior Credit Agreement was an all-revolving credit facility with a borrowing capacity of $150,000, which could be increased by an additional $50,000 at the request of the Company expectsand the individual or collective option of any of the lenders, and with an interest rate based on the effective LIBOR plus an additional amount in the range of 1.00% to renew this facility,1.75%, depending on our consolidated net leverage ratio or, enter into a new facility, prior toat the Company’s option, at the bank’s base lending rate. It was substantially available at July 27, 2021, the time of its expiration to maintain Chase’s ability to support its strategic initiatives.amendment and restatement.
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Note 17 – Acquisitions
Acquisition of Emerging Technologies, Inc.
On February 5, 2021, the Company acquired certain assets of Emerging Technologies, Inc. (“ETi”), a superabsorbent polymers solutions provider, located in Greensboro, NC. The business was acquired for a purchase price of $9,997, comprising $8,997 paid on February 5, 2021 and an accrual of $1,000 to be paid out up to eighteen months after the purchase, subsequent to final working capital adjustments, and excluding acquisition-related costs. As part of this transaction, Chase acquired substantially all working capital and fixed assets of the business and entered a multi-year lease at ETi’s existing location. The Company expensed $128 of acquisition-related costs during the three-month period ended February 28, 2021 associated with this acquisition. The purchase was funded with available cash on hand. ETi is a solutions provider and formulator of absorbent polymers for use in the packaging, recreational, consumer, and sanitation markets. The acquisition broadens the Company’s superabsorbent polymers product offerings and formulation capabilities while expanding its market reach. The Company is currently in the process of finalizingfinalized purchase accounting regarding a final allocationduring the first quarter of the purchase pricefiscal 2022, with no significant change to tangible and identifiable intangible assets assumed, and anticipates completion within fiscal 2021.amounts initially recorded. Since the effective date of the acquisition, the financial results of ETi’s acquired operations have been included in the Company’s financial statements within the functional additives product line, contained within the Adhesives, Sealants and Additives operating segment. The ETi 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 preliminary goodwill of $2,451 that is largely attributable to the synergies and economies of scale from combining the operations, technologies and research and development capabilities of ETi and Chase, particularly as they pertain to the expansion of the Company's product and service offerings, the established workforce and marketing efforts. This goodwill is deductible for income tax purposes.
Acquisition of ABchimie
On September 1, 2020 (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,adjustments, excluding acquisition-related costs totaling $274 recognized in fiscal 2020 (with $20 and $153 recognized in the three- and nine-month periods ended May 31, 2020) and with a performance-based earn out (measured over four years post-acquisition) potentially worth an additional €7,000 (approximately $8,330 at the time of the transaction). The Company accrued $1,939$2,888 at May 31,November 30, 2021 within Other liabilities on the condensed consolidated balance sheet related to its current estimate of the earn out. Following its initial recording at the acquisition date, a $262 and $995 increasechanges in the performance-based earn out accrual washave been recorded within Loss (gain) on contingent consideration in the condensed consolidated statement of operations for(including $475 recognized in the three and nine months ended May 31, 2021, respectively. first quarter of fiscal 2022).
ABchimie is a Corbelin, France headquartered solutions provider for the cleaning and protection of electronic assemblies, with further formulation, production, and research and development capabilities. The transaction was funded with available cash on hand. The 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 finalizingfinalized purchase accounting regarding a final allocationduring the fourth quarter of the purchase pricefiscal 2021, with no significant change to tangible and identifiable intangible assets assumed, including finalizing the recording of deferred taxes, and anticipates completion within fiscal 2021.amounts initially recorded. 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 preliminarily measured atof $13,055 that is largely attributable to the synergies and economies of scale from combining the operations, technologies and research and development capabilities of ABchimie and Chase, particularly as they pertain to the expansion of the Company's product and service offerings, the established workforce and marketing efforts. A portion of this goodwill is deductible in the U.S. for calculation of GILTI period costs but is nondeductible for French income tax purposes.
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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, 2020.2021.
Overview
General
Strong revenue inIn the quarter and nine-month period ended May 31,November 30, 2021, resulted in improvements in operating income and net incomethe Company’s revenue grew as compared to the prior year periods. Allperiod, with all three of Chase Corporation’sour reportable operating segments surpassing sales achieved top-line improvement overin the COVID-19 affected thirdprior year period. However, a less favorable relative margin and higher operating expenses (including those recognized in relation to the ABchimie contingent earn-out accrual) resulted in lower company-wide operating income and net income. The contracted relative margin in the quarter was due to both: a.) increased input costs caused by continued global raw material inflationary pressures, increased logistics costs and a more competitive labor market; and b.) a less favorable sales mix, with sales increases in our lower margin Industrial Tapes segment outpacing revenue gains seen in our Adhesive, Sealants and Additives and Corrosion Protections and Waterproofing segments. Further to this, the Adhesives, Sealants and Additives and Industrial Tapes segments also experienced less favorable sales mixes within the segments themselves — with historically less favorable margin products constituting a comparatively larger part of fiscal 2020.total segment sales. The Company has implemented and continues to implement customer price adjustments and work with our customers and suppliers in an effort to counteract margin compression but with a benefit lag reflected in current quarter results — given some delay experienced due to notification period requirements with certain customers.
Revenue for our Adhesives, Sealants and Additives segment ledincreased for the improvement by achieving both organic andfirst quarter against the comparable period with increased demand for our North American focused functional additives product line, including inorganic growth with sales into automotive, industrial, medical and consumer markets, and continued an upward trajectory in international markets. The results of both the Company’s current year acquisitions (the February 2021 acquisition of the operations offrom our Emerging Technologies, Inc. (“ETi”) business acquired in the second quarter of fiscal 2021. Partially offsetting this increase in revenue was a quarter-to-quarter reduction in sales volume from our electronic and industrial coatings product line due to delayed quarterly demand most acutely seen with sales into the September 2020 acquisition of ABchimie) are reported under the Adhesives, Sealants and Additives segment and combined provided accretive resultsautomotive industry.
First quarter revenue for both the quarter and year-to-date period. Theour Industrial Tapes segment surpassed the COVID-19 impacted prior year period with increased demand for our cable material, pulling and detection and electronic materials product lines. Tempering this overall increase in revenue were quarter-to-quarter reduction in sales volume from our specialty products product line.
Revenue for our Corrosion Protection and Waterproofing segments achieved recoverysegment surpassed the prior year with increased demand for our coating and lining systems and bridge and highway product lines. Partially offsetting these increases in revenue were quarter-to-quarter reductions in sales over the prior year. The Corrosion Protectionvolume from our pipeline coatings and Waterproofing sales in the third quarter brought the year-to-date total over the prior year-to-date period with domestic waterproofing projects work leading the rebound. However, challenges resulting from the global economic disruptions caused by the COVID-19 pandemic during the first nine months of fiscal 2021 resulted in the Industrial Tapes segment unable to surpass prior year sales results on a year-to-date basis. All of Chase Corporation’s segments are subject to current global raw material inflationary pressures and supply chain challenges, and the Company, in line with customer agreements, is addressing this by instituting customer price adjustments across impactedbuilding envelope product lines in an effort to protect gross margins.lines.
Business DevelopmentDevelopments
During the first quarter of fiscal 2022, Chase took steps to prepare for the future relocation of its Corporate Headquarters to another location within Westwood, MA. The move, part of the Company’s ongoing consolidation and optimization initiative, takes advantage of the new work from home hybrid realities of many of Chase’s corporate employees and is expected to provide future operational cost savings. The facility will also house research and development operations currently performed at the existing Westwood, MA location as well as those currently housed in our Woburn, MA location. The relocation to the new Corporate Headquarters is anticipated to be completed during the second fiscal quarter of 2022.
During the third quarter of fiscal 2021, Chase announced to the employees at its Woburn, MA location that its adhesives systems operations, part of the Adhesives, Sealants and Additives segment’s electronic and industrial coatings product line, would be consolidating into the Company’s existing O'Hara Township, PA location. This rationalization and consolidation initiative-related announcementinitiative aligns with the second quarter of fiscal 2021 announcement of the Company’s plan to move its
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sealant systems production from Newark, CA to its locationHickory, NC, described in Hickory, NC.more detail below. Chase Corporation obtained both the adhesive and sealants systems as part of its fiscal 2017 acquisition of the operations of Resin Designs. No expense was recognized related to the adhesive systems initiative during the first quarter of fiscal 2022, with the majority of future costs anticipated to occur in the second half of fiscal 2022.
On February 5, 2021, the Company acquired certain assets of Emerging Technologies, Inc. (“ETi”), a Greensboro, NC-located solutions provider and formulator of absorbent polymers for use in the packaging, recreational, consumer and sanitation markets. Following its fiscal 2018 acquisition of Zappa Stewart, the acquisition of ETi expands Chase Corporation’s market share in the growing superabsorbent polymers vertical. This second quarter of fiscal 2021 acquisition comescame following the September 1, 2020 (first day of fiscal 2021) purchase of ABchimie, a Corbelin, France-headquartered solutions provider for the cleaning and protection of electronic assemblies, withthat includes additional formulation, production, and research and development capabilities.Both the fiscal 2021 acquisitions were funded with available cash on hand and broaden the Company’s specialty chemical offerings within the Adhesives, Sealants and Additives reporting segment with high performance, environmentally-friendly technologies that are complementary to Chase’s existing product offerings.
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Revenue by Segment
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. |
Revenue from the Adhesives, Sealants and Additives segment increased for the third quarter and year-to-date period versus the prior year. Driven by Asian and European markets showing growth and the inorganic boost provided by the acquired operations of ABchimie, sales volumes within the electronic and industrial coatings product line increased. The Company’s North American-focused functional additives product line sales also experienced both organic and inorganic volume growth over both the comparative periods, with the operations of ETi added to the product line following its February 5, 2021 acquisition.
Sales showed recovery in the Industrial Tapes segment for the quarter ended May 31, 2021 over the COVID-19 impacted third quarter of the prior year, but remained below the prior year for the nine-month period ended May 31, 2021, with the cable materials, specialty products and pulling and detection product lines driving the top-line remission for the year-to-date period. The cable materials, specialty products and pulling and detection product lines all have a North American concentration, with the specialty products sales reductions further impacted in the year-to-date period by the Company’s prior year planned exit from providing low margin transitional toll manufacturing servicesto the purchaser of the structural composites rod and the fiber optical cable components businesses. By contrast, for the third quarter of fiscal 2021 the specialty products, pulling and detection and cable materials product lines had sales up from the prior year period. The Company’s electronic materials product line, which sells nearly exclusively to Asian markets, saw a sales volume decrease for the current year third quarter, but remained above the prior year on a year-to-date basis.
The Corrosion Protection and Waterproofing segment’s sales increased compared to both the third quarter and the first nine months of the prior year. The coating and lining systems and building envelope product lines were favorable to the prior year for both the current quarter and year-to-date period, with the pipeline coatings product line favorable for the third quarter, but remaining behind on a year-to-date basis. The bridge and highway product line sales were unfavorable to the third quarter and the first nine months of the prior year.
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Balance Sheet and Cash Flow
Chase Corporation’s balance sheet remained strong on May 31,as of November 30, 2021, with cash on hand of $102,947,000,$124,234,000, and a current ratio of 7.2. Favorable third quarter cash flow generation resulted in higher cash provided by operating activities over the prior year for both the quarter and year-to-date period.5.9. The Company’s cash position remainscontinues to remain healthy, withas does cash flow from operations more than offsetting the costs to acquire ETi and ABchimieoperations. Chase continued its strategic inventory build during the nine-month period.quarter to ensure our ability to satisfy our customers’ demands and to address our elevated backlog caused in part by supply chain challenges. In addition, Chase Corporation paid out an annual cash dividend of $9,460,000 on December 9, 2021 during the second fiscal quarter.
The Company held no outstanding balance on its $150,000,000$200,000,000 revolving credit facility as of May 31,November 30, 2021. The revolving credit facility, which was amended and restated in July 2021 (fourth quarter of fiscal 2021) to increase its capacity from $150,000,000 to $200,000,000, 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 they are identified. Chase’s current credit facility matures in December 2021. The Company expects to enter a new facility withinalso gives Chase the current fiscal year, prior to the current facility’s expiration, to maintain its ability to support Chase’s strategic initiatives.
request an increase in this amount by an additional $100,000,000 ($300,000,000 in total borrowing capacity) at the individual or collective option of any of the lenders. Through this amendment and restatement, Chase also extended the maturity date of the facility through July 2026.
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Results of Operations
Revenue and Income before Income Taxes by Segment were as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | |
| % of |
| |
| % of |
| | |
| % of |
| |
| % of |
| | | |
| % of |
| |
| % of |
| ||||||
| | Three Months Ended | | Total | | Three Months Ended | | Total | | | Nine Months Ended | | Total | | Nine Months Ended | | Total |
| | | Three Months Ended | | Total | | Three Months Ended | | Total |
| ||||||
|
| May 31, 2021 |
| Revenue |
| May 31, 2020 |
| Revenue |
| | May 31, 2021 |
| Revenue |
| May 31, 2020 |
| Revenue | |
| | November 30, 2021 |
| Revenue |
| November 30, 2020 |
| Revenue | | ||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 33,861 | | 43 | % | $ | 22,922 | | 35 | % | | $ | 95,507 | | 44 | % | $ | 73,184 | | 37 | % | | | $ | 31,049 | | 41 | % | $ | 30,071 | | 45 | % |
Industrial Tapes | | | 32,249 | | 41 | % | | 31,752 | | 49 | % | | | 87,085 | | 40 | % | | 91,931 | | 47 | % | | | | 32,761 | | 44 | % | | 26,491 | | 39 | % |
Corrosion Protection and Waterproofing | |
| 13,483 | | 17 | % |
| 10,197 | | 16 | % | |
| 32,624 | | 15 | % |
| 32,140 | | 16 | % | | |
| 11,200 | | 15 | % |
| 10,614 | | 16 | % |
Total | | $ | 79,593 | | | | $ | 64,871 | | | | | $ | 215,216 | | | | $ | 197,255 | | | | | | $ | 75,010 | | | | $ | 67,176 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | % of | |
| | | % of | | |
| | % of | | | | | % of | | | |
| | % of | | | | | % of | | |||
| | Three Months Ended | | Segment | | Three Months Ended | | Segment | | | Nine Months Ended | | Segment | | Nine Months Ended | | Segment | | | | Three Months Ended | | Segment | | Three Months Ended | | Segment | | ||||||
| | May 31, 2021 | | Revenue | | May 31, 2020 | | Revenue | | | May 31, 2021 | | Revenue | | May 31, 2020 | | Revenue | | | | November 30, 2021 | | Revenue | | November 30, 2020 | | Revenue | | ||||||
Income before income taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 10,982 | (a) | 32 | % | $ | 6,704 | | 29 | % | | $ | 31,098 | (c) | 33 | % | $ | 20,936 | | 29 | % | | | $ | 7,597 | (a) | 24 | % | $ | 9,979 | | 33 | % |
Industrial Tapes | | | 10,945 | | 34 | % | | 9,011 | | 28 | % | | | 27,273 | | 31 | % | | 24,050 | (e) | 26 | % | | | | 9,290 | | 28 | % | | 7,868 | | 30 | % |
Corrosion Protection and Waterproofing | |
| 5,098 | | 38 | % |
| 4,149 | | 41 | % | |
| 11,599 | | 36 | % |
| 12,240 | | 38 | % | | |
| 4,446 | | 40 | % |
| 4,086 | | 38 | % |
Total for reportable segments | |
| 27,025 | | 34 | % |
| 19,864 | | 31 | % | |
| 69,970 | | 33 | % |
| 57,226 | | 29 | % | | |
| 21,333 | | 28 | % |
| 21,933 | | 33 | % |
Corporate and Common Costs | |
| (9,282) | | | |
| (7,337) | (b) | | | |
| (25,385) | (d) | | |
| (23,823) | (f) | | | | |
| (8,216) | (b) | | |
| (7,956) | | | |
Total | | $ | 17,743 | | 22 | % | $ | 12,527 | | 19 | % | | $ | 44,585 | | 21 | % | $ | 33,403 | | 17 | % | | | $ | 13,117 | | 17 | % | $ | 13,977 | | 21 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Note: Some percentage of revenue amounts may not sum due to rounding
(a) | Includes |
Includes |
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Total Revenue
Total revenue increased $14,722,000$7,834,000 or 23%12% to $79,593,00075,010,000 for the quarter ended May 31,November 30, 2021, compared to $64,871,000$67,176,000 in the same quarter of the prior year. Total revenue increased $17,961,000 or 9% to $215,216,000 in the fiscal year-to-date period compared to $197,255,000 in the same period in fiscal 2020.
