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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation | (I.R.S. Employer Identification No.) |
(Address of Principal Executive Offices) (Zip Code)
(
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| ||
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
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. ⌧ 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). ⌧ NO ◻
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ◻ | |
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
The number of shares of Common Stock outstanding as of June 30, 2022 was
CHASE CORPORATION
INDEX TO FORM 10-Q
For the Quarter Ended May 31, 2022
2
Cautionary Note Concerning Forward-Looking Statements
This Quarterly Report on Form 10-Q contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements, including without limitation forward-looking statements made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” involve risks and uncertainties. Any statements contained in this Quarterly Report that are not statements of historical fact may be deemed to be forward-looking statements. Forward-looking statements include, without limitation, statements as to 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. Readers should refer to the discussions under “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 2021 concerning certain factors that could cause our actual results to differ materially from the results anticipated in such forward-looking statements. These Risk Factors are hereby incorporated by reference into this Quarterly Report.
3
Item 1 — Unaudited Condensed Consolidated Financial Statements
CHASE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
In thousands, except share and per share amounts
May 31, | August 31, | ||||||
| 2022 |
| 2021 |
| |||
ASSETS | |||||||
Current Assets | |||||||
Cash and cash equivalents | $ | | $ | | |||
Accounts receivable, less allowances of $ | | | |||||
Inventory | | | |||||
Prepaid expenses and other current assets | | | |||||
Prepaid income taxes and refunds due | | | |||||
Total current assets | | | |||||
Property, plant and equipment, less accumulated depreciation of $ | | | |||||
Other Assets | |||||||
Goodwill | | | |||||
Intangible assets, less accumulated amortization of $ | | | |||||
Cash surrender value of life insurance | | | |||||
Restricted investments | | | |||||
Deferred income taxes | | | |||||
Operating lease right-of-use asset | | | |||||
Other assets | | | |||||
Total assets | $ | | $ | | |||
LIABILITIES AND EQUITY | |||||||
Current Liabilities | |||||||
Accounts payable | $ | | $ | | |||
Accrued payroll and other compensation | | | |||||
Income taxes payable | | | |||||
Accrued expenses | | | |||||
Total current liabilities | | | |||||
Operating lease long-term liabilities | | | |||||
Deferred compensation | | | |||||
Accumulated pension obligation | | | |||||
Other liabilities | | | |||||
Deferred income taxes | | | |||||
Accrued income taxes | | | |||||
Commitments and contingencies (Note 10) | |||||||
Equity | |||||||
First Serial Preferred Stock, $ | |||||||
Common stock, $ | | | |||||
Additional paid-in capital | | | |||||
Accumulated other comprehensive loss | ( | ( | |||||
Retained earnings | | | |||||
Total equity | | | |||||
Total liabilities and equity | $ | | $ | | |||
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
Three Months Ended May 31, | Nine Months Ended May 31, | ||||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| |||||||
Revenue | |||||||||||||||
Sales | $ | | $ | | $ | | $ | | |||||||
Royalties and commissions | | | | | |||||||||||
| | | | ||||||||||||
Costs and Expenses | |||||||||||||||
Cost of products and services sold | | | | | |||||||||||
Selling, general and administrative expenses | | | | | |||||||||||
Research and product development costs | | | | | |||||||||||
Operations optimization costs (Note 15) | | | | | |||||||||||
Acquisition-related costs (Note 17) | — | — | — | | |||||||||||
(Gain) loss on contingent consideration (Note 17) | ( | | ( | | |||||||||||
Operating income | | | | | |||||||||||
Interest expense | ( | ( | ( | ( | |||||||||||
Other income (expense) | ( | ( | | ( | |||||||||||
Income before income taxes | | | | | |||||||||||
Income taxes (Note 14) | | | | | |||||||||||
Net income | $ | | $ | | $ | | $ | | |||||||
Net income available to common shareholders, per common and common equivalent share (Note 4) | |||||||||||||||
Basic | $ | | $ | | $ | | $ | | |||||||
Diluted | $ | | $ | | $ | | $ | | |||||||
Weighted average shares outstanding | |||||||||||||||
Basic | | | | | |||||||||||
Diluted | | | | | |||||||||||
Annual cash dividends declared per share | — | — | $ | $ |
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
Three Months Ended May 31, | Nine Months Ended May 31, | |||||||||||||
| 2022 |
| 2021 |
| 2022 | 2021 |
| |||||||
Net income | $ | |
| $ | | $ | | $ | | |||||
Other comprehensive income (loss): | ||||||||||||||
Net unrealized (loss) gain on restricted investments, net of tax | ( | | ( | | ||||||||||
Change in funded status of pension plans, net of tax | | | | | ||||||||||
Foreign currency translation adjustment | ( | | ( | | ||||||||||
Total other comprehensive income (loss) | ( | | ( | | ||||||||||
Comprehensive income | $ | | $ | | $ | | $ | | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements
6
CHASE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
THREE MONTHS ENDED MAY 31, 2022 AND 2021
(UNAUDITED)
In thousands, except share and per share amounts
Additional | Accumulated Other | Total | |||||||||||||||
Common Stock | Paid-In | Comprehensive | Retained | Stockholders' | |||||||||||||
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Earnings |
| Equity | ||||||
Balance at February 28, 2021 | | $ | $ | $ | ( | $ | $ | ||||||||||
Amortization of restricted stock grants | | | |||||||||||||||
Amortization of stock option grants | | | |||||||||||||||
Exercise of stock options | | — | | | |||||||||||||
Common stock received for payment of stock option exercises | ( | — | ( | ( | |||||||||||||
Common stock retained to pay statutory minimum withholding taxes on common stock | ( | — | ( | ( | |||||||||||||
Change in funded status of pension plans, net of tax $ | | | |||||||||||||||
Foreign currency translation adjustment | | | |||||||||||||||
Net unrealized gain (loss) on restricted investments, net of tax $ | | | |||||||||||||||
Net income | | ||||||||||||||||
Balance at May 31, 2021 | | $ | $ | | $ | ( | $ | | $ | | |||||||
Balance at February 28, 2022 | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Restricted stock grants, net of forfeitures | ( | — | — | ||||||||||||||
Amortization of restricted stock grants | | | |||||||||||||||
Amortization of stock option grants | | | |||||||||||||||
Change in funded status of pension plans, net of tax $ | | | |||||||||||||||
Foreign currency translation adjustment | ( | ( | |||||||||||||||
Net unrealized gain (loss) on restricted investments, net of tax ($ | ( | ( | |||||||||||||||
Net income | | | |||||||||||||||
Balance at May 31, 2022 | | $ | | $ | | $ | ( | $ | | $ | | ||||||
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
Additional | Accumulated Other | Total | |||||||||||||||
Common Stock | Paid-In | Comprehensive | Retained | Stockholders' | |||||||||||||
| Shares |
| