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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, 2022
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.) |
375 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, 2022 was 9,468,590.9,500,018.
CHASE CORPORATION
INDEX TO FORM 10-Q
For the Quarter Ended May 31,November 30, 2022
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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 future operating results; seasonality expectations; plans for the development, utilization or disposal of manufacturing facilities; future economic conditions; our expectations as to legal proceedings; the effect of our market and product development efforts; and expectations or plans relating to the implementation or realization of our strategic goals and future growth, including through potential future acquisitions. Forward-looking statements may also include, among other things, statements relating to future sales, earnings, cash flow, results of operations, use of cash and other measures of financial performance, 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 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. ReadersInvestors should refer to the discussions under “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 20212022, 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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| 2022 |
| 2021 |
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ASSETS | | | | | | | |
Current Assets | | | | | | | |
Cash and cash equivalents | | $ | 124,683 | | $ | 119,429 | |
Accounts receivable, less allowances of $537 and $451 | | | 51,330 | | | 46,212 | |
Inventory | | | 58,551 | | | 41,217 | |
Prepaid expenses and other current assets | | | 3,434 | | | 2,851 | |
Prepaid income taxes and refunds due | | | 3,249 | | | 3,255 | |
Total current assets | | | 241,247 | | | 212,964 | |
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Property, plant and equipment, less accumulated depreciation of $52,154 and $50,666 | | | 24,531 | | | 24,267 | |
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Other Assets | | | | | | | |
Goodwill | | | 96,321 | | | 97,866 | |
Intangible assets, less accumulated amortization of $99,506 and $91,484 | | | 36,947 | | | 46,954 | |
Cash surrender value of life insurance | | | 4,450 | | | 4,450 | |
Restricted investments | | | 2,312 | | | 2,260 | |
Deferred income taxes | | | 5,273 | | | 5,265 | |
Operating lease right-of-use asset | | | 9,078 | | | 9,312 | |
Other assets | | | 732 | | | 821 | |
Total assets | | $ | 420,891 | | $ | 404,159 | |
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LIABILITIES AND EQUITY | | | | | | | |
Current Liabilities | | | | | | | |
Accounts payable | | $ | 18,375 | | $ | 19,575 | |
Accrued payroll and other compensation | | | 5,884 | | | 7,179 | |
Income taxes payable | | | 159 | | | 761 | |
Accrued expenses | | | 5,639 | | | 5,407 | |
Total current liabilities | | | 30,057 | | | 32,922 | |
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Operating lease long-term liabilities | | | 7,060 | | | 7,202 | |
Deferred compensation | | | 2,320 | | | 2,267 | |
Accumulated pension obligation | | | 8,155 | | | 9,416 | |
Other liabilities | | | 2,099 | | | 2,537 | |
Deferred income taxes | | | 2,822 | | | 3,301 | |
Accrued income taxes | | | 1,813 | | | 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; 9,468,590 shares at May 31, 2022 and 9,447,905 shares at August 31, 2021 issued and outstanding | | | 948 | | | 946 | |
Additional paid-in capital | | | 21,375 | | | 18,959 | |
Accumulated other comprehensive loss | | | (16,325) | | | (11,210) | |
Retained earnings | | | 360,567 | | | 335,629 | |
Total equity | | | 366,565 | | | 344,324 | |
Total liabilities and equity | | $ | 420,891 | | $ | 404,159 | |
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| | November 30, | | August 31, | | ||
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ASSETS | | | | | | | |
Current Assets | | | | | | | |
Cash and cash equivalents | | $ | 56,317 | | $ | 315,495 | |
Accounts receivable, less allowances of $666 and $610 | | | 58,166 | | | 51,540 | |
Inventory | | | 85,984 | | | 63,039 | |
Prepaid expenses and other current assets | | | 12,373 | | | 4,374 | |
Prepaid income taxes and refunds due | | | 1,902 | | | 2,329 | |
Total current assets | | | 214,742 | | | 436,777 | |
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Property, plant and equipment, less accumulated depreciation of $54,902 and $52,503 | | | 62,655 | | | 24,248 | |
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Other Assets | | | | | | | |
Goodwill | | | 175,782 | | | 95,160 | |
Intangible assets, less accumulated amortization of $109,968 and $101,237 | | | 173,757 | | | 33,661 | |
Cash surrender value of life insurance | | | 4,450 | | | 4,450 | |
Restricted investments | | | 2,540 | | | 2,367 | |
Deferred income taxes | | | 121 | | | 5,763 | |
Operating lease right-of-use assets | | | 8,249 | | | 8,596 | |
Other assets | | | 766 | | | 558 | |
Total assets | | $ | 643,062 | | $ | 611,580 | |
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LIABILITIES AND EQUITY | | | | | | | |
Current Liabilities | | | | | | | |
Accounts payable | | $ | 23,570 | | $ | 20,122 | |
Accrued payroll and other compensation | | | 5,565 | | | 6,381 | |
Income taxes payable | | | 2,576 | | | 554 | |
Accrued expenses | | | 10,617 | | | 8,271 | |
Dividend Payable | | | 9,500 | | | — | |
Total current liabilities | | | 51,828 | | | 35,328 | |
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Long-term debt | | | 165,000 | | | 180,000 | |
Operating lease long-term liabilities | | | 6,716 | | | 6,618 | |
Deferred compensation | | | 2,548 | | | 2,375 | |
Accumulated pension obligation | | | 7,181 | | | 7,431 | |
Other liabilities | | | 3,295 | | | 2,897 | |
Deferred income taxes | | | 31,544 | | | 2,282 | |
Accrued income taxes | | | 1,925 | | | 1,820 | |
Total liabilities | | $ | 270,037 | | $ | 238,751 | |
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Commitments and contingencies (Note 10) | | | | | | | |
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Equity | | | | | | | |
First Serial Preferred Stock, $1.00 par value: Authorized 100,000 shares; none issued | | | — | | | — | |
Common stock, $.10 par value: Authorized 20,000,000 shares; 9,499,704 shares at November 30, 2022 and 9,462,765 shares at August 31, 2022 issued and outstanding | | | 951 | | | 947 | |
Additional paid-in capital | | | 22,134 | | | 21,409 | |
Accumulated other comprehensive loss | | | (18,124) | | | (20,367) | |
Retained earnings | | | 368,064 | | | 370,840 | |
Total equity | | | 373,025 | | | 372,829 | |
Total liabilities and equity | | $ | 643,062 | | $ | 611,580 | |
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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 | | $ | 87,724 | | $ | 78,822 | | | $ | 235,098 | | $ | 212,533 | | | | $ | 102,121 | | $ | 74,192 | | | |
Royalties and commissions | | | 895 | | | 771 | | | | 2,484 | | | 2,683 | | | | | 772 | | | 818 | | | |
| | | 88,619 | | | 79,593 | | | | 237,582 | | | 215,216 | | | | | 102,893 | | | 75,010 | | | |
Costs and Expenses | | | | | | | | | | | | | | | | | | | | | | | | |
Cost of products and services sold | | | 54,438 | | | 46,312 | | | | 148,630 | | | 126,832 | | | | | 67,000 | | | 47,281 | | | |
Selling, general and administrative expenses | | | 13,807 | | | 13,969 | | | | 40,307 | | | 38,560 | | | | | 21,607 | | | 13,375 | | | |
Research and product development costs | | | 1,186 | | | 957 | | | | 3,274 | | | 3,034 | | | | | 1,491 | | | 993 | | | |
Operations optimization costs (Note 15) | | | 59 | | | 22 | | | | 707 | | | 120 | | | | | 653 | | | 59 | | | |
Acquisition-related costs (Note 17) | | | — | | | — | | | | — | | | 128 | | | | | 29 | | | — | | | |
(Gain) loss on contingent consideration (Note 17) | | | (474) | | | 262 | | | | (199) | | | 995 | | | |||||||||
Loss on impairment of right-of-use lease asset (Note 15) | | | 548 | | | — | | | | |||||||||||||||
Loss on contingent consideration (Note 17) | | | 306 | | | 475 | | | | |||||||||||||||
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Operating income | | | 19,603 | | | 18,071 | | | | 44,863 | | | 45,547 | | | | | 11,259 | | | 12,827 | | | |
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Interest expense | | | (89) | | | (68) | | | | (262) | | | (204) | | | | | (2,138) | | | (87) | | | |
Other income (expense) | | | (166) | | | (260) | | | | 231 | | | (758) | | | | | (521) | | | 377 | | | |
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Income before income taxes | | | 19,348 | | | 17,743 | | | | 44,832 | | | 44,585 | | | | | 8,600 | | | 13,117 | | | |
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Income taxes (Note 14) | | | 3,803 | | | 3,454 | | | | 10,434 | | | 10,288 | | | | | 1,876 | | | 3,390 | | | |
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Net income | | $ | 15,545 | | $ | 14,289 | | | $ | 34,398 | | $ | 34,297 | | | | $ | 6,724 | | $ | 9,727 | | | |
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Net income available to common shareholders, per common and common equivalent share (Note 4) | | | | | | | | | | | | | | | | | | | | | | | | |
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Basic | | $ | 1.64 | | $ | 1.51 | | | $ | 3.64 | | $ | 3.63 | | | | $ | 0.71 | | $ | 1.03 | | | |
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Diluted | | $ | 1.64 | | $ | 1.50 | | | $ | 3.62 | | $ | 3.61 | | | | $ | 0.71 | | $ | 1.02 | | | |
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Weighted average shares outstanding | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | | 9,399,231 | | | 9,386,814 | | | | 9,398,778 | | | 9,381,433 | | | | | 9,417,418 | | | 9,397,873 | | | |
Diluted | | | 9,431,259 | | | 9,435,335 | | | | 9,435,369 | | | 9,426,879 | | | | | 9,444,124 | | | 9,438,434 | | | |
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Annual cash dividends declared per share | | | — | | | — | | | $ | 1.00 | | $ | 0.80 | | | | $ | 1.00 | | $ | 1.00 | | |
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 | | $ | 15,545 |
| $ | 14,289 | | $ | 34,398 | | $ | 34,297 | | | | $ | 6,724 |
| $ | 9,727 | | |
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Other comprehensive income (loss): | | | | | | | | | | | | | | | | | | | | | | |
Net unrealized (loss) gain on restricted investments, net of tax | | | (112) | | | 68 | | | (277) | | | 186 | | | | | 38 | | | (30) | | |
Change in funded status of pension plans, net of tax | | | 112 | | | 124 | | | 336 | | | 371 | | | | | 112 | | | 112 | | |
Pension settlement loss, net of tax | | | 150 | | | — | | | ||||||||||||||
Foreign currency translation adjustment | | | (3,116) | | | 1,386 | | | (5,174) | | | 3,273 | | | | | 1,943 | | | (2,173) | | |
Total other comprehensive income (loss) | | | (3,116) | | | 1,578 | | | (5,115) | | | 3,830 | | | | | 2,243 | | | (2,091) | | |
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Comprehensive income | | $ | 12,429 | | $ | 15,867 | | $ | 29,283 | | $ | 38,127 | | | | $ | 8,967 | | $ | 7,636 | | |
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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, 2022 AND 2021
(UNAUDITED)
In thousands, except share and per share amounts
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| | | | | | | Additional | | Accumulated Other | | | | | Total | |||
| | Common Stock | | Paid-In | | Comprehensive | | Retained | | Stockholders' | |||||||
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| Shares |
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| Capital |
| Income (Loss) |
| Earnings |
| Equity | |||||
Balance at February 28, 2021 | | 9,448,371 | | $ | 946 | | $ | 17,721 | | $ | (10,840) | | $ | 310,717 | | $ | 318,544 |
Amortization of restricted stock grants | | | | | | | | 600 | | | | | | | | | 600 |
Amortization of stock option grants | | | | | | | | 195 | | | | | | | | | 195 |
Exercise of stock options | | 2,149 | | | — | | | 166 | | | | | | | | | 166 |
Common stock received for payment of stock option exercises | | (689) | | | — | | | (80) | | | | | | | | | (80) |
Common stock retained to pay statutory minimum withholding taxes on common stock | | (45) | | | — | | | (6) | | | | | | | | | (6) |
Change in funded status of pension plans, net of tax $41 | | | | | | | | | | | 124 | | | | | | 124 |
Foreign currency translation adjustment | | | | | | | | | | | 1,386 | | | | | | 1,386 |
Net unrealized gain (loss) on restricted investments, net of tax $24 | | | | | | | | | | | 68 | | | | | | 68 |
Net income | | | | | | | | | | | | | | 14,289 | | | 14,289 |
Balance at May 31, 2021 | | 9,449,786 | | $ | 946 | | $ | 18,596 | | $ | (9,262) | | $ | 325,006 | | $ | 335,286 |
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Balance at February 28, 2022 | | 9,468,888 | | $ | 948 | | $ | 20,513 | | $ | (13,209) | | $ | 345,022 | | $ | 353,274 |
Restricted stock grants, net of forfeitures | | (298) | | | — | | | | | | | | | | | | — |
Amortization of restricted stock grants | | | | | | | | 613 | | | | | | | | | 613 |
Amortization of stock option grants | | | | | | | | 249 | | | | | | | | | 249 |
Change in funded status of pension plans, net of tax $37 | | | | | | | | | | | 112 | | | | | | 112 |
Foreign currency translation adjustment | | | | | | | | | | | (3,116) | | | | | | (3,116) |
Net unrealized gain (loss) on restricted investments, net of tax ($37) | | | | | | | | | | | (112) | | | | | | (112) |
Net income | | | | | | | | | | | | | | 15,545 | | | 15,545 |
Balance at May 31, 2022 | | 9,468,590 | | $ | 948 | | $ | 21,375 | | $ | (16,325) | | $ | 360,567 | | $ | 366,565 |
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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, 2022 AND 2021
(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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| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Earnings |
| Equity |
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Earnings |
| Equity | ||||||||||
Balance at August 31, 2020 | | 9,439,082 | | $ | 944 | | $ | 16,674 | | $ | (13,092) | | $ | 298,266 | | $ | 302,792 | |||||||||||||||||
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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Balance at August 31, 2022 | | 9,462,765 | | $ | 947 | | $ | 21,409 | | $ | (20,367) | | $ | 370,840 | | $ | 372,829 | |||||||||||||||||
Restricted stock grants, net of forfeitures | | 10,693 | | | 2 | | | (2) | | | | | | | | | — | | 30,307 | | | 3 | | | (3) | | | — | | | — | | | — |
Amortization of restricted stock grants | | | | | | | | 1,789 | | | | | | | | | 1,789 | | | | | — | | | 832 | | | — | | | — | | | 832 |
Amortization of stock option grants | | | | | | | | 420 | | | | | | | | | 420 | | | | | — | | | 126 | | | — | | | — | | | 126 |
Exercise of stock options | | 4,681 | | | — | | | 207 | | | | | | | | | 207 | | 15,152 | | | 2 | | | 555 | | | — | | | — | | | 557 |
Common stock received for payment of stock option exercises | | (1,075) | | | — | | | (121) | | | | | | | | | (121) | | (6,140) | | | (1) | | | (556) | | | — | | | — | | | (557) |
Common stock retained to pay statutory minimum withholding taxes on common stock | | (3,595) | | | — | | | (371) | | | | | | | | | (371) | | (2,380) | | | — | | | (229) | | | — | | | — | | | (229) |
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 | |||||||||||||||||
Cash dividend declared, $1.00 per share | | | | | — | | | — | | | — | | | (9,500) | | | (9,500) | |||||||||||||||||
Change in funded status of pension plans, net of tax $37 | | | | | — | | | — | | | 112 | | | — | | | 112 | |||||||||||||||||
Pension settlement loss, net of tax $50 | | | | | — | | | — | | | 150 | | | — | | | 150 | |||||||||||||||||
Foreign currency translation adjustment | | | | | | | | | | | 3,273 | | | | | | 3,273 | | | | | — | | | — | | | 1,943 | | | — | | | 1,943 |
Net unrealized gain (loss) on restricted investments, net of tax $63 | | | | | | | | | | | 186 | | | | | | 186 | |||||||||||||||||
Net unrealized gain (loss) on restricted investments, net of tax $14 | | | | | — | | | — | | | 38 | | | — | | | 38 | |||||||||||||||||
Net income | | | | | | | | | | | | | | 34,297 | | | 34,297 | | | | | — | | | — | | | — | | | 6,724 | | | 6,724 |
Balance at May 31, 2021 | | 9,449,786 | | $ | 946 | | $ | 18,596 | | $ | (9,262) | | $ | 325,006 | | $ | 335,286 | |||||||||||||||||
Balance at November 30, 2022 | | 9,499,704 | | $ | 951 | | $ | 22,134 | | $ | (18,124) | | $ | 368,064 | | $ | 373,025 | |||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at August 31, 2021 | | 9,447,905 | | $ | 946 | | $ | 18,959 | | $ | (11,210) | | $ | 335,629 | | $ | 344,324 | |||||||||||||||||
Restricted stock grants, net of forfeitures | | 20,685 | | | 2 | | | (2) | | | | | | | | | — | |||||||||||||||||
Amortization of restricted stock grants | | | | | | | | 1,721 | | | | | | | | | 1,721 | |||||||||||||||||
Amortization of stock option grants | | | | | | | | 697 | | | | | | | | | 697 | |||||||||||||||||
Cash dividend on common stock, $1.00 per share | | | | | | | | | | | | | | (9,460) | | | (9,460) | |||||||||||||||||
Change in funded status of pension plans, net of tax $111 | | | | | | | | | | | 336 | | | | | | 336 | |||||||||||||||||
Foreign currency translation adjustment | | | | | | | | | | | (5,174) | | | | | | (5,174) | |||||||||||||||||
Net unrealized gain (loss) on restricted investments, net of tax ($92) | | | | | | | | | | | (277) | | | | | | (277) | |||||||||||||||||
Net income | | | | | | | | | | | | | | 34,398 | | | 34,398 | |||||||||||||||||
Balance at May 31, 2022 | | 9,468,590 | | $ | 948 | | $ | 21,375 | | $ | (16,325) | | $ | 360,567 | | $ | 366,565 | |||||||||||||||||
| | | | | | | | | | | | | | | | | |
See accompanying notes to the unaudited condensed consolidated financial statements
87
CHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
In thousands
| | | | | | | | | |
| | | Nine Months Ended May 31, | | | ||||
|
| | 2022 |
| 2021 |
|
| ||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | |
Net income | | | $ | 34,398 | | $ | 34,297 | | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | |
(Gain) Loss on contingent consideration | | | | (199) | | | 995 | | |
Depreciation | | | | 2,654 | | | 2,925 | | |
Amortization | | | | 9,092 | | | 9,566 | | |
Provision for allowance for doubtful accounts | | | | 91 | | | (8) | | |
Stock-based compensation | | | | 2,418 | | | 2,209 | | |
Realized gain on restricted investments | | | | (86) | | | (54) | | |
Deferred taxes | | | | (187) | | | — | | |
Increase (decrease) from changes in assets and liabilities | | | | | | | | | |
Accounts receivable | | | | (5,852) | | | (6,946) | | |
Inventory | | | | (17,768) | | | 2,062 | | |
Prepaid expenses and other assets | | | | (573) | | | (260) | | |
Accounts payable | | | | (936) | | | 3,049 | | |
Accrued compensation and other expenses | | | | (1,765) | | | 49 | | |
Accrued income taxes | | | | (1,001) | | | (4,884) | | |
Net cash provided by operating activities | | | | 20,286 | | | 43,000 | | |
| | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | |
Purchases of property, plant and equipment | | | | (3,103) | | | (1,749) | | |
Payments for acquisitions | | | | — | | | (31,238) | | |
Changes in restricted investments | | | | (340) | | | (119) | | |
Net cash used in investing activities | | | | (3,443) | | | (33,106) | | |
| | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | |
Dividend paid | | | | (9,460) | | | (7,557) | | |
Proceeds from exercise of common stock options | | | | — | | | 86 | | |
Payments of taxes on stock options and restricted stock | | | | — | | | (371) | | |
Net cash used in financing activities | | | | (9,460) | | | (7,842) | | |
| | | | | | | | | |
INCREASE IN CASH & CASH EQUIVALENTS | | | | 7,383 | | | 2,052 | | |
Effect of foreign exchange rates on cash | | | | (2,129) | | | 1,827 | | |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | | 119,429 | | | 99,068 | | |
CASH AND CASH EQUIVALENTS, END OF PERIOD | | | $ | 124,683 | | $ | 102,947 | | |
| | | | | | | | | |
Non-cash Investing and Financing Activities | | | | | | | | | |
Common stock received for payment of stock option exercises | | | $ | — | | $ | 121 | | |
Property, plant and equipment additions included in accounts payable | | | $ | 207 | | $ | 141 | | |
| | | | | | | | | |
| | Three Months Ended | | | | ||||
|
| November 30, 2022 |
| November 30, 2021 | | |
| ||
CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | | |
Net income | | $ | 6,724 | | $ | 9,727 | | | |
Adjustments to reconcile net income to net cash provided by operating activities | | | | | | | | | |
Loss on impairment of right-of-use lease asset | | | 548 | | | — | | | |
Loss on contingent consideration | | | 306 | | | 475 | | | |
Depreciation | | | 2,330 | | | 877 | | | |
Amortization | | | 8,400 | | | 3,125 | | | |
Provision for allowance for doubtful accounts | | | 54 | | | (40) | | | |
Stock-based compensation | | | 958 | | | 775 | | | |
Realized gain on restricted investments | | | (7) | | | (7) | | | |
Pension curtailment and settlement loss | | | 150 | | | — | | | |
Deferred taxes | | | (2,008) | | | 34 | | | |
Increase (decrease) from changes in assets and liabilities | | | | | | | | | |
Accounts receivable | | | 4,019 | | | 2,272 | | | |
Inventory | | | (6,636) | | | (6,021) | | | |
Prepaid expenses and other assets | | | (2,746) | | | (1,331) | | | |
Accounts payable | | | (1,482) | | | (2,024) | | | |
Accrued compensation and other expenses | | | (5,578) | | | (2,254) | | | |
Accrued income taxes | | | 1,726 | | | 295 | | | |
Net cash provided by operating activities | | | 6,758 | | | 5,903 | | | |
| | | | | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | | |
Purchases of property, plant and equipment | | | (2,052) | | | (496) | | | |
Payments for acquisitions, net of cash acquired | | | (248,967) | | | — | | | |
Changes in restricted investments | | | (114) | | | (121) | | | |
Net cash (used in) provided by investing activities | | | (251,133) | | | (617) | | | |
| | | | | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | | |
Payments of principal on debt | | | (15,000) | | | — | | | |
Payments of taxes on stock options and restricted stock | | | (229) | | | — | | | |
Net cash (used in) provided by financing activities | | | (15,229) | | | — | | | |
| | | | | | | | | |
(DECREASE) INCREASE IN CASH & CASH EQUIVALENTS | | | (259,604) | | | 5,286 | | | |
Effect of foreign exchange rates on cash | | | 426 | | | (481) | | | |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | | 315,495 | | | 119,429 | | | |
CASH AND CASH EQUIVALENTS, END OF PERIOD | | $ | 56,317 | | $ | 124,234 | | | |
| | | | | | | | | |
Non-cash Investing and Financing Activities | | | | | | | | ||
Common stock received for payment of stock option exercises | | $ | 557 | | $ | — | | | |
Property, plant and equipment additions included in accounts payable | | $ | 246 | | $ | 207 | | | |
Annual cash dividend declared | | $ | 9,500 | | $ | 9,460 | | | |
Purchase price final working capital adjustment | | $ | 480 | | $ | — | | | |
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-Qwith the rules and Rule 10-01regulations of Regulation S-X.the Securities and Exchange Commission regarding interim financial reporting. 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.flows. 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, 20212022 in conjunction with its 20212022 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.
Unless otherwise indicated, all references to a year mean our fiscal year, which ends on August 31.
The results of operations for the interim period ended May 31,November 30, 2022 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, 20212022 which are contained in the Company’s 20212022 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, 2022, and the results of its operations, comprehensive income, changes in equity and cash flows for the interim periods ended May 31,November 30, 2022 and 2021.
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 the operations of NuCera Solutions in France, are measured using the euro as the functional currency. The financial position and results of the Company’s HumiSeal India Private Limited business are measured using the Indian rupee as the functional currency. The financial position and results of operations of the NuCera Solutions operations in Singapore are measured using the Singapore dollar as the functional currency. The functional currency for all Chase Corporation’sof the Company’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
9
statements of operations, and were $94$(199) and $431$241 for the three- and nine-monththree-month periods ended May 31,November 30, 2022 respectively, and ($241) and ($678) for the three- and nine-month periods ended May 31, 2021, respectively.
10
Other Business Developments
On September 1, 2022 (the first day of fiscal 2023), the Company acquired all of the capital stock of NuCera Solutions (“NuCera”) for a purchase price of $250,000, net of debt, accrued income taxes and cash at closing, and working capital adjustments. The purchase was funded by utilizing $180,000 from the Company’s existing revolving credit facility and the remaining $70,000 from available cash on hand. The Company substantiallyrecorded transaction costs of $29 in the first quarter of fiscal 2023 and $4,000 in the fourth quarter of fiscal 2022 related to this acquisition which are excluded from the purchase price. NuCera is a recognized global leader in the production and development of highly differentiated specialty polymers and polymerization technologies serving demanding applications, offering products critical to enabling end-product functionality, performance and reliability. Chase will continue to market under NuCera brands and the business is integrated into Chase’s Adhesives, Sealants and Additives reporting unit for fiscal 2023.
During the first quarter of fiscal 2023, the Company began the process of upgrading our current Oracle Legacy ERP System to the Oracle Fusion Cloud Platform. This upgrade will position us with a more advanced system to support business expansion, access to upgrades in functionality and a more modern system for operations. Additionally, the upgrade will be a multi-year, phased-in approach designed to mitigate any disruptions to our business. The Company recognized $540 in expense related to the ERP System upgrade in the first quarter of fiscal 2023.
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. Chase Corporation obtained the adhesives systems operations as part of its fiscal 2017 acquisition of the operations of Resin Designs. The Company expensed $113 and $0 related to the consolidation of the Woburn, MA location during the first quarters of fiscal 2023 and 2022, respectively. In addition, the Company expensed $548 as a lease impairment related to the Woburn, MA facility relocation in the first quarter of 2023. The Company may have additional costs related to the lease termination in future periods.
The Company completed the relocation of its Corporate Headquarterscorporate headquarters to another location within Westwood, MA during the second quarter of the fiscal year.year ending August 31, 2022. The move, part of the Company’s ongoing consolidation and optimization initiative, capitalizes on the hybrid work model utilized by many of Chase’s corporate and administrative employees and is expected to provide future operational cost savings. The new facility also consolidates and houses research and development operations previously conducted at the previous Westwood, MA and Woburn, MA locations. Operations optimization costs related to the Westwood move of $32 and $232$59 were expensed in the third quarter and year-to-date fiscal period, respectively. The Company does not anticipate any significant additional operations optimization costs related to the new Corporate Headquarters during the fourth quarter of the fiscal year.
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 aligns with the announcement in the second quarter of fiscal 2021 of the Company’s plan to move its sealant systems production from Newark, CA to 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. The Company expensed $27 and $328 related to the consolidation of the Woburn, MA location during the third quarter and year-to-date fiscal period, respectively, and expects to recognize additional expense during the fourth quarter of the fiscal year.
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 second quarter of fiscal 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 finalized purchase accounting during the first quarter of fiscal 2022, with2022. The relocation of its corporate headquarters is complete and no significant change to amounts initially recorded. Since the effective date of the acquisition, the financial results of ETi’s acquired operations have been includedcosts are expected in the Company’s financial statements within the functional additives product line, contained within the Adhesives, Sealants and Additives operating segment.fiscal 2023.
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 terminated in fiscal 2021. The Company recognized $977 in expense related to the move during the entire prior fiscal year ended August 31, 2021 and $147 of expense in the first half of fiscal 2022. This project is now substantially completed and any future costs related to this move are not anticipated to be significant to the condensed consolidated financial statements.
11
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 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. Since the effective date of the acquisition, the financial results of the business have been included in the Company's financial statements within the Adhesives, Sealants and Additives operating segment in the electronic and industrial coatings product line.
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, 2021.2022. See Note 2 of the condensed consolidated financial statements for a discussion of the effects of recently issued accounting pronouncements.
12
Note 2 — Recent Accounting Standards
Recently IssuedAdopted Accounting Pronouncements - Fiscal 2023
In November 2021,No new Accounting Pronouncements were adopted in the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2021-10, “Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance”, which requires entities to make annual disclosures about transactions with a government they account for by analogizing to a grant or contribution accounting model under ASC 958-605. The ASU is effective for the Company beginning September 1, 2022 (the startfirst quarter of fiscal 2023). ASU 2021-10 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.2023.
Recently Adopted Accounting Pronouncements - Fiscal 2022
In October 2021, the FASB issued ASU No. 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers”, which amends the accounting for contract assets and contract liabilities from revenue contracts with customers in a business combination. The amendment requires that an entity acquiring the contract assets and contract liabilities in a business combination be recognized in accordance with ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”. The ASU is effective for all public entities for fiscal years beginning after December 15, 2022, and interim periods therein. The Company early adopted ASU 2021-08 on February 28, 2022 and any impact on the condensed consolidated financial statements will be dependentdepend on the magnitude and nature of future acquired entities.customer contracts associated with entities that the Company may acquire in the future.
Note 3 — Inventory
Inventory consisted of the following as of May 31,November 30, 2022 and August 31, 2021:2022:
| | | | | | | | | | | | | | |
| | | May 31, | | August 31, | | | November 30, | | August 31, | ||||
|
|
| 2022 |
| 2021 |
|
| 2022 |
| 2022 | ||||
Raw materials | | | $ | 36,192 | | $ | 24,055 | | | $ | 47,270 | | $ | 37,909 |
Work in process | | | | 7,835 | | | 5,928 | | | | 9,695 | | | 9,569 |
Finished goods | | | | 14,524 | | | 11,234 | | | | 29,019 | | | 15,561 |
Total Inventory | | | $ | 58,551 | | $ | 41,217 | | | $ | 85,984 | | $ | 63,039 |
13
Note 4 — Net Income Per Share
The Company has unvested share-based payment awards with a right to receive nonforfeitable dividends which are considered participating securities under ASC Topic 260, “Earnings Per Share.” The Company allocates earnings to participating securities and computes earnings per share using the two-class method. The determination of earnings per share under the two-class method is as follows:
| | | | | | | | | | | | | | | | | | | | ||
| | Three Months Ended May 31, | | | Nine Months Ended May 31, |
| | Three Months Ended November 30, | | ||||||||||||
|
| 2022 |
| 2021 |
| | 2022 |
| 2021 |
|
| 2022 |
| 2021 |
| ||||||
| | | | | | | | | | | | | | | | | | | | | |
Basic Earnings per Share | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Net income |
| $ | 15,545 |
| $ | 14,289 |
| | $ | 34,398 |
| $ | 34,297 | |
| $ | 6,724 |
| $ | 9,727 |
|
Less: Allocated to participating securities | | | 104 | | | 94 | | | | 228 | | | 239 | | | | 56 | | | 64 | |
Net income available to common shareholders |
| $ | 15,441 |
| $ | 14,195 |
| | $ | 34,170 |
| $ | 34,058 | |
| $ | 6,668 |
| $ | 9,663 |
|
| | | | | | | | | | | | | | | | | | | | | |
Basic weighted average shares outstanding | | | 9,399,231 | | | 9,386,814 | | | | 9,398,778 | | | 9,381,433 | | | | 9,417,418 | | | 9,397,873 | |
Net income per share - Basic |
| $ | 1.64 |
| $ | 1.51 |
| | $ | 3.64 |
| $ | 3.63 | |
| $ | 0.71 |
| $ | 1.03 |
|
| | | | | | | | | | | | | | | | | | | | | |
Diluted Earnings per Share | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
Net income |
| $ | 15,545 |
| $ | 14,289 |
| | $ | 34,398 |
| $ | 34,297 | |
| $ | 6,724 |
| $ | 9,727 |
|
Less: Allocated to participating securities | | | 104 | | | 94 | | | | 228 | | | 239 | | | | 56 | | | 64 | |
Net income available to common shareholders |
| $ | 15,441 |
| $ | 14,195 |
| | $ | 34,170 |
| $ | 34,058 | |
| $ | 6,668 |
| $ | 9,663 |
|
| | | | | | | | | | | | | | | | | | | | | |
Basic weighted average shares outstanding | | | 9,399,231 | | | 9,386,814 | | | | 9,398,778 | | | 9,381,433 | | | | 9,417,418 | | | 9,397,873 | |
Additional dilutive common stock equivalents | | | 32,028 | | | 48,521 | | | | 36,591 | | | 45,446 | | | | 26,706 | | | 40,561 | |
Diluted weighted average shares outstanding | | | 9,431,259 | | | 9,435,335 | | | | 9,435,369 | | | 9,426,879 | | | | 9,444,124 | | | 9,438,434 | |
Net income per share - Diluted |
| $ | 1.64 |
| $ | 1.50 |
| | $ | 3.62 |
| $ | 3.61 | |
| $ | 0.71 |
| $ | 1.02 |
|
Included in the calculation of dilutive common stock equivalents are the unvested portion of restricted stock and stock options. For the three- and nine-monththree-month periods ended May 31,November 30, 2022 and 2021, stock options to purchase 108,392129,295 and 93,869 shares of common stock, respectively, were outstanding but were not included in the calculation of diluted income per share because their inclusion would be anti-dilutive. For the three- and nine-month periods ended May 31, 2021, stock options to purchase 17,947 and 59,34672,690 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.
14
Note 5 — Stock-Based Compensation
In August 2020, the Board of Directors of the Company approved the fiscal year 2021 Long Term Incentive Plan (“2021 LTIP”) for the executive officers and other members of management. The 2021 LTIP is an equity-based plan with a grant date of September 1, 2020 and contains (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 the 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 (a) a restricted stock grant of 9,584 shares in the aggregate (of which 3,304 included a performance-based vesting component and were subject to adjustment as discussed below), with a vesting date of August 31, 2024, and (b) options to purchase 12,942 shares of common stock in the aggregate with an exercise price of $114.50 per share, vesting in three equal annual installments ending on August 31, 2024.
Based on the fiscal year 2022 results, 842 shares of restricted stock were forfeited subsequent to the end of fiscal year 2022 in accordance with not meeting the performance measurement criteria. No further performance-based measurements apply to this award.
In August 2022, the Board of Directors of the Company approved the fiscal year 2023 Long Term Incentive Plan (“2023 LTIP”) for executive officers and other members of management. The 2023 LTIP is an equity-based plan with a grant date of September 1, 2022 and contains the following equity components:
Restricted Shares — (a) a performance and service-based restricted stock grant of 3,30410,580 shares in the aggregate, subject to adjustment based on fiscal 20222023 results, with a vesting date of August 31, 2024.2025. 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 6,2809,918 shares in the aggregate,and 636 shares, with a vesting date of August 31, 2024.2025 and August 31, 2023, respectively. Compensation expense is being recognized on a ratable basis over the vesting period. Additionally, the Board of Directors approved a retention grant of time-based restricted stock grant of 10,015 shares in the aggregate. Out of the 10,015 shares of granted time-based restricted stock, 2,056 shares vest on March 1, 2023, 3,705 shares vest on September 1, 2023, 1,418 shares vest on August 31, 2024, and 2,836 shares vest on August 31, 2026. Compensation expense is being recognized on a ratable basis over the vesting period.
Stock Options — options to purchase 12,94225,987 shares of common stock in the aggregate with an exercise price of $114.50$88.16 per share. The options will vest in 3three equal annual installments beginning on August 31, 20222023 and ending on August 31, 2024.2025. The options will expire ten years after the grant date. Compensation expense is being recognized over the period of the award consistent with the vesting terms.
Restricted stock from fiscal 2020 grants in the amount of 437 and 570 shares were forfeited in the first and second quarters, respectively, and restricted stock from fiscal 2022 grants of 559 and 298 shares were forfeited in the second and third quarters, respectively, in conjunction with the termination of employment of non-executive members of management of the Company.
In February 2022, the Board of Directors of the Company approved an equity retention agreement with the Treasurer and Chief Financial Officer. Awards under the equity-based retention agreement have a grant date of February 1, 2022 and contain the following equity components: (a) a time-based restricted stock grant of 5,332 shares with a vesting date of January 31, 2025; and (b) options to purchase 14,480 shares of common stock with an exercise price of $94.88 per share. The options will vest on January 31, 2025 and will expire on February 1, 2032. Compensation expense for both the restricted stock and the stock option components of the equity retention agreements is being recognized on a ratable basis over the vesting period.
In February 2022, as part of their standard compensation for board service, non-employee members of the Board received a total grant of 5,000 shares of restricted stock for service for the period from January 31, 2022 through January 31, 2023. The shares of restricted stock will vest at the conclusion of this service period. Compensation expense for restricted stock is being recognized on a ratable basis over the twelve-month vesting period.
15
Note 6 — Segment Data and Foreign Operations
The Company is organized into 3three 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, customized sealant and adhesive systems for electronics, synthesized specialty waxes and polymers, polymeric microspheres, polyurethane dispersions and superabsorbent polymers. Beginning September 1, 2020,2022, the Adhesives, Sealants and Additives segment includes the acquired operations of ABchimie, within the electronic and industrial coatings product lineand beginning February 5, 2021, the acquired operations of ETi,NuCera, 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 wire and cable manufacturing, utilities and telecommunications, and electronics packaging. The segment’s offerings include insulating and conducting materials for wire and cable manufacturers,manufacturers; laminated durable papers,papers; laminates for the packaging and industrial laminate markets,markets; custom manufacturing services,services; pulling and detection tapes used in the installation, measurement and location of fiber optic cables and water and natural gas lineslines; 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 and industrial structures. The segment’s products include protective coatings for pipeline applications, coating and lining systems for waterproofing and liquid storage applications, adhesives and sealants used in architectural and building envelope waterproofing applications, high-performance polymeric asphalt additives, and expansion joint systems for waterproofing applications in transportation and architectural markets. With sales generally dependent on outdoor project work, the segment experiences highly seasonal sales patterns.
16
The following tables summarize information about the Company’s reportable segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | | Nine Months Ended May 31, | | | | Three Months Ended November 30, | | | |||||||||||||||
|
| 2022 |
| | 2021 | | | 2022 | |
| 2021 |
|
| | 2022 | |
| 2021 |
|
| ||||||
Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 36,771 | | | $ | 33,861 | | | $ | 99,600 | | | $ | 95,507 | | | | $ | 55,553 | | | $ | 31,049 | | |
Industrial Tapes | | | 38,329 | | | | 32,249 | | | | 104,420 | | | | 87,085 | | | | | 39,077 | | | | 32,761 | | |
Corrosion Protection and Waterproofing | | | 13,519 | | | | 13,483 | | | | 33,562 | | | | 32,624 | | | | | 8,263 | | | | 11,200 | | |
Total | | $ | 88,619 | | | $ | 79,593 | | | $ | 237,582 | | | $ | 215,216 | | | | $ | 102,893 | | | $ | 75,010 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Income before income taxes | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 12,320 | (a) | | $ | 10,982 | (c) | | $ | 27,719 | (a) | | $ | 31,098 | (c) | | | $ | 4,124 | (a) | | $ | 7,597 | (c) | |
Industrial Tapes | | | 10,985 | | | | 10,945 | | | | 30,525 | | | | 27,273 | | | | | 11,947 | | | | 9,290 | | |
Corrosion Protection and Waterproofing | | | 5,353 | | | | 5,098 | | | | 12,683 | | | | 11,599 | | | | | 2,551 | | | | 4,446 | | |
Total for reportable segments | | | 28,658 | | | | 27,025 | | | | 70,927 | | | | 69,970 | | | | | 18,622 | | | | 21,333 | | |
Corporate and common costs | | | (9,310) | (b) | | | (9,282) | (c) | | | (26,095) | (b) | | | (25,385) | (c) | | | | (10,022) | (b) | | | (8,216) | (d) | |
Total | | $ | 19,348 | | | $ | 17,743 | | | $ | 44,832 | | | $ | 44,585 | | | | $ | 8,600 | | | $ | 13,117 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Includes the following costs by segment: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest | | $ | 36 | | | $ | 25 | | | $ | 105 | | | $ | 79 | | | | $ | 2,138 | | | $ | 35 | | |
Depreciation | | | 234 | | | | 255 | | | | 697 | | | | 744 | | | | | 1,684 | | | | 243 | | |
Amortization | | | 2,541 | | | | 2,715 | | | | 7,939 | | | | 7,931 | | | | | 8,398 | | | | 2,740 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Industrial Tapes | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest | | $ | 36 | | | $ | 15 | | | $ | 105 | | | $ | 57 | | | | $ | — | | | $ | 35 | | |
Depreciation | | | 363 | | | | 412 | | | | 1,184 | | | | 1,305 | | | | | 339 | | | | 410 | | |
Amortization | | | 383 | | | | 387 | | | | 1,150 | | | | 1,160 | | | | | 1 | | | | 384 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Corrosion Protection and Waterproofing | | | | | | | | | | | | | | | | | | | | | | | | | | |
Interest | | $ | 17 | | | $ | 28 | | | $ | 52 | | | $ | 68 | | | | $ | — | | | $ | 17 | | |
Depreciation | | | 138 | | | | 157 | | | | 385 | | | | 432 | | | | | 125 | | | | 118 | | |
Amortization | | | 1 | | | | 274 | | | | 3 | | | | 475 | | | | | 1 | | | | 1 | | |
(a) | Includes |
(b) | Includes $540 of operations optimization related to the Company’s ERP upgrade |
(c) | Includes $475 loss on the upward adjustment of the |
(d) | Includes $59 of |
17
Total assets for the Company’s reportable segments as of November 30, 2022 and August 31, 2022 were as follows:
| | | | | | | | |
| | November 30, | | August 31, | | | ||
|
| 2022 |
| 2022 |
|
| ||
Total Assets | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 443,209 | | $ | 153,784 | | |
Industrial Tapes | | | 91,078 | | | 87,751 | | |
Corrosion Protection and Waterproofing | | | 30,821 | | | 33,037 | | |
Total for reportable segments | | | 565,108 | | | 274,572 | | |
Corporate and common assets (a) | | | 77,954 | | | 337,008 | | |
Total | | $ | 643,062 | | $ | 611,580 | | |
(a) | Corporate and common assets at August 31, 2022 include $180,000 in cash drawn from the Company’s revolving credit facility and $70,000 of cash on hand in anticipation of the acquisition of NuCera, which closed on the first day of fiscal year 2023. |
The Company’s products are sold worldwide. Revenue for the three-month periods ended November 30, 2022 and 2021 was attributed to operations located in the following countries:
| | | | | | | | | |
| | Three Months Ended November 30, | | | |||||
| | 2022 | |
| 2021 | | | ||
Revenue | | | | | | | | | |
United States | | $ | 87,161 | | | $ | 65,053 | | |
United Kingdom | | | 5,803 | | | | 4,594 | | |
France | | | 7,213 | | | | 2,531 | | |
All other foreign (1) | | | 2,716 | | | | 2,832 | | |
Total | | $ | 102,893 | | | $ | 75,010 | | |
| | | | | | | | | |
(1) | Consists of sales from royalty revenue attributable to its licensed manufacturer in Asia and sales originated from the Company’s foreign operations in China, India and Singapore. |
18
Total assets for the Company’s reportable segments as of May 31, 2022 and August 31, 2021 were:
| | | | | | | | |
| | May 31, | | August 31, | | | ||
|
| 2022 |
| 2021 |
|
| ||
Total Assets | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 156,385 | | $ | 161,968 | | |
Industrial Tapes | | | 85,264 | | | 72,301 | | |
Corrosion Protection and Waterproofing | | | 33,447 | | | 31,067 | | |
Total for reportable segments | | | 275,096 | | | 265,336 | | |
Corporate and common assets | | | 145,795 | | | 138,823 | | |
Total | | $ | 420,891 | | $ | 404,159 | | |
The Company’s products are sold worldwide. Revenue for the three- and nine-month periods ended May 31, 2022 and 2021 was attributed to operations located in the following countries:
| | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | | Nine Months Ended May 31, | | | ||||||||||
| | 2022 |
| | 2021 | | | 2022 | |
| 2021 | | | ||||
Revenue | | | | | | | | | | | | | | | | | |
United States | | $ | 76,140 | | | $ | 67,264 | | | $ | 204,009 | | | $ | 178,635 | | |
United Kingdom | | | 6,604 | | | | 6,184 | | | | 17,125 | | | | 19,208 | | |
All other foreign (1) | | | 5,875 | | | | 6,145 | | | | 16,448 | | | | 17,373 | | |
Total | | $ | 88,619 | | | $ | 79,593 | | | $ | 237,582 | | | $ | 215,216 | | |
| | | | | | | | | | | | | | | | | |
As of May 31,November 30, 2022 and August 31, 20212022 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, | | | ||||
| | 2022 |
| 2021 | | | | 2022 |
| 2022 | | | ||||
Long-Lived Assets | | | | | | | | | | | | | | | ||
United States | | | | | | | | | | | | | | | | |
Property, plant and equipment, net | | $ | 21,385 | | $ | 20,990 | | | | $ | 59,680 | | $ | 21,300 | | |
Goodwill and Intangible assets, less accumulated amortization | | | 107,633 | | | 115,936 | | | | | 315,886 | | | 105,216 | | |
| | | | | | | | | | | | | | | | |
United Kingdom | | | | | | | | | | | | | | | | |
Property, plant and equipment, net | | | 2,050 | | | 2,174 | | | | | 1,827 | | | 1,832 | | |
Goodwill and Intangible assets, less accumulated amortization | | | 3,589 | | | 3,905 | | | | | 3,402 | | | 3,318 | | |
| | | | | | | | | | | | | | | | |
France | | | | | | | | | ||||||||
Property, plant and equipment, net | | | 267 | | | 239 | | | ||||||||
Goodwill and Intangible assets, less accumulated amortization | | | 29,606 | | | 20,130 | | | ||||||||
| | | | | | | | | ||||||||
All other foreign | | | | | | | | | | | | | | | | |
Property, plant and equipment, net | | | 1,096 | | | 1,103 | | | | | 881 | | | 877 | | |
Goodwill and Intangible assets, less accumulated amortization | | | 22,046 | | | 24,979 | | | | | 645 | | | 157 | | |
| | | | | | | | | | | | | | | | |
Total | | | | | | | | | | | | | | | | |
Property, plant and equipment, net | | $ | 24,531 | | $ | 24,267 | | | | $ | 62,655 | | $ | 24,248 | | |
Goodwill and Intangible assets, less accumulated amortization | | $ | 133,268 | | $ | 144,820 | | | | $ | 349,539 | | $ | 128,821 | | |
1819
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, 2021 | | $ | 65,945 | | $ | 21,215 | | $ | 10,706 | | $ | 97,866 | | |||||||||||||
Balance at August 31, 2022 | | $ | 63,272 | | $ | 21,215 | | $ | 10,673 | | $ | 95,160 | | |||||||||||||
Acquisition of NuCera Solutions | | | 80,041 | | | — | | | — | | | 80,041 | | |||||||||||||
Foreign currency translation adjustment | | | (1,527) | | | — | | | (18) | | | (1,545) | | | | 576 | | | — | | | 5 | | | 581 | |
Balance at May 31, 2022 | | $ | 64,418 | | $ | 21,215 | | $ | 10,688 | | $ | 96,321 | | |||||||||||||
Balance at November 30, 2022 | | $ | 143,889 | | $ | 21,215 | | $ | 10,678 | | $ | 175,782 | | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
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 3three reporting units, corresponding to its 3three 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 thecoronavirus disease 2019 (COVID-19) pandemic.factors. When testing, fair values of the reporting units 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, 2022 and August 31, 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | 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, 2022 | | | | | | | | | | | | | ||||||||||||
November 30, 2022 | | | | | | | | | | | | | ||||||||||||
Patents and agreements | | 14.6 | years | $ | 1,760 | | $ | 1,722 | | $ | 38 | | | 14.6 | years | $ | 1,760 | | $ | 1,726 | | $ | 34 | |
Formulas and technology | | 7.8 | years | | 10,844 | | | 9,989 | | | 855 | | | 7.9 | years | | 24,172 | | | 10,456 | | | 13,716 | |
Trade names | | 5.9 | years | | 8,747 | | | 8,435 | | | 312 | | | 6.3 | years | | 14,798 | | | 8,678 | | | 6,120 | |
Customer lists and relationships | | 9.1 | years | | 115,102 | | | 79,360 | | | 35,742 | | | 11.0 | years | | 242,995 | | | 89,108 | | | 153,887 | |
| | | | $ | 136,453 | | $ | 99,506 | | $ | 36,947 | | | | | $ | 283,725 | | $ | 109,968 | | $ | 173,757 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
August 31, 2021 | | | | | | | | | | | | | ||||||||||||
August 31, 2022 | | | | | | | | | | | | | ||||||||||||
Patents and agreements | | 14.6 | years | $ | 1,760 | | $ | 1,715 | | $ | 45 | | | 14.6 | years | $ | 1,760 | | $ | 1,724 | | $ | 36 | |
Formulas and technology | | 7.9 | years | | 10,987 | | | 9,769 | | | 1,218 | | | 7.8 | years | | 10,730 | | | 9,961 | | | 769 | |
Trade names | | 5.9 | years | | 8,836 | | | 8,285 | | | 551 | | | 5.9 | years | | 8,673 | | | 8,407 | | | 266 | |
Customer lists and relationships | | 9.2 | years | | 116,855 | | | 71,715 | | | 45,140 | | | 9.1 | years | | 113,735 | | | 81,145 | | | 32,590 | |
| | | | $ | 138,438 | | $ | 91,484 | | $ | 46,954 | | | | | $ | 134,898 | | $ | 101,237 | | $ | 33,661 | |
1920
Aggregate amortization expense related to intangible assets for the ninethree months ended May 31,November 30, 2022 and 2021 was $9,092$8,400 and $9,566$3,125, respectively. Estimated amortization expense for the remainder of fiscal year 20222023 and for the next five years is as follows:
| | | | | | | | |
Years ending August 31, |
| | | |
| | | |
2022 (remaining 3 months) | | $ | 2,669 |
| ||||
2023 | | | 8,612 | | ||||
2023 (remaining 9 months) | | | 15,435 | | ||||
2024 | | | 7,405 | | | | 19,598 | |
2025 | | | 5,805 | | | | 17,998 | |
2026 | | | 5,007 | | | | 17,200 | |
2027 | | | 2,460 | | | | 14,653 | |
2028 | | | 14,035 | |
Note 8 — Leases
The Company accounts for leases in accordance towith ASU 2016-02, “Leases (Topic 842).” 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 Company expensed $548 as a lease impairment related to the Woburn, MA facility relocation in the first quarter of 2023. The Company may have additional costs related to the lease termination in future periods.
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, 2022 and August 31, 2021:2022:
| | | | | | | | | | | | |
| | May 31, | | August 31, | | November 30, | | August 31, | ||||
| | 2022 | | 2021 | | 2022 | | 2022 | ||||
Assets |
| | |
| | |
| | |
| | |
Operating lease right-of-use asset | | $ | 9,078 | | $ | 9,312 | ||||||
Operating lease right-of-use assets | | $ | 8,249 | | $ | 8,596 | ||||||
| | | | | | | | | | | | |
Liabilities | | | | | | | | | | | | |
Current (accrued expenses) | | $ | 1,466 | | $ | 1,515 | | $ | 1,578 | | $ | 1,448 |
Operating lease long-term liabilities | | | 7,060 | | | 7,202 | | | 6,716 | | | 6,618 |
Total lease liability | | $ | 8,526 | | $ | 8,717 | | $ | 8,294 | | $ | 8,066 |
| | | | | | | | | | | | |
2021
Lease costCost
The components of lease costs for the three and nine months ended May 31,November 30, 2022 and 2021 are as follows:
| | | | | | | | | | | | | |||||||
| | Three Months Ended May 31, | | Nine Months Ended May 31, | | | | | | | |||||||||
| | 2022 | | 2021 | | 2022 | | 2021 | | Three Months Ended November 30, | |||||||||
| | | | | | | | | | | | | | 2022 | | 2021 | |||
Operating lease cost (a) | | $ | 790 | | $ | 911 | | $ | 2,451 | | $ | 2,833 | | $ | 1,069 | | $ | 828 | |
| | $ | 1,069 | | $ | 828 |
(a) | Includes short-term leases and variable lease costs (e.g. common area maintenance), which are immaterial. |
Maturity of lease liabilityLease Liability
The maturity of the Company's lease liabilities at May 31,November 30, 2022 was as follows:
| | | | | | |
| | Future Operating | | Future Operating | ||
Year ending August 31, |
| Lease Payments |
| Lease Payments | ||
2022 (remaining 3 months) | | | 427 | |||
2023 | | | 1,677 | |||
2023 (remaining 9 months) | | | 1,347 | |||
2024 | | | 1,602 | | | 1,721 |
2025 | | | 1,444 | | | 1,566 |
2026 | | | 1,182 | | | 1,318 |
2027 and thereafter | | | 3,002 | |||
2027 | | | 901 | |||
2028 and thereafter | | | 2,203 | |||
Less: Interest | | | (808) | | | (762) |
Present value of lease liabilities | | $ | 8,526 | | $ | 8,294 |
The weighted average remaining lease termterms and discount rates are as follows:
| | | | | | | | | | | | | | |
| | May 31, | | August 31, | | | November 30, | | August 31, | | ||||
| | 2022 | | 2021 | | | 2022 | | 2022 | | ||||
Lease Term and Discount Rate |
| | |
| | | |
| | |
| | | |
Weighted average remaining lease term (years) | | | | | | | | |||||||
Weighted average remaining lease terms (years) | | | | | | | | |||||||
Operating leases | | | 6.7 | | | 6.8 | | | | 6.2 | | | 6.5 | |
Weighted average discount rate (percentage) | | | | | | | | | | | | | | |
Operating leases | | | 2.8 | % | | 3.1 | % | | | 3.0 | % | | 2.8 | % |
Other Information
Supplemental cash flow information related to leases included in the balance sheet is as follows:
| | | | | | | | | | | | |
| | Nine Months Ended May 31, | | Three Months Ended November 30, | ||||||||
| | 2022 | | 2021 | | 2022 | | 2021 | ||||
| | | | | | | | | | | | |
Operating cash outflows from operating leases | | $ | 1,311 | | $ | 1,797 | | $ | 443 | | $ | 476 |
Total cash paid for amounts included in the measurement of lease liabilities | | $ | 1,311 | | $ | 1,797 | | $ | 443 | | $ | 476 |
2122
Note 9 — Revenue from Contracts with Customers
The Company accounts for revenue in accordance with ASC 606, “Revenue from Contracts with Customers.” The 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, 2022 and August 31, 2021:2022:
| | | | | | | | | | | | |
| | May 31, | | August 31, | | November 30, | | August 31, | ||||
|
| 2022 |
| 2021 |
| 2022 |
| 2022 | ||||
Contract Assets | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 27 | | $ | 21 | | $ | 23 | | $ | 55 |
Industrial Tapes | | | 75 | | | 82 | | | 161 | | | 123 |
Corrosion Protection and Waterproofing | | | 102 | | | 25 | | | 12 | | | 3 |
Total | | $ | 204 | | $ | 128 | | $ | 196 | | $ | 181 |
The Company did 0tnot have any contract liabilities as of May 31,November 30, 2022 and August 31, 2021.2022.
2223
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, 2022 and 2021 was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, 2022 | | Three Months Ended November 30, 2022 | ||||||||||||||||||||||||
| | 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 | | $ | 24,015 | | $ | 34,044 | | | $ | 11,728 | | | $ | 69,787 | | $ | 29,631 | | $ | 35,352 | | | $ | 7,631 | | | $ | 72,614 |
Asia\Middle East | | | 6,143 | | | 2,103 | | | | 1,121 | | | | 9,367 | | | 14,581 | | | 1,781 | | | | 246 | | | | 16,608 |
Europe | | | 6,362 | | | 1,373 | | | | 654 | | | | 8,389 | | | 11,184 | | | 1,488 | | | | 352 | | | | 13,024 |
All other foreign | | | 251 | | | 809 | | | | 16 | | | | 1,076 | | | 157 | | | 456 | | | | 34 | | | | 647 |
Total Revenue | | $ | 36,771 | | $ | 38,329 | | | $ | 13,519 | | | $ | 88,619 | | $ | 55,553 | | $ | 39,077 | | | $ | 8,263 | | | $ | 102,893 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended May 31, 2022 | | 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 | | $ | 62,992 | | $ | 93,321 | | | $ | 28,932 | | | $ | 185,245 | | $ | 20,095 | | $ | 29,634 | | | $ | 9,377 | | | $ | 59,106 |
Asia\Middle East | | | 19,292 | | | 5,682 | | | | 2,547 | | | | 27,521 | | | 5,970 | | | 1,798 | | | | 890 | | | | 8,658 |
Europe | | | 16,733 | | | 3,734 | | | | 2,019 | | | | 22,486 | | | 4,796 | | | 912 | | | | 915 | | | | 6,623 |
All other foreign | | | 583 | | | 1,683 | | | | 64 | | | | 2,330 | | | 188 | | | 417 | | | | 18 | | | | 623 |
Total Revenue | | $ | 99,600 | | $ | 104,420 | | | $ | 33,562 | | | $ | 237,582 | | $ | 31,049 | | $ | 32,761 | | | $ | 11,200 | | | $ | 75,010 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | ||||||||||||||
| | 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\Middle East | | | 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 | ||||||||||||||||||||||||||
| | Adhesives, Sealants | | Industrial | | | Corrosion Protection | | | Consolidated | ||||||||||||||||||
| | and Additives |
| Tapes | | | and Waterproofing | | | Revenue | ||||||||||||||||||
Revenue | | | | | | | | | | | | | | | ||||||||||||||
North America | | $ | 56,606 | | $ | 76,429 | | | $ | 27,062 | | | $ | 160,097 | ||||||||||||||
Asia\Middle East | | | 21,958 | | | 5,855 | | | | 3,592 | | | | 31,405 | ||||||||||||||
Europe | | | 16,497 | | | 3,061 | | | | 1,823 | | | | 21,381 | ||||||||||||||
All other foreign | | | 446 | | | 1,740 | | | | 147 | | | | 2,333 | ||||||||||||||
Total Revenue | | $ | 95,507 | | $ | 87,085 | | | $ | 32,624 | | | $ | 215,216 | ||||||||||||||
| | | | | | | | | | | | | | |
2324
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 of 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, 2022 and 2021 were as follows:
| | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | | Nine Months Ended May 31, | | | | | Three Months Ended November 30, | ||||||||||||
|
| 2022 |
| 2021 |
| | 2022 |
| 2021 |
|
|
| | 2022 |
| 2021 | ||||||
Components of net periodic benefit cost | | | | | | | | | | | | | | | | | | | | | | |
Service cost | | $ | 95 | | $ | 91 | | | $ | 285 | | $ | 274 | | | | | $ | 75 | | $ | 95 |
Interest cost | | | 96 | | | 86 | | | | 288 | | | 256 | | | | | | 161 | | | 96 |
Expected return on plan assets | | | (103) | | | (97) | | | | (309) | | | (293) | | | | | | (95) | | | (103) |
Amortization of prior service cost | | | 1 | | | 1 | | | | 3 | | | 3 | | | | | | 1 | | | 1 |
Amortization of accumulated loss | | | 148 | | | 164 | | | | 444 | | | 492 | | | | | | 148 | | | 148 |
Curtailment and settlement loss | | | | 200 | | | — | |||||||||||||||
Net periodic benefit cost | | $ | 237 | | $ | 245 | | | $ | 711 | | $ | 732 | | | | | $ | 490 | | $ | 237 |
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 $1,526391 in the ninethree months ended May 31,November 30, 2022 to fund its obligations under its pension plans, and plans to make the necessary contributions over the remainder of fiscal 20222023 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.conditions. The Company made contributions of $1,174$391 in the ninethree months ended May 31,November 30, 2021.
2425
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, 2022 and August 31, 20212022 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, 2022 and August 31, 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 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, 2022 | | $ | 2,312 | | $ | 2,070 | | $ | 242 | | $ | — | | | November 30, 2022 | | $ | 2,540 | | $ | 2,295 | | $ | 245 | | $ | — | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Restricted investments | | August 31, 2021 | | $ | 2,260 | | $ | 2,016 | | $ | 244 | | $ | — | | | August 31, 2022 | | $ | 2,367 | | $ | 2,125 | | $ | 242 | | $ | — | |
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, 2022 and August 31, 2021:2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | 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, 2022 | | $ | — | | $ | — | | $ | — | | $ | — | | | November 30, 2022 | | $ | 165,000 | | $ | — | | $ | 165,000 | | $ | — | |
Contingent consideration | | May 31, 2022 | | $ | 2,099 | | $ | — | | $ | — | | $ | 2,099 | | | November 30, 2022 | | $ | 2,983 | | $ | — | | $ | — | | $ | 2,983 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt | | August 31, 2021 | | $ | — | | $ | — | | $ | — | | $ | — | | | August 31, 2022 | | $ | 180,000 | | $ | — | | $ | 180,000 | | $ | — | |
Contingent consideration | | August 31, 2021 | | $ | 2,537 | | $ | — | | $ | — | | $ | 2,537 | | | August 31, 2022 | | $ | 2,584 | | $ | — | | $ | — | | $ | 2,584 | |
The long-term debt (including any current portion of long-term debt) had 0 outstandinga $165,000 and $180,000 balance as of May 31,November 30, 2022 and August 31, 2021.2022, respectively. The carrying value of the long-term debt approximates its fair value and has a weighted average interest rate of 6% as theof November 30, 2022. 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 (fiscal 2021), the Company recorded a contingent consideration liability included within Other liabilities on the condensed consolidated balance sheet of €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, 2022, the liability decreasedincreased to $2,099$2,983 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.
2526
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, 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 (1) | | | 226 | | | — | | | 3,273 | | | 3,499 | | | | (25) | | | — | | | (2,173) | | | (2,198) | |
Reclassifications to net income of previously deferred (gains) losses (2) | | | (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) | | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at August 31, 2021 | | $ | 518 | | $ | (7,979) | | $ | (3,749) | | $ | (11,210) | | |||||||||||||
Balance at August 31, 2022 | | $ | 164 | | $ | (7,200) | | $ | (13,331) | | $ | (20,367) | | |||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Other comprehensive gains (losses) before reclassifications (3) | | | (213) | | | — | | | (5,174) | | | (5,387) | | | | 43 | | | — | | | 1,943 | | | 1,986 | |
Reclassifications to net income of previously deferred (gains) losses (4) | | | (64) | | | 336 | | | — | | | 272 | | | | (5) | | | 262 | | | — | | | 257 | |
Other comprehensive income (loss) | | | (277) | | | 336 | | | (5,174) | | | (5,115) | | | | 38 | | | 262 | | | 1,943 | | | 2,243 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Balance at May 31, 2022 | | $ | 241 | | $ | (7,643) | | $ | (8,923) | | $ | (16,325) | | |||||||||||||
Balance at November 30, 2022 | | $ | 202 | | $ | (6,938) | | $ | (11,388) | | $ | (18,124) | |
(1) | Net of tax benefit of |
(2) | Net of tax expense of |
(3) | Net of tax |
(4) | Net of tax expense of |
The following table summarizes the reclassifications from accumulated other comprehensive income (loss) to the unaudited condensed consolidated statements of income:
| | | | | | | | | | |||||||||||||||||||||
| | | | | | | | | | | | | | | | | Amount of Gain (Loss) | | | Location of Gain (Loss) | | |||||||||
| | | | | | | | | | | | Accumulated Other | | | Reclassified from | | ||||||||||||||
| | | | | Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive | | | | | Comprehensive Income | | | Accumulated | | ||||||||||||||||
| | | | | Income (Loss) into Income | | | | | (Loss) into Income | | | Other Comprehensive | | ||||||||||||||||
| | | | | Three Months Ended May 31, | | | Nine Months Ended May 31, | | Location of Gain (Loss) Reclassified from Accumulated | | | Three Months Ended | | | | Income (Loss) | | ||||||||||||
|
|
|
| | 2022 |
| 2021 |
|
| 2022 |
| 2021 | | Other Comprehensive Income (Loss) into Income |
|
| November 30, 2022 |
| November 30, 2021 |
|
| | into Income |
| ||||||
Gains on Restricted Investments: | | | | | | | | | | | | | | | | | | | | | | | | | | |||||
Realized loss (gain) on sale of restricted investments | | | | | $ | (6) | | $ | (5) | | | $ | (86) | | $ | (54) | | Selling, general and administrative expenses | | | $ | (7) | | $ | (7) | | | Selling, general and administrative expenses | | |
Tax expense (benefit) | | | | | | 1 | | | 1 | | | | 22 | | | 14 | | | | | | 2 | | | 2 | | | | | |
Gain net of tax | | | | | $ | (5) | | $ | (4) | | $ | (64) | | $ | (40) | | | | | $ | (5) | | $ | (5) | | | | | ||
| | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Loss on Funded Pension Plan adjustments: | | | | | | | | | | | | | | | | | | | | | | | | | ||||||
Amortization of prior pension service costs and unrecognized losses | | | | | | 149 | | 165 | | | | 447 | | 495 | | Other income (expense) | | | $ | 149 | | $ | 149 | | | Other income (expense) | | |||
Settlement and curtailment loss | | | 200 | | — | | | Other income (expense) | | |||||||||||||||||||||
Tax expense (benefit) | | | | | | (37) | | | (41) | | | | (111) | | | (124) | | | | | | (87) | | | (37) | | | | | |
Loss net of tax | | | | | $ | 112 | | $ | 124 | | $ | 336 | | $ | 371 | | | | | $ | 262 | | $ | 112 | | | | | ||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||
Total net loss reclassified for the period | | | | | $ | 107 | | $ | 120 | | $ | 272 | | $ | 331 | | | | | $ | 257 | | $ | 107 | | | | |
2627
Note 14 — Income Taxes
For the three and nine monthsmonth periods ended May 31,November 30, 2022 the Company’s recognized effective tax rate was 19.7% and 23.3%, respectively. For the three and nine months ended May 31, 2021, the Company’s recognized effective tax rate was 19.5%21.8% and 23.1%25.8%, respectively.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 third quarter and year-to-date fiscal periodsquarters ended May 31,November 30, 2022 and 2021.
In addition, the Company also 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 third quarter and year-to-date fiscalthree-month periods ended May 31,November 30, 2022 and 2021. Additionally, the Company concluded that the Base Erosion and Anti AbuseAnti-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 third quarter and year-to-date fiscalthree-month periods ended May 31,November 30, 2022 and 2021.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act)(the “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 has evaluated the impact of the CARES Act, and 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 third quarter and year-to-date fiscalthree-month periods ended May 31,November 30, 2022 and 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 the third quarter and year-to-date fiscal periodsthree-month period ended May 31,November 30, 2022, FDII had a favorable impact on the Company’s effective tax rate.
The Inflation Reduction Act ("IRA") was enacted into law on August 16, 2022. Included in the IRA was a provision to implement a 15% corporate alternative minimum tax on “adjusted financial statement income” for applicable corporations and a 1% excise tax on repurchases of stock. These provisions are effective for tax years beginning after December 31, 2022. We are in the process of evaluating the provisions of the IRA, but we do not currently believe the IRA will have a material impact on our reported results, cash flows or financial position when it becomes effective.
0Note 15 — Operations Optimization Costs
ERP System Upgrade
During the first quarter of fiscal 2023, the Company began the process of upgrading our current Oracle Legacy ERP System to the Oracle Fusion Cloud Platform. This upgrade will position us with a more advanced system to support business expansion, access to upgrades in functionality and a more modern system for operations. Additionally, the upgrade will be a multi-year, phased-in approach designed to mitigate any disruptions to our business. The Company recognized $540 in operations optimization expense related to the ERP system upgrade in the first quarter of fiscal 2023.
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. Chase obtained the adhesives systems operations as part of its fiscal 2017 acquisition of the operations of Resin Designs. The Company expensed $113 and $0 related to the consolidation of the Woburn, MA location during the first quarters of fiscal 2023 and 2022, respectively. In addition, the Company expensed $548 as a lease impairment related to the Woburn, MA facility relocation in the first quarter of 2023. The Company may have additional costs related to the lease termination in future periods.
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Relocation of Chase Corporate Headquarters
The Company substantially completed the relocation of its Corporate Headquarterscorporate headquarters to another location within Westwood, MA during the second quarter of the fiscal year ended August 31, 2022. The move, part of the Company’s ongoing consolidation and optimization initiative, capitalizes on the hybrid work model utilized by many of Chase’s corporate and administrative employees and is expected to provide future operational cost savings. The new facility also consolidates and houses research and development operations previously conducted at the previous Westwood, MA and Woburn, MA locations. Operations optimization expensescosts related to the Westwood move of $32 and $232$59 were expensed in the thirdfirst quarter of fiscal 2022. The project is complete and fiscal year-to-date period of 2022, respectively. The Company does not anticipate any significant additional operations optimizationfuture costs related to the new Corporate Headquarters during the fourth quarter of the fiscal year.
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 aligns with the announcement in the second quarter of fiscal 2021 of the Company’s plan to move its sealant systems production from Newark, CA to 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. The Company expensed $27 and $328 related to the consolidation of the Woburn, MA location during the third quarter and fiscal 2022 period, respectively, and expects to recognize additional expense during the fourth quarter of the fiscal year.
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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 terminated in fiscal 2021. The Company recognized $977 of expense related to the move during the entire prior fiscal year ended August 31, 2021 and $0 and $147 of expense in the third quarter and year-to-date fiscal 2022. This project is now substantially completed and any future costs related to this move are not anticipated to be significant to the condensed consolidated financial statements.
in fiscal 2023.
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Note 16 — Long-Term Debt
On July 27, 2021 (the fourth quarter of fiscal 2021), the Company entered into the Second Amended and Restated Credit Agreement (the “New Credit“Credit Agreement”) by and among the Company and NEPTCO Incorporated (“NEPTCO”), each as borrowers, the guarantor subsidiaries party thereto, the financial institutions party thereto as Lenders, and Bank of America, N.A., as administrative agent, with participation from Wells Fargo Bank, N.A., PNC Bank, N.A. and JPMorgan Chase Bank, 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 had a maturity date of December 15, 2021, andis used to provide for additional liquidity to finance acquisitions, working capital and capital expenditures, and for other general corporate purposes. Under the NewThe Credit Agreement Chase obtained an increasedincludes a revolving credit loan (the “New Revolving“Revolving Facility”), with borrowing capabilities not to exceed $200,000 at any time, with the ability to request an increase in this amount by an additional $100,000 at the individual or collective option of any of the Lenders. The applicable interest rate for the New Revolving Facility and New Term Loan (defined below) is based on the effective London Interbank Offered Rate (LIBOR) plus a range ofspread ranging from 1.00% to 1.75%, depending on the consolidated net leverage ratio of Chase and its subsidiaries. At May 31,As of November 30, 2022, there was 0 outstanding principal balance, andthe Company had $165,000 in long-term debt related to the acquisition of NuCera Solutions that closed on September 1, 2022. The long-term debt has a weighted average interest rate of 6% as such, 0 applicable interest rate.of November 30, 2022.
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 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 “New Term“Term Loan”, and collectively with the New Revolving Facility, the “New Credit“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, which collectively had a carrying value of approximately $302,914$76,078 at May 31,November 30, 2022. 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 May 31,November 30, 2022. The New Credit Agreement also placesrequires lender approval for acquisitions over a 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.
Note 17 – Acquisitions
Acquisition of NuCera Solutions
On September 1, 2022 (the first day of fiscal 2023), the Company acquired all of the capital stock of NuCera Solutions (“NuCera”). The Prior Credit AgreementNuCera acquisitions extends our global reach in the production and development of highly differentiated specialty polymers and polymerization technologies serving demanding applications, offering products critical to enabling end-product functionality, performance and reliability for new blue-chip customers and high-growth end markets such as personal care, polymer additives, coatings, diversified consumer products and masterbatches.
The Company acquired all of the capital stock of NuCera for a purchase price of $250,000, net of debt, accrued income taxes, cash at closing, and working capital adjustments resulting in a purchase price consideration of $249,945. In the first quarter of fiscal 2023, the Company paid $248,967, net of $498 of cash acquired, and the remaining $480 related to the final working capital adjustment will be paid in the second quarter of fiscal 2023. The purchase was an all-revolvingfunded by
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utilizing $180,000 from the Company’s existing revolving credit facility and the remaining $70,000 from available cash on hand. The Company recorded transaction costs of $29 in the first quarter of fiscal 2023 and $4,000 in the fourth quarter of fiscal 2022 related to this acquisition which are excluded from the purchase price. Acquisition-related costs consist of legal and professional fees related to the NuCera acquisition.
The NuCera acquisition has been accounted for using the acquisition method of accounting in accordance with a borrowing capacityAccounting Standards Codification Topic 805, Business Combinations, (“ASC 805”). The purchase price consideration has been allocated to the assets acquired and liabilities assumed of $150,000, which could be increased by anNuCera based upon preliminary estimate of their fair values as of the acquisition date. Fair values of the assets acquired and liabilities assumed are measured in accordance with ASC Topic 820, Fair Value Measurements, (“ASC 820”), using the discounted cash flows and other applicable valuation techniques. For certain assets and liabilities, those fair values are consistent with historical carrying values.
The following table summarizes the purchase consideration and the preliminary purchase price allocation to estimate fair values of the identifiable assets acquired and liabilities assumed as of the acquisition date (in thousands):
| | | |
Allocation of the Purchase Price | | | |
| | | |
Preliminary Purchase Price Allocation |
| Amount | |
Cash consideration | | $ | 249,945 |
Total fair value of consideration transferred | | | 249,945 |
| | | |
Assets acquired: | | | |
Cash and cash equivalents | | $ | 498 |
Accounts receivable | | | 10,392 |
Inventory | | | 16,063 |
Prepaid and other current assets | | | 5,096 |
Property, plant & equipment | | | 38,489 |
Operating lease right-of-use assets | | | 579 |
Goodwill | | | 80,041 |
Intangible assets | | | 148,021 |
Other assets | | | 211 |
Total assets acquired | | | 299,390 |
| | | |
Liabilities assumed: | | | |
Accounts payable | | $ | 4,731 |
Accrued expenses | | | 6,559 |
Income taxes payable | | | 716 |
Operating lease long-term liabilities | | | 474 |
Deferred income taxes | | | 36,866 |
Accrued Income Taxes | | | 99 |
Total liabilities assumed | | | 49,445 |
Net Assets acquired | | $ | 249,945 |
The purchase price allocation is preliminary and subject to revision as acquisition-date fair value analyses are completed and if additional $50,000information about facts and circumstances that existed at the requestacquisition date become available. The purchase price consideration, as well as the estimated fair values of the assets acquired and liabilities assumed, will be finalized as practicable, but no later than one year from the closing of the NuCera acquisition.
The preliminary purchase price allocation resulted in goodwill of $80,041 of which $1,147 is deductible for income tax purposes. Goodwill consists of the excess of the purchase price over the fair value of the acquired assets and assumed liabilities representing the estimated economic value attributable to future operations.
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At this time, except for the items noted below, we do not expect material changes to the value of the assets acquired or liabilities assumed in conjunction with the transaction. Specifically, deferred tax assets and liabilities are subject to change. As management receives additional information during the measurement period, these assets and liabilities may be adjusted. Under the acquisition method of accounting for business combinations, if we identify changes to acquired deferred tax asset valuation allowances or liabilities related to uncertain tax positions during the measurement period, and they are related to new information obtained about facts and circumstances that existed as of the acquisition date, those changes are considered a measurement-period adjustment, and we record the offset to goodwill. The Company will record all other changes to deferred tax asset valuation allowances and liabilities related to uncertain tax positions in current-period income tax expense. This accounting applies to all of our acquisitions, regardless of acquisition date.
The revenue and net loss for the results of operations for NuCera was $20,350 and ($4,429) for the first quarter of fiscal 2023.
The pro forma summary below presents the results of operations as if the NuCera acquisition occurred on September 1, 2021 and includes proforma adjustments such as $5,880 of incremental amortization expense from acquired intangible assets, $2,240 of inventory step-up, $2,140 of incremental interest expense, and the individualtax related impact. The pro forma summary uses estimates and assumptions based on information available at the time. Management believes the estimates and assumptions to be reasonable; however, actual results may have differed significantly from this pro forma financial information. The pro forma information does not reflect any cost savings, operating synergies or collective optionrevenue enhancements that might have been achieved from combining the operations. The unaudited pro forma summary is provided for illustrative purposes only and does not purport to represent Chase’s actual consolidated results of anyoperations had the acquisition been completed as of the lenders, and with an interest rate based on the effective LIBOR plus an additional amount in the rangedate presented, nor should it be considered indicative of 1.00% to 1.75%, depending on ourChase’s future consolidated net leverage ratio or, at the Company’s option, at the bank’s base lending rate. It was substantially available at July 27, 2021, the timeresults of its amendment and restatement.operations.
| | | | | | | |
| | Three Months Ended November 30, | |||||
| | 2022 |
| | 2021 | ||
| | |
| | | | |
Revenue | | $ | 102,893 | | | $ | 96,608 |
Net income | | | 6,724 | | | | 8,965 |
Note 18 – Subsequent Event
Dividend Payment
On November 10, 2022, Chase announced a cash dividend of $1.00 per share (totaling $9,500) to shareholders of record on November 30, 2022 and paid on December 9, 2022, the second quarter of fiscal 2023.
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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 finalized purchase accounting during the first quarter of fiscal 2022, with no significant change to 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 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, subject to final working capital adjustments, excluding acquisition-related costs totaling $274 recognized in fiscal 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 had $2,692 accrued at February 28, 2022 within Other liabilities on the condensed consolidated balance sheet related to its estimate of the current fair value of the earn out. Following its initial recording at the acquisition date, changes in the performance-based earn out accrual have been recorded within (Gain) loss on contingent consideration in the condensed consolidated statement of operations (including a $474 gain in the third quarter and $199 year-to-date net gain adjustment in 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 financial statements within the Adhesives, Sealants and Additives operating segment in the electronic and industrial coatings product line. The Company finalized purchase accounting during the fourth quarter of fiscal 2021, with no significant change to amounts initially recorded.
The excess of the purchase price over the net tangible and intangible assets acquired resulted in goodwill of $13,055 that is largely attributable to the 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.operations for the first quarter of fiscal 2023. It should be read in conjunction with the Condensed Consolidated Financial Statements. Notes thereto are 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, 2021.2022.
Overview
General
The Company’s revenue grew in the thirdfirst fiscal quarter and nine months ended May 31,November 30, 2022, with all three of itsthe Adhesives, Sealants and Additives and Industrial Tapes reportable operating segments surpassing sales achieved in the prior yearcomparable fiscal quarter. The revenue increase was primarily attributable to inorganic growth from our NuCera Solutions (“NuCera”) business acquired in the first month of fiscal 2023. The Company’s gross margin decreased to 34.9% in the first quarter and year-to-date fiscal periods. Despitecompared to 37% in the ongoing challengesfirst quarter of the global operating environmentprior year primarily due to purchase accounting expense (NuCera inventory step-up) and unfavorable sales mix detailed below, the Company increased its gross margin to 38.6% in the third quarter resulting in a 37.4% gross margin for the year-to-date fiscal period.below.
Despite the Company’s healthy sales growth in both the current quarter and year-to-date period, and an increase in third quarter gross margin compared to the [second quarter][first halfquarter of the prior fiscal 2022],year, the Company continues to havehad a less favorable gross margin percentage in the current quarterquarter. The decrease in the gross margin percentage is primarily due to purchase accounting expense related to our NuCera business which includes inventory step-up adjustment expensed in the first quarter. Additionally, the Company’s gross margin was negatively impacted by unfavorable sales mix in our Corrosion Protection and year-to-date periodWaterproofing segment caused by decreased sales volume due to lower demand and customer inventory reduction initiatives compared to the prior year periods. Lowercomparable fiscal quarter. In addition, increased operating costs seen inexpenses for the current quarter resulted in higherare related to purchase accounting adjustments, including incremental depreciation and amortization (including backlog fully amortized during the quarter) and a lease impairment associated with the Woburn, MA facility relocation, all of which negatively impacted operating income over the comparable prior year quarter. Higher operating costs seen in the year-to-date current period resulted in decreased operating income over the comparable year-to-date period. Chase’s relative gross margin in the quarter and year-to-date period continue
The Company continues to be negatively impacted by both: a.)both increased input costs caused by continued global raw material inflationary pressures, increased logisticslogistic costs and a more competitive labor market; and b.) a less favorable sales mix, with sales increases in its lower margin Industrial Tapes segment outpacing revenue gains seen in its higher margin Adhesives, Sealants and Additives, and Corrosion Protection and Waterproofing segments. Further, the Adhesives, Sealants and Additives segment also experienced a less favorable sales mix within the segment itself due to historically less favorable margin products constituting a comparatively larger part of total segment sales in the quarterly and year-to-date periods.
market. The Company continues to work with ourits customers and suppliers in an effort to counteract margin compression. However, givencompression and has benefited from sales price increases within the delay experienced due to notification period requirements with certain customersAdhesives, Sealants and Additives and Industrial Tapes segments over the continuation of upward inflationary pressures on input costs, the current period and year-to-date results reflect a lag in the realization of the full benefits of these efforts.comparable prior year quarter.
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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; highly differentiated specialty waxes and 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 for our Adhesives, Sealants and Additives segment increasedgrew in the first quarter, predominately due to year-to-date inorganic growth from our NuCera business acquired on the first day of fiscal 2023. The remaining revenue increase for the third quarter and year-to-date periods againstsegment was due to sales price increases realized over the comparable prior year periods withperiod and increased demand for both our world-wide focused electronic and industrial coatings product line and our North American-focused functional additives product line, including year-to-date inorganic growth from our Emerging Technologies, Inc. (“ETi”) business acquired in the last month of the second quarter of fiscal 2021. Partially offsetting this increase in revenue was a quarter to quarter and year-to-date reduction in sales volume from our worldwide-focused electronic and industrial coatings product line due to reduced demand acutely seen with sales within the automotive industry for the third quarter and year-to-date fiscal periods.line.
Revenue for our Industrial Tapes segment surpassedincreased in the COVID-19 impacted thirdcurrent quarter and year-to-dateover the comparable prior year period due to sales with continuedprice increases realized over the past year and increased demand for our North American-focused cable materials, specialty products and pulling and detection product lines. Tempering thethis overall increase in third quarter revenue was a decrease in third quarter sales from the specialty products product line due to raw material supply constraints. However, the specialty products product line continues to experience a year-to-date increasereduction in sales over the prior year-to-date comparable period.volume from our Asia-focused electronic materials product line.
Revenue decreased for our Corrosion Protection and Waterproofing segment surpassedin the first quarter due to a reduction in sales volume for our building envelope, coating and lining systems and pipeline coatings product lines over the comparable prior period. The decrease in revenue for our building envelope and coating and lining systems product lines is predominately due to a decrease in customer sales volume as a result of to customer inventory reduction initiatives compared to the prior year quarter and year-to-date periods with increased demand fromcomparable period. Additionally, the decrease in revenue for our pipeline coatings product line benefitingis due to project delays in the current quarter,Middle East market and our building envelope lines benefitting bothcontinued COVID-19 overhang delays in China which affect revenue within other Asian-end markets and outpaces North American sales gains in the current quarteroil and year-to-date periods.gas markets. Partially offsetting these increasesthe decrease in revenue were current quarter and year-to-date reductionswas an increase in net sales volume fromfor our bridge and highway product lines. The coatingsline due to increased demand of bridge and lining systems product line also experienced reductionhighway projects in net sales volume in the current quarter compared to the prior year quarter and continues to experience an increase in year-to-date sales compared to the prior comparable period.North America.
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Balance Sheet and Cash Flow
Chase Corporation’s balance sheet remained strong as of May 31,November 30, 2022, with cash on hand of $124,683,000,$56,317,000, and a current ratio of 8.1.4.1. The Company’s cash position remained healthy, as diddoes cash flow from operations. ChasePurchase accounting adjustments related to the Company’s NuCera business were made in the first quarter and include increases in inventory step-up, intangible assets, goodwill and other working capital. Additionally, the Company continued its strategic inventory build during the thirdfirst quarter, undertaken to help ensure its ability to satisfy our customers’ demands and to address its elevated backlog caused in part by supply chain challenges. In addition, during
Subsequent to the secondend of the first fiscal quarter of 2023, Chase Corporation paid out its largest everan annual cash dividend of $9,460,000$9,500,000 on December 9, 2021.2022.
The Company held nohad a $165,000,000 outstanding balance on its $200,000,000 revolving credit facility as of May 31, 2022.November 30, 2022, related to the funding of the NuCera acquisition as noted above. 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. The new facility also gives Chase the ability to 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. The facility matures in July 2026.
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Results of Operations
Revenue and Income before Income Taxes by Segment were as follows (dollars in thousands):
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| | Three Months Ended | | Total | | Three Months Ended | | Total | | | Nine Months Ended | | Total | | Nine Months Ended | | Total |
| | Three Months Ended | | Total | | Three Months Ended | | Total | | | ||||||
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| May 31, 2022 |
| Revenue |
| May 31, 2021 |
| Revenue |
| | May 31, 2022 |
| Revenue |
| May 31, 2021 |
| Revenue | |
| November 30, 2022 |
| Revenue |
| November 30, 2021 |
| Revenue |
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Revenue | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 36,771 | | 41 | % | $ | 33,861 | | 43 | % | | $ | 99,600 | | 42 | % | $ | 95,507 | | 44 | % | | $ | 55,553 | | 54 | % | $ | 31,049 | | 41 | % | |
Industrial Tapes | | | 38,329 | | 43 | % | | 32,249 | | 41 | % | | | 104,420 | | 44 | % | | 87,085 | | 40 | % | | | 39,077 | | 38 | % | | 32,761 | | 44 | % | |
Corrosion Protection and Waterproofing | |
| 13,519 | | 15 | % |
| 13,483 | | 17 | % | |
| 33,562 | | 14 | % |
| 32,624 | | 15 | % | |
| 8,263 | | 8 | % |
| 11,200 | | 15 | % | |
Total | | $ | 88,619 | | | | $ | 79,593 | | | | | $ | 237,582 | | | | $ | 215,216 | | | | | $ | 102,893 | | | | $ | 75,010 | | | | |
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| | 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, 2022 | | Revenue | | May 31, 2021 | | Revenue | | | May 31, 2022 | | Revenue | | May 31, 2021 | | Revenue | | | November 30, 2022 | | Revenue | | November 30, 2021 | | Revenue | | | ||||||
Income before income taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adhesives, Sealants and Additives | | $ | 12,320 | (a) | 34 | % | $ | 10,982 | (c) | 32 | % | | $ | 27,719 | (a) | 28 | % | $ | 31,098 | (c) | 33 | % | | $ | 4,124 | (a) | 7 | % | $ | 7,597 | (c) | 24 | % | |
Industrial Tapes | | | 10,985 | | 29 | % | | 10,945 | | 34 | % | | | 30,525 | | 29 | % | | 27,273 | | 31 | % | | | 11,947 | | 31 | % | | 9,290 | | 28 | % | |
Corrosion Protection and Waterproofing | |
| 5,353 | | 40 | % |
| 5,098 | | 38 | % | |
| 12,683 | | 38 | % |
| 11,599 | | 36 | % | |
| 2,551 | | 31 | % |
| 4,446 | | 40 | % | |
Total for reportable segments | |
| 28,658 | | 32 | % |
| 27,025 | | 34 | % | |
| 70,927 | | 30 | % |
| 69,970 | | 33 | % | |
| 18,622 | | 18 | % |
| 21,333 | | 28 | % | |
Corporate and Common Costs | |
| (9,310) | (b) | | |
| (9,282) | (c) | | | |
| (26,095) | (b) | | |
| (25,385) | (c) | | | |
| (10,022) | (b) | | |
| (8,216) | (d) | | | |
Total | | $ | 19,348 | | 22 | % | $ | 17,743 | | 22 | % | | $ | 44,832 | | 19 | % | $ | 44,585 | | 21 | % | | $ | 8,600 | | 8 | % | $ | 13,117 | | 17 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Note: Some percentage of total revenue amounts may not sum to 100% due to rounding.
(a) | Includes |
(b) | Includes $540 of operations optimization related to the Company’s ERP upgrade |
(c) | Includes $475 loss on the upward adjustment of the performance-based earn out contingent consideration associated with the September 2020 acquisition of ABchimie |
(d) | Includes $59 of operations optimization costs related to the Company’s move to the new corporate headquarters in Westwood, MA |
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Total Revenue
Total revenue increased $9,026,000,$27,883,000, or 11%37% to $88,619,000$102,893,000 for the quarter ended May 31,November 30, 2022, compared to $79,593,000$75,010,000 in the same quarter of the prior year. Total revenue increased $22,366,000, or 10% to $237,582,000 in the fiscal year-to-date period compared to $215,216,000 in the same period in fiscal 2021.
Revenue in the Company’s Adhesives, Sealants and Additives segment increased $2,910,000,$24,504,000, or 9% and $4,093,000, or 4%78.9% to $55,553,000 for the quarter ended November 30, 2022, compared to $31,049,000 in the currentsame quarter of the prior year. The increase in revenue was primarily driven by year-to-date inorganic growth from our NuCera business acquired on the first day of fiscal 2023, which benefited sales growth in our functional additives product line. The remaining revenue increase for the segment was predominately due to sales price increases realized over the comparable prior period and year-to-date period, respectively. Positively impacting salesincreased demand for both the current quarterour world-wide focused electronic and year-to-date period were demand-driven sales increases of $3,416,000industrial coatings product line and $7,804,000, respectively, by our North American-focused functional additives product line, which includes year-to-date inorganic growth attributable to the ETi business acquired in the last month of the second quarter of fiscal 2021. Negatively impacting the segment’s sales was volume-driven decreases in the current quarter and year-to-date period for its worldwide-focused electronic and industrial coatings line totaling $506,000 and $3,711,000, respectively, with logistics and raw material supply constraints affecting demand in automotive verticals.line.
Compared to the prior year quarter and year-to-date period, revenueRevenue in the Company’s Industrial Tapes segment increased $6,080,000,$6,316,000, or 19% and $17,335,000, or 20%, respectively. Positively impacting19.3% to $39,077,000 for the quarter ended November 30, 2022, compared to $32,761,000 in the comparable quarter of the prior year. The increase in sales for both the current quarter and year-to-date period were was driven bysales price increases realized over the comparable prior period and volume-driven increases of $6,351,000increased demand for our North American-focused cable materials, specialty products and $17,063,000, respectively due to its wire and cable, pulling and detection andproduct lines totaling $6,757,000. Tempering this overall increase in revenue was a reduction in sales volume due to decreased demand for our Asia-focused electronic materials product lines over the COVID-19 impacted prior year periods. Negatively impacting the sales increase for the quarter was its specialty product line totaling a sales decrease of $271,000 due to raw material supply constraints. However, the specialty products line continues to experience a year-to-date sales increase of $272,000 over the comparable year-to-date period.period totaling $441,000.
Revenue in the Company’s Corrosion Protection and Waterproofing segment increased $36,000,decreased $2,937,000, or less than 1%26.2% to $8,263,000 for the current quarter and increased $938,000, or 3%ended November 30, 2022, compared to $11,200,000 in the year-to-date period, respectively. Positivelysame quarter of the prior year. Negatively impacting segment sales for the current quarter was the demand-driven sales price and volume increasesa reduction in its pipeline coatings andour building envelope, coating and lining systems, and pipeline coating product linesline totaling $728,000$3,121,000. The sales decrease for our building envelope and $299,000, respectively, duecoating and lining system in the first quarter is attributed to continued recoverysales volume decrease and lower inventory levels of our customers compared to the comparable prior fiscal period. Additionally, the decrease in our oil and gas pipeline business attributable torevenue for our pipeline coatings product line is due to project delays in the Middle East market and increased construction demand attributable to our building envelope product lines. Negativelycontinued COVID-19 overhang delays in China which affect revenue within other Asian-end markets and outpace North American sales gains in the oil and gas markets. Positively impacting the segment’ssegment sales was a decrease in revenue from itsour bridge and highway product linesline totaling $126,000 and $131,000 in the current quarter and year-to-date period, respectively, due to delayed project demand. Negatively impacting the quarter was the coatings and lining product lines totaling a loss of $566,000 due to the strong prior year quarter activity after the winter weather events which impacted the Houston, TX manufacturing facility and surrounding regions. However, the coatings and lining product line experienced an increase of $770,000 in the fiscal year-to-date period$184,000 compared to the comparable period of the prior year, comparable period.attributed to increased demand in bridge and highway projects in North America.
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Cost of Products and Services Sold
Cost of products and services sold increased $8,126,000,$19,719,000, or 18%42% to $54,438,000$67,000,000 for the quarter ended May 31,November 30, 2022, compared to $46,312,000$47,281,000 in the prior year quarter. Costs of products and services sold increased $21,798,000, or 17% to $148,630,000 in the first nine months of fiscal 2022, compared to $126,832,000 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 | |
| 2022 |
| 2021 |
| | 2022 |
| 2021 | | |
| |
| 2022 |
| 2021 | | |
|
Adhesives, Sealants and Additives | | | 57 | % | 56 | % | | 60 | % | 55 | % | | | | | 65 | % | 61 | % | | |
Industrial Tapes | | | 67 | | 62 | | | 67 | | 64 | | | | | | 66 | | 68 | | | |
Corrosion Protection and Waterproofing | | | 56 | | 55 | | | 56 | | 57 | | | | | | 61 | | 55 | | | |
Total Company | | | 61 | % | 58 | % | | 63 | % | 59 | % | | | | | 65 | % | 63 | % | | |
Cost of products and services sold in the Adhesives, Sealants and Additives segment was $21,073,000 and $59,828,000$36,232,000 in the current quarter and year-to-date period compared to $18,850,000 and $52,461,000$18,905,000 in the comparable periodsprior year period. The increase in cost of products and services in the prior year.Adhesives, Sealants and Additives segment is primarily attributed to the inclusion of expenses from our NuCera business which was acquired on the first day of fiscal 2023. Cost of products and services sold in the Industrial Tapes segment was $25,836,000 and $69,845,000$25,719,000 in the current quarter and year-to-date period compared to $20,043,000 and $55,853,000$22,231,000 in the comparable periods in the prior year.year period. Cost of products and services sold in the Corrosion Protection and Waterproofing segment was $7,529,000 and $18,957,000$5,049,000 in the current quarter and year-to-date period compared to $7,419,000 and $18,518,000$6,145,000 in the comparable periods in the prior year.year period.
As a percentage of revenue, cost of products and services increased for both the Adhesives, Sealants and Additives and Industrial Tapes segment inCorrosion Protection and Waterproofing segments as compared to the current quarter and year-to-date period.prior year first quarter. As a percentage of revenue, costscost of products and services solddecreased for the Corrosion Protection and WaterproofingIndustrial Tapes segment increased inas compared to first quarter of the current quarter and decreased in the year-to-date period.prior fiscal year. The decrease in the relative gross margin for the Adhesives, Sealants and Additives and Industrial Tapes segment for the current quarterCorrosion Protection and year-to-date periodWaterproofing segments was due in each case to continued global raw material inflationary pressures, increased logistics and freight costs and a more competitive labor market. Additionally,The decrease in relative gross margin for the Company’s overall relative margin was 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 Additives and Corrosion Protection and Waterproofing segments. The Adhesives, Sealants and Additives segment was also experiencedimpacted by purchase accounting inventory step-up expense related to our NuCera business and a less favorable sales mix withinlease impairment associated with the segment itself, with historically less favorable margin products constituting a comparatively larger part of total segment sales.Woburn, MA facility relocation. The Company has implemented and continueswill continue to implement customer price adjustments (if necessary) and continues to work with our customers and suppliers in an effort to counteract margin compression but with a lag reflected in current quarter and year-to-date period results.compression.
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 the market demand for its product offerings. In an effort to preserve margins, the Company diligently monitors raw materials and commodities pricing across all its product lines.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased $162,000,increased $8,232,000, or 1%62% to $13,807,000$21,607,000 for the quarter ended May 31,November 30, 2022, compared to $13,969,000$13,375,000 in the comparable prior year quarter. Selling, general and administrative expenses increased $1,747,000, or 5% to $40,307,000 in the fiscal year-to-date period compared to $38,560,000 in the same period in fiscal 2021. The year-to-datequarter-to-quarter increase in activityexpense is attributedpredominately due to total increased sellingthe inclusion of expenses from our NuCera business (including additional amortization expected to recur in future periods and sales activity costs overbacklog amortization fully amortized during the comparable prior year-to-date period.quarter) which was acquired on the first day of fiscal 2023. As a percentage of revenue, selling, general and administrative expenses represented 16%21% and 17%17.8% for the three-three-month periods ended November 30, 2022 and nine-month periods of the fiscal year, respectively, and 18% in the comparable three- and nine-month periods of the prior year.2021, respectively.
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Research and Product Development Costs
Research and product development costs increased $229,000,$498,000, or 24% percent50% to $1,186,000$1,491,000 during the thirdfirst quarter of fiscal 2022,2023, compared to $957,000$993,000 in the first quarter of fiscal 2021. Research2022. The increase in research and product development costs increased $240,000, or 8% percentis primarily related to $3,274,000 duringour NuCera business which was acquired in the first nine monthsmonth of fiscal 2022, compared to $3,034,000 in the same period of fiscal 2021. Research and development costs increased from fiscal 2021 to 2022 as the Company continued focused development work on strategic product lines.2023.
Operations Optimization Costs
ERP System Upgrade
During the first quarter of fiscal 2023, the Company began the process of upgrading our current Oracle Legacy ERP System to the Oracle Fusion Cloud Platform. This upgrade will position us with a more advanced system to support business expansion, access to upgrades in functionality and a more modern system for operations, all within the Oracle Ecosystem. Additionally, the upgrade will be a multi-year, phased-in approach designed to mitigate any disruptions to our business. The Company substantially completed the relocation of its Corporate Headquarters to another location within Westwood, MA during the second quarter of the fiscal year. The move, part of the Company’s ongoing consolidation andrecognized $540,000 in operations optimization initiative, capitalizes on the hybrid work model utilized by many of Chase’s corporate and administrative employees and is expected to provide future operational cost savings. The facility will consolidate and house research and development operations previously conducted at the previous Westwood, MA and Woburn, MA locations. Operations optimization costsexpense related to the Westwood move of $32,000 and $232,000 were expensedERP system upgrade in the third quarter and year-to-date fiscal period, respectively. The Company does not anticipate any significant additional operations optimization costs related to the new Corporate Headquarters during the fourthfirst quarter of the fiscal year.2023.
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 aligns with the announcement in the second quarter of fiscal 2021 of the Company’s plan to move its sealant systems production from Newark, CA to Hickory, NC, described in more detail below. Chase Corporation obtained both the adhesive and sealantsadhesives systems operations as part of its fiscal 2017 acquisition of the operations of Resin Designs. The Company expensed $27,000 and $328,000,recognized $113,000 in operations optimization expense related to the consolidation of the Woburn, MA location during the third quarter and year-to-date fiscal year, respectively, and expects to recognize additional expense during the fourthfirst quarter of the fiscal year.2023.
DuringLoss on Impairment of right-of-use Lease Asset
The Company recognized a $548,000 lease impairment related to the second quarter of fiscal 2021, Chase began moving the sealant systems operations,Woburn, MA facility relocation, as part of the relocation of the Company’s 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 terminated in fiscal 2021. The Company recognized $977,000 in expense related to the move during the entire prior fiscal year ended August 31, 2021, of which $98,000 was recognized in the first half of the year. The Company recognized $147,000 in expense during both the first half of fiscal 2022. This project is now substantially completed and any future costs related to this move are not anticipated to be significant.O'Hara Township, PA location.
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(Gain) lossLoss on Contingent Consideration
As a component of the September 1, 2020 (fiscal 2021) 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, $1,664,000 and $432,000 in expense related to adjustments to the performance-based earn out accrual waswere recorded during the fiscal yearyears ended August 31, 2021 (with $733,000 of expense recognized in the second quarter and first half of fiscal 2021).2022, respectively. The Company recognized a gainan expense of $474,000$306,000 and $406,000 in the thirdfirst quarter of fiscal 2023 and a net $199,000 gain over the fiscal year-to-date period2022, respectively, related to the performance-based contingent consideration.
Interest Expense
Interest expense increased $21,000, or 31% to $89,000$2,138,000 for the quarter ended May 31,November 30, 2022, compared to $68,000$87,000 in the comparable prior year comparable period. InterestThe increase in interest expense increased $58,000, or 28% forrelates to our outstanding long-term debt which was used to fund our NuCera business acquisition at the first nine monthsbeginning of fiscal 2022, compared to $204,000 in the prior comparable period. As the Company had no outstanding balance on its revolving debt facility for both periods, interest expense has remained relatively low.2023.
Other Income (Expense)
Other income (expense) was an expense of $166,000($521,000) in the quarter ended May 31,November 30, 2022, compared to an expenseincome of $260,000$377,000 in the same period in the prior year, a difference of $94,000. Other income (expense) was income of $231,000 in the first nine months of the fiscal year compared to an expense of $758,000 in the comparable period, a difference of $989,000.$898,000. 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 our 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 non-trade/non-royalty/non-commission receipts. The change in total other income (expense) in the first quarter of fiscal 20222023 compared to the first quarter of fiscal 2021 for both the quarter-to-date and year-to-date periods2022 was largely due to the recognition of neta foreign exchange gainsloss in fiscal 20222023 as compared to a net lossesforeign exchange gain in fiscal 2021.2022.
Income Taxes
For the threethree-month periods ended November 30, 2022 and nine months ended May 31, 2022, the Company’s recognized effective tax rate was 19.7% and 23.3%, respectively. For the three and nine months ended May 31, 2021, the Company’s recognized effective tax rate was 19.5%21.8% and 23.1%25.8%, respectively.
For fiscal 20222023 and 2021,2022, 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 effects of the Tax Act.
Net Income
Net income increased $1,256,000,decreased $3,003,000, or 9%31% to $15,545,000$6,724,000 in the quarter ended May 31,November 30, 2022, compared to $14,289,000$9,727,000 in the comparable prior year thirdfirst quarter. Net income increased $101,000, or less than 1% to $34,398,000 in the nine month year-to-date period ended May 31, 2022 compared to $34,297,000 in the comparable nine month year-to-date prior period. The increasedecrease in net income inis predominately caused by purchase accounting expense related to our NuCera business which includes inventory step-up, incremental depreciation and amortization (including backlog fully amortized during the third quarterquarter), and year-to-date period was primarily due to sales increases in its lower margin Industrial Tapes segment outpacing revenue gains seen in its higher margin Adhesives, Sealants and Additives segment and Corrosion Protection and Waterproofing segments.a lease impairment associated with the Woburn, MA facility all negatively impacting operating income over the comparable prior year quarter.
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Liquidity and Sources of Capital
The Company’s overall cash and cash equivalents balance increased $5,254,000decreased by $259,178,000 to $124,683,000$56,317,000 at May 31,November 30, 2022, from $119,429,000$315,495,000 at August 31, 2021.2022. The increaselower cash balance at November 30, 2022 was attributed to the $180,000,000 of cash drawn from the revolving credit facility prior to the end of fiscal 2022, the proceeds of which were used, together with $70,000,000 in cash on hand, to fund the acquisition of NuCera which closed on September 1, 2022 (the first day of fiscal 2023). The decrease in cash balance at November 30, 2022 is primarilyalso attributable in part to the continued strategic inventory build (outside of purchase accounting inventory step-up) offset by cash provided by operations of $20,286,000 offset by the $9,460,000 annual dividend in the second quarter of fiscal 2022 and the continued strategic inventory build over the first half and third quarter of fiscal 2022. $6,758,000.
Of the above-noted amounts, $30,402,000balances, $20,000,000 and $26,309,000$28,951,000 were held outside the United States by Chase Corporation and its foreign subsidiaries as of May 31,November 30, 2022 and August 31, 2021,2022, 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, 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 fiscal 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, 2021, and year-to-dateor 2022. The Company repatriated $11,458,000 in U.K. foreign earnings in first quarter of fiscal period 2022.2023. 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 $20,286,000$6,758,000 in the first ninethree months of fiscal year 20222023 compared to $43,000,000$5,903,000 in the same period of the comparable year. Cash provided by operations during the current period was primarily related to operating income. Negatively impacting the cash flow from operations in the current period was our continued strategic inventory build, undertaken to help ensure our ability to satisfy our customers’ demands and to address our elevated backlog caused in part by macroeconomic supply chain challenges.
The ratio of current assets to current liabilities was 8.04.1 as of May 31,November 30, 2022 compared to 6.512.4 (or 7.3 excluding the $180,000,000 cash drawn from our revolving credit facility to fund the NuCera acquisition) as of August 31, 2021,2022. The decrease in the ratio of current assets to current liabilities is primarily due to the year-to-date increase in cash and inventory balance offset by decreases in accounts payable and accrued payroll and other compensation balances.outflow of $250,000,000 to fund the acquisition of NuCera mentioned above.
Cash flow used in investing activities of $3,443,000$251,133,000 was largelyprimarily due to the cash spentpurchase of NuCera, which occurred on capital purchases of machinery and equipment in the first nine monthsday of fiscal 2022.2023.
Cash flows used in financing activities of $9,460,000$15,229,000 was due to a cash dividendprincipal payments on our long-term debt related to the funding of $1.00 per share. The dividend was paid on December 9, 2021 to shareholders of record on November 30, 2021.the NuCera acquisition mentioned above.
On July 27, 2021 (the fourth quarter of fiscal 2021), the Company entered into the Second Amended and Restated Credit Agreement (the “New Credit“Credit Agreement”) by and among the Company and NEPTCO Incorporated (“NEPTCO”), each of theas borrowers, the subsidiary guarantorsguarantor subsidiaries party thereto, the financial institutions party thereto as Lenders, and Bank of America, N.A., as administrative agent, with participation from Wells Fargo Bank, N.A., PNC Bank, N.A. and JPMorgan Chase Bank, N.A. The New Credit Agreement was entered into to amend, restate and extend the Company’s preexisting credit facility, which had a maturity date of December 15, 2021,is used to provide for additional liquidity to finance acquisitions, working capital and capital expenditures, and for other general corporate purposes. Under the NewThe Credit Agreement Chase obtained an increasedincludes a revolving credit loan (the “New Revolving“Revolving Facility”), with borrowing capabilities not to exceed $200,000,000 at any time, with the ability to request an increase in this amount by an additional $100,000,000 at the individual or collective option of any of the Lenders. The applicable interest rate for the New Revolving Facility and New Term Loan (defined below) is based on the effective London Interbank Offered Rate (LIBOR) plus a range ofspread ranging from 1.00% to 1.75%, depending on the consolidated net leverage ratio of Chase and its subsidiaries. At May 31,As of November 30, 2022, there was no outstanding principal balance, and as such, no applicablethe Company had $165,000,000 in long-term debt attributed to the acquisition of NuCera Solutions that closed on September 1, 2022. The long-term debt has a weighted average interest rate. rate of 6%.
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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 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 “New Term“Term Loan”, and collectively with the
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New Revolving Facility, the “New Credit“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.subsidiaries, which collectively had a carrying value of approximately $76,078,000 at November 30, 2022. 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 May 31,November 30, 2022. The New Credit Agreement also placesrequires lender approval for acquisitions over a 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, including upgrading the Company’s ERP system, 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.
We may acquire companies or other assets in future periods which are complementary to our 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, we will assess the impact of these higher interest rates on the financial and cash flow projections of our potential acquisitions.
We have no material 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, 20212022 for a complete discussion of itsthe Company’s 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
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States.U.S. GAAP. To apply these principles, we must make estimates and judgments that affect our reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. In many instances, we 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 our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates and judgments on historical experience and other assumptions that we believe to be reasonable at the time and under the circumstances, and we evaluate these estimates and judgments on an ongoing basis. We refer to accounting estimates and judgments of this type as critical accounting policies, judgments, and estimates. Management believes there have been no material changes during the ninethree months ended May 31,November 30, 2022 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, 2021.2022.
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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, 2022, 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 itsthe Company’s 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’sChase’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, 2022, the Company had cash balances in the following foreign currencies (with USD equivalents, dollars in thousands):
| | | | | | | | | | | |
Currency Code |
| Currency Name |
| USD Equivalent at May 31, 2022 |
|
| Currency Name |
| USD Equivalent at November 30, 2022 | ||
EUR |
| Euro | | $ | 8,319 | ||||||
GBP |
| British Pound | | $ | 17,383 | |
| British Pound | | $ | 5,746 |
EUR |
| Euro | | $ | 6,518 | | |||||
CAD |
| Canadian Dollar | | $ | 2,528 | |
| Canadian Dollar | | $ | 2,736 |
INR |
| Indian Rupee | | $ | 831 | ||||||
CNY |
| Chinese Yuan | | $ | 421 | |
| Chinese Yuan | | $ | 193 |
INR |
| Indian Rupee | | $ | 223 | | |||||
| | | | | | | |||||
SGD |
| Singapore Dollar | | $ | 57 |
The Company will continue to review its current cash balances denominated in foreign currency consideringin light of 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 lossgain for the ninethree months ended May 31,November 30, 2022 in the amount of $5,178,000$1,943,000 related to Chase Corporation’sits European, Asian 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 noan outstanding balance of long-term debt on May 31,of $165,000,000 at November 30, 2022. 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. The effect of anAn immediate hypothetical 10% change in variable interest rates would not have a material effect on our 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’sits reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company carries out a variety of ongoing procedures under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of its disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that its disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.
Changes in internal control over financial reporting
ThereDuring the first quarter ended November 30, 2022, the Company initiated the process of reviewing and implementing financial internal controls on the operations associated with NuCera, acquired in September 2022.
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, 2022 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 of 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, 20212022 for a complete discussion of the risk factors which could materially affect our business, financial condition or future results.
Item 6 — Exhibits
| ||
Exhibit | | Description |
| | |
31.1 | | |
31.2 | | |
32.1 | | |
32.2 | | |
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.
| | |
| Chase Corporation | |
| | |
| | |
Dated: | By: | /s/ Adam P. Chase |
| | Adam P. Chase |
| | President and Chief Executive Officer |
| | |
| | |
Dated: | By: | /s/ Michael J. Bourque |
| | Michael J. Bourque |
| | Treasurer and Chief Financial Officer |
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