Revenue in the Company’s Adhesives, Sealants and Additives segment increased $10,939,000$978,000 or 48% and $22,323,000 or 31%3% to $31,049,000 in the current quarter and year-to-date period, respectively. Organic revenue growth accounted for $7,229,000 and $15,380,000 of the segment’s overall third quarter and year-to-date period sales increases, respectively.quarter. The increasesincrease in revenue fromfor the Adhesives, Sealants and Additives segment in fiscal 2021 for the current quarter and year-to-date period, respectively, werewas primarily due to our functional additives product line’s $2,243,000 increase, which includes the inorganic growth attributable to ETi in the quarter. Negatively impacting the segment’s sales was a decrease in revenue from our electronic and industrial coatings line totaling $1,265,000, with logistics and raw material supply constraints effecting sales in automotive verticals.
Revenue in the Company’s Industrial Tapes segment increased $6,270,000 or 24% to $32,761,000 in the current quarter. The increase in revenue for the Industrial Tapes segment for the current quarter was primarily due to our wire and cable, pulling and detection, and electronic materials product line’s $7,301,000 and $17,963,000 organic and inorganic increases. The operations of ABchimie, acquired September 1, 2020 (first day of fiscal 2021), providedlines’ combined $6,385,000 increase over the product line accretive top-line gains, while strong organic gains were seen both domestically and internationally. Also positivelyCOVID-19 impacted prior year period. Negatively impacting the segment’s sales were organic and inorganic increaseswas a decrease in revenue from the North American-focused functional additives product line totaling $3,638,000 and $4,360,000 in the current quarter and year-to-date period. The functional additives product line sales totals included the operations of ETi, following its acquisition on February 5, 2021 (second quarter of fiscal 2021).
Revenue in the Industrial Tapes segment increased $497,000 or 2% in the current quarter but decreased $4,846,000 or 5% for the year-to-date period. The net changes in revenue for the segment were primarily due to the following: (a) revenue increase of $493,000 for the quarter but a reduction of $261,000 for the year-to-date period for theour 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 (prior year); (b) the pulling and detection tapes product line saw sales growth of $136,000 over the prior year quarter but a reduction of $229,000 for the year-to-date period on lower sales volume; (c) the North American-focused cable materials product line achieved a sales volume and price increase of $94,000 for the quarter but remained $4,529,000 behind for the year-to-date period, with both COVID-19 and certain exposure to oil and gas markets negatively impacting year-to-date results; and (d) the electronic materials product line, which has a nearly exclusive Asian end-market, saw a reduction of $226,000 for the quarter but remained $173,000 above the prior year-to-date period.totaling $115,000.
ComparedRevenue in the Company’s Corrosion Protection and Waterproofing segment increased $586,000 or 6% to $11,200,000 in the prior year third quarter and year-to-date period,current quarter. The increase in revenue fromfor the Corrosion Protection and Waterproofing segment increased $3,286,000 or 32% and $484,000 or 2%, respectively. The segment’s sales increases infor the current quarter and year-to-date period were predominantly driven by: (a)the coatingwas primarily due to our coatings and lining systems and bridge and highway product linelines’ combined $778,000 increase. Negatively impacting the segment’s sales increases of $2,542,000was a decrease in revenue from our pipeline coatings and $1,652,000, with recovery and growth achieved following winter weather events which impacted the Houston, TX manufacturing facility and the surrounding region in the second quarter of fiscal 2021; and (b)the building envelope product line’s sales increases of $518,000 and $208,000, respectively. While achieving revenue growth of $492,000 over the prior year third quarter, thelines, totaling a combined $192,000. The pipeline coatings product line remained $898,000 behindsaw a net decrease for the prior year to-date period, with the Company’sCOVID-19 overhang delays in products sold into Middle East and Asian markets outpacing North American operations effected by a net prolonged decrease in worldwidesales gains into oil and gas prices, and with the Rye, U.K.-based facility’s Middle East sales prospects and margin also negatively impacted by energy prices during the current year periods. The bridge and highway product line sales saw reductions of $266,000 and $478,000 compared to the prior year third quarter and year-to-date period on lower project demand.
markets.
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Cost of Products and Services Sold
Cost of products and services sold increased $6,623,000$7,676,000 or 17%19% to $46,312,000$47,281,000 for the quarter ended May 31,November 30, 2021, compared to $39,689,000$39,605,000 in the prior year quarter. Cost of products and services sold increased $4,694,000 or 4% to $126,832,000 in the first nine months of fiscal 2021, compared to $122,138,000 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 | |
| 2021 |
| 2020 |
| | 2021 |
| 2020 | | |
| |
| 2021 |
| 2020 | | |
|
Adhesives, Sealants and Additives | | | 56 | % | 57 | % | | 55 | % | 57 | % | | | | | 61 | % | 55 | % | | |
Industrial Tapes | | | 62 | | 67 | | | 64 | | 68 | | | | | | 68 | | 65 | | | |
Corrosion Protection and Waterproofing | | | 55 | | 54 | | | 57 | | 55 | | | | | | 55 | | 55 | | | |
Total Company | | | 58 | % | 61 | % | | 59 | % | 62 | % | | | | | 63 | % | 59 | % | | |
Cost of products and services sold in the Adhesives, Sealants and Additives segment was $18,850,000 and $52,461,000$18,905,000 in the current quarter and year-to-date period compared to $13,044,000 and $41,831,000$16,613,000 in the comparable periods in the prior year. year period. Cost of products and services sold in the Industrial Tapes segment was $20,043,000 and $55,853,000$22,231,000 in the current quarter and year-to-date period compared to $21,118,000 and $62,640,000$17,117,000 in the same periods in thecomparable prior year.year period. Cost of products and services sold in the Corrosion Protection and Waterproofing segment was $7,419,000 and $18,518,000 for$6,145,000 in the current quarter and year-to-date period ended May 31, 2021, compared to $5,527,000 and $17,667,000$5,875,000 in the comparable periods of thesame prior year. year period.
As a percentage of revenue, cost of products and services sold was reducedincreased for both the Adhesives, Sealants and Additives and Industrial Tapes segments and increasedheld steady for the Corrosion Protection and Waterproofing segment as compared to the third quarter andprior year first nine months ofquarter. The decrease in the prior year. These changes in relative gross margin were primarily due to: (a)more favorable sales mixes infor the Adhesives, Sealants and Additives and Industrial Tapes segments as higherwas due tocontinued global raw material inflationary pressures, increased logistics and freight costs, and a more competitive labor market. Additionally, the Company’s overall relative margin productswas affected by a less favorable sales mix with sales increases in our lower margin Industrial Tapes segment outpacing revenue gains seen in our Adhesive, Sealants and offerings constituted a comparatively higher portion of total sales;Additives and (b) net productionCorrosion Protections and operational efficiencies realized in theWaterproofing segments. The Adhesives, Sealants and Additives and Industrial Tapes segments foralso experienced less favorable sales mixes within the current quartersegments themselves, with historically less favorable margin products constituting a comparatively larger part of total segment sales. The Company has implemented and year-to-date period, including those gained in part through the facility rationalization and consolidation initiative.All of Chase Corporation’s segments are subjectcontinues to current global raw material inflationary pressures and supply chain challenges, and the Company, in line with customer agreements, is addressing this by institutingimplement customer price adjustments across affected product lines.and continues to work with our customers and suppliers in an effort to counteract margin compression but with a lag reflected in current quarter results.
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 an effort to preserve margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased $2,174,000$1,115,000 or 18%9% to $13,969,000$13,375,000 for the quarter ended May 31,November 30, 2021 compared to $11,795,000$12,260,000 in the prior year quarter. Selling, general and administrative expenses increased $1,535,000 or 4% to $38,560,000 in the fiscal year-to-date period compared to $37,025,000 in the same period in fiscal 2020. As a percentage of revenue, selling, general and administrative expenses represented 18% for both the current year third quarter and fiscal year-to-date period, compared to 18% and 19% for the three- and nine-month periods of the prior year respectively.periods.
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Research and Product Development Costs
Research and Product Development Costs decreased $1,000 or less than one percent$58,000 to $957,000$993,000 during the thirdfirst quarter of fiscal 2021,2022, compared to $958,000 in fiscal 2020. Research and Product Development Costs decreased $11,000 or less than one percent to $3,034,000 during the first nine months of fiscal 2021, compared to $3,045,000$1,051,000 in the same period of fiscal 2020.prior year quarter. Research and development stayed relatively consistent from fiscal 20202021 to 20212022 as the Company continued focused development work on strategic product lines.
Operations Optimization Costs
During the first quarter of fiscal 2022, Chase took steps to prepare for the future relocation of its Corporate Headquarters to a new location also located within Westwood, MA. The move, part of the Company’s ongoing consolidation and optimization initiatives, takes advantage of the new work from home hybrid realities of many of Chase’s corporate employees and is expected to provide future operational cost savings. The facility will also house research and development operations currently performed at the existing Westwood, MA location as well as those currently housed in our Woburn, MA location. Operations optimization expenses of $59,000 related to the relocation were expensed in the first quarter. The relocation to the new Corporate Headquarters is anticipated to be completed during the second fiscal quarter of 2022.
During the third quarter of fiscal 2021, Chase announced to the employees at its Woburn, MA location that its adhesives systems operations, part of the Adhesives, Sealants and Additives segment’s electronic and industrial coatings product line, would be consolidating into the Company’s existing O'Hara Township, PA location. This rationalization and consolidation initiative-related announcementinitiative aligns with the second quarter of fiscal 2021 announcement of the Company’s plan to move its sealant systems production from Newark, CA to its location in Hickory, NC, described in more detail below. Chase Corporation obtained both the adhesive and sealants systems as part of its fiscal 2017 acquisition of the operations of Resin Designs. No expense was recognized related to thisthe adhesive systems initiative during the thirdfirst quarter of fiscal quarter,2022, with the majority of future costs anticipated to occur in the firstsecond half of fiscal 2022.
During the second quarter of fiscal 2021, Chase began moving the sealant systems operations, part of the Adhesives, Sealants and Additives segment’s electronic and industrial coatings product line, from its Newark, CA 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. The sealant systems operations and Newark, CA location came to Chase Corporation as part of the fiscal 2017 acquisition of the operations of Resin Designs, and the Company’s lease there will terminateterminated in the current fiscal year.2021. The Company recognized $22,000 and $120,000$977,000 in expense related to the move during the prior fiscal year ended August 31, 2021 (but with no expense recognized in the three-monthfirst quarter of 2021). This project is now substantively completed, and nine-month periods ended May 31, 2021.
Duringno expense was recognized 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 half 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 from 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 (prior year). The Company recognized $559,000 in expense related to the move in the nine-month period ended May 31, 2020, having recognized $526,000 in expense during the second half of fiscal 2019. This project is substantively completed, and no costs were recorded in the first nine months of fiscal 2021, and any2022. Any future costs related to this move are not anticipated to be significant to the condensed consolidated financial statements.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. 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.
Acquisition-Related Costs
In the second quarter of fiscal 2021, the Company incurred $128,000 of costs related to our February 5, 2021 acquisition of Emerging Technologies, Inc (“ETi”). This acquisition was accounted for as a business combination in accordance with applicable accounting standards, and all related professional service fees (including legal, accounting and actuarial fees) were expensed as incurred within the second fiscal quarter of 2021.
In the three- and nine-month periods ended May 31, 2020, the Company incurred $20,000 and $153,000 of costs related to our September 1, 2020 acquisition of ABchimie, respectively. This acquisition was accounted for as a business combination in accordance with applicable accounting standards, and all related professional service fees (including banking, legal, accounting and actuarial fees) were expensed as incurred within the second, third and fourth quarters of fiscal 2020 (total of $274,000 in acquisition-related expense recognized over the last three quarters of fiscal 2020). The transaction was consummated at the beginning of fiscal 2021.
Gain on Sale of Real Estate
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.
Loss (Gain) on Contingent Consideration
As a component of the September 1, 2020 acquisition of ABchimie, the Company incurred a performance-based earn out liability potentially worth an additional €7,000,000 (approximately $8,330,000 at the time of the transaction) in consideration. Following its initial recording of an accrual for $928,000 at the acquisition date, $262,000 and $995,000$1,664,000 in expense related to adjustments to the performance-based earn out accrual were recorded for the three and nine monthsduring fiscal year ended MayAugust 31, 2021 respectively.(but with no expense recognized in the first quarter of fiscal 2021). The Company recognized an additional $475,000 in the first quarter of fiscal 2022 related to the contingent consideration.
Interest Expense
Interest expense increased $1,000$18,000 or 1%26% to $68,000 for the quarter ended May 31, 2021$87,000 in fiscal 2022 compared to $67,000$69,000 in the prior year third quarter. Interest expense increased $26,000 or 15% to $204,000 for the first nine monthsquarter of fiscal 2021 compared to $178,000 in the prior year period.2021. As the Company had no outstanding balance on its revolving debt facility for both periods, interest expense has remained relatively low.
Other Income (Expense)
Other income (expense) was an$377,000 in the first quarter of fiscal 2022 compared to other expense of $260,000 in the quarter ended May 31, 2021, compared to an expense of $307,000 in the same period in the prior year, a decrease of $47,000. Other income (expense) was an expense of $758,000 in the nine months ended May 31, 2021, compared to an expense of $1,096,000$214,000 in the comparable period in the prior year,fiscal quarter, a decreasechange of $338,000.$591,000. 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’sour 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 classifiednon-trade/non-royalty/non-commission receipts. The change in total other income (expense) in fiscal 2022 compared to fiscal 2021 was largely due to the recognition of a foreign exchange gain in fiscal 2022 as trade, royalties or commissions.compared to a loss in fiscal 2021.
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Income Taxes
The effective tax rate for the quarter ended May 31,November 30, 2021 was 19.5%25.8%, compared to 20.9%22.5% for the quarter ended May 31,November 30, 2020.The effectiveprior year first quarter benefited from a discrete item that did not repeat in the current fiscal year first quarter.
For fiscal 2021 and 2020, the Company is utilizing the 21% Federal tax rate enacted by the Tax Cuts and Jobs Act (the “Tax Act”) passed in December 2017. Please see Note 14 — “Income Taxes” to the Condensed Consolidated Financial Statements for further discussion of the nine months ended May 31, 2021 was 23.1%, compared to 24.7% foreffects of the nine months ended May 31, 2020.Tax Act.
Net Income
Net income increased $4,381,000decreased $1,110,000 or 44%10% to $14,289,0009,727,000 in the quarter ended May 31,November 30, 2021 compared to $9,908,000$10,837,000 in the prior year thirdfirst quarter. Net income increased $9,148,000 or 36% to $34,297,000 in the nine months ended May 31, 2021 compared to $25,149,000 in the same period in the prior year. The increasedecrease in net income in both the third fiscalfirst quarter and year-to-date period was primarily due to: a.) a lower relative margin, brought on bycontinued global raw material inflationary pressures, increased logistics costs and a more competitive labor market; b.) a less favorable sales mix; and c.) increased operating expenses (including those recognized in relation to higher sales and an improved relative gross margin.
the ABchimie contingent earn-out accrual).
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Liquidity and Sources of Capital
The Company’s overall cash and cash equivalents balance increased $3,879,000$4,805,000 to $102,947,000$124,234,000 at May 31,November 30, 2021, from $99,068,000$119,429,000 at August 31, 2020.2021. The increased cash balance is primarily attributable tocash provided by operations of $43,000,000, net of $22,241,000 utilized to acquire ABchimie on September 1, 2020, $8,997,000 in cash utilized to acquire the operations of Emerging Technologies, Inc. (“ETi”) on February 5, 2021 and the $7,557,000 dividend paid in December 2020.flow from operations. Of the above-noted balances, $27,023,000amounts, $27,428,000 and $42,615,000$26,309,000 were held outside the United States by Chase Corporation and its foreign subsidiaries as of May 31,November 30, 2021 and August 31, 2020,2021, 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 recentfiscal 2021 acquisition of ABchimie in France)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, or2021 and the first nine monthsquarter of fiscal 2021.2022. Please see Note 14 — “Income Taxes” to the Condensed Consolidated Financial Statements for further discussion of the effects of the Tax Act.
Cash flow provided by operations was $43,000,000$5,903,000 in the first ninethree months of fiscal year 20212022 compared to $42,665,000$14,052,000 in the same period in the prior year. Cash provided by operations during the current period was primarily related to operating income. Negatively impacting the cash flow from operations was an increase in accounts receivable, on higher sales in the current year third quarter, partially offset byperiod was a strategic build up in inventory, and a decrease in accrued compensation and other expenses, due in part to the volumepayment of inventory on hand and a rise in accounts payable.the Company’s domestic annual bonus to its employees during the first quarter of fiscal 2022.
The ratio of current assets to current liabilities was 7.25.9 as of May 31,November 30, 2021 compared to 7.76.5 as of August 31, 2020.2021. The ratio decreased over the first ninethree months of fiscal 2022 due largely to the dividend payable which was recorded at November 30, 2021 primarily due to increases accounts payable at May 31, 2021.and paid out in the second quarter of fiscal 2022.
Cash flow used in investing activities of $33,106,000$617,000 was largely due to the cash on hand purchases of both ABchimie and ETi and cash spent on capital purchases of machinery and equipment in the first quarter of fiscal 2021.2022.
Cash flow used inflows from financing activities of $7,842,000 was primarily related topayments of our annual dividend in December 2020 and taxes on restricted stock vested in fiscalhad no activity during the first quarter ended November 30, 2021.
On November 12, 2020,15, 2021, Chase Corporation announced a cash dividend of $0.80$1.00 per share (totaling $7,557,000)$9,460,000). The dividend was paid on December 7, 20209, 2021 (the second quarter of fiscal 2021)2022) to shareholders of record on November 27, 2020.30, 2021.
On December 15, 2016,July 27, 2021 (the fourth quarter of fiscal 2021), the Company entered aninto the Second Amended and Restated Credit Agreement (the “Credit“New Credit Agreement”) withby and among the Company (the “Chase Borrower”), NEPTCO Incorporated (“NEPTCO”), the subsidiary guarantors party thereto, the financial institutions party thereto as Lenders, and Bank of America, actingN.A., as administrative agent, and with participation from CitizensWells Fargo Bank, N.A., PNC Bank, N.A. and JPMorgan Chase Bank, (collectively with Bank of America, the “Lenders”).N.A. The New Credit Agreement iswas entered into to amend, restate and extend the Company’s preexisting Amended and Restated Credit Agreement (the “Prior Credit Agreement”), which had a maturity date of December 15, 2021, and to provide for additional liquidity to finance acquisitions, working capital and capital expenditures, and for other general corporate purposes. Under the New Credit Agreement, Chase obtained an all-revolvingincreased revolving credit facilityloan (the “New Revolving Facility”), with a borrowing capacity of $150,000,000, which can be increasedcapabilities not to exceed $200,000,000 at any time, with the ability to request an increase in this amount by an additional $50,000,000$100,000,000 at the request of the Company and the individual or collective option of any of the Lenders. The facility matures December 15, 2021 (second quarter of fiscal 2022). 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, 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 compliant with the debt covenants as of May 31, 2021. The applicable interest rate for the Credit AgreementNew Revolving Facility and New Term Loan (defined below) is based on the effective LIBORLondon Interbank Offered Rate (LIBOR) plus an additional amount in thea 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. of Chase and its subsidiaries. At May 31,November 30, 2021, there was no outstanding principal balance, and as such, no applicable interest rate.The New 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, July 27, 2026. The New Credit Agreement contains provisions that may replace LIBOR as the benchmark index under certain circumstances. In addition, the Company expectsmay elect a base rate option for all or a portion of the New Revolving Facility, in which case interest payments shall be due with respect to renew this facility, or enter into a new facility, prior tosuch portion of the current facility’s expiration to maintain Chase’s ability to support its strategic initiatives.
New Revolving Facility on the
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last business day of each quarter. Subject to certain conditions set forth in the New Credit Agreement, the Company may elect to convert all or a portion of the outstanding New Revolving Facility into a new term loan twice during the term of the New Revolving Facility (each, a “New Term Loan”, and collectively with the New Revolving Facility, the “New Credit Facility”), which New Term Loan shall be payable quarterly in equal installments sufficient to amortize the original principal amount of such Term Loan on a ten year amortization schedule. The outstanding balance on the New Credit Facility is guaranteed by all of Chase’s direct and indirect domestic subsidiaries. The New Credit Facility is subject to restrictive covenants under the New Credit Agreement, and financial covenants that require Chase and its subsidiaries to maintain certain financial ratios on a consolidated basis, including a consolidated net leverage ratio of 3.25 to 1.00 and a consolidated interest coverage ratio of 3.50 to 1.00 (both defined in the New Credit Agreement). Chase Corporation was in compliance with the debt covenants as of November 30, 2021. The New Credit Agreement also places certain Lender-approval requirements as to the size of permitted acquisitions which may be entered into by the Company and its subsidiaries, and allows for a temporary step-up in the allowed consolidated leverage ratio for the four fiscal quarters ending after certain designated acquisitions. Prepayment is allowed by the New Credit Agreement at any time during the term of the agreement, subject to customary notice requirements and the payment of customary LIBOR breakage fees.
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.
The CompanyWe may acquire companies or other assets in future periods which are complementary to the existingour 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 the Company expects to pay with cash on hand if the applicable conditions are met. The acquisition of ETi includes a $1,000,000 withholding, which is payable by the Company within eighteen months of the acquisition. The Company believes that its existing resources, including cash on hand and the New Amended and Restated Credit Agreement, together with cash generated from operations and additional bank borrowings, will be sufficient to fund 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 Companywe will assess the impact of these higher interest rates on the financial and cash flow projections of itsour potential acquisitions.
The Company hasWe have no significantmaterial 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, 20202021 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’sOur financial statements are prepared in accordance with accounting principles generally accepted in the United States. To apply these principles, the Companywe must make estimates and judgments that affect theour reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. In many instances, the Companywe 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’sour estimates. To the extent that there are material differences between these estimates and actual results, the Company’sour financial condition or results of operations will be affected. The Company bases itsWe base our estimates and judgments on historical experience and other assumptions that it believeswe believe to be reasonable at the time and under the circumstances, and it evaluateswe evaluate these estimates and judgments on an ongoing basis. The Company refersWe refer to accounting estimates and judgments of this type as critical accounting policies, judgments, and estimates. Other 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, managementManagement believes that there have been no material changes during the ninethree months ended May 31,November 30, 2021 to the critical accounting policies reported in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2020.2021.
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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, 2021, 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, 2021, the Company had cash balances in the following foreign currencies (with USD equivalents, dollars in thousands):
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| USD Equivalent at November 30, 2021 |
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GBP |
| British Pound | | $ | 13,465 | |
| British Pound | | $ | 15,155 | |
EUR |
| Euro | | $ | 6,236 | |
| Euro | | $ | 6,165 | |
CAD |
| Canadian Dollar | | $ | 1,810 | |
| Canadian Dollar | | $ | 2,189 | |
CNY |
| Chinese Yuan | | $ | 666 | |
| Chinese Yuan | | $ | 430 | |
INR |
| Indian Rupee | | $ | 528 | |
| Indian Rupee | | $ | 197 | |
| | | | | | | | | | | | |
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 gainloss for the ninethree months ended May 31,November 30, 2021 in the amount of $3,273,000$2,173,000 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 on May 31,November 30, 2021. 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. AnThe effect of an immediate hypothetical 10% change in variable interest rates would not have a material direct effect on the Company’s Condensedour 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
During the quarter ended May 31,November 30, 2021, the Company continued the process of implementingrefining financial internal controls on the operations associated with ABchimie, acquired in September 2020, and Emerging Technologies, Inc. (ETi), acquired in February 2021.
Other than the foregoing, there have not been any changes in the Company’s internal control over financial reporting during the quarter ended May 31,November 30, 2021 that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.
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Part II — OTHER INFORMATION
Item 1 — Legal Proceedings
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.
Item 1A — Risk Factors
Please refer to Item 1A in our Annual Report on Form 10-K for the fiscal year ended August 31, 20202021 for a complete discussion of the risk factors which could materially affect our business, financial condition or future results.
Item 6 — Exhibits
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Exhibit | | Description |
10.1 | | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
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|
|
|
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101 | | The following materials from this Quarterly Report on Form 10-Q, formatted in Inline Extensible Business Reporting Language (iXBRL): (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Operations, (iii) Condensed Consolidated Statements of Comprehensive Income, (iv) Condensed Consolidated Statement of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows, and (vi) Notes to Unaudited Condensed Consolidated Financial Statements. |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
*Furnished, not filed
**Identifies management plan or compensatory plan or arrangement.
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SIGNATURES
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/ Michael J. Bourque |
| | Michael J. Bourque |
| | Treasurer and Chief Financial Officer |
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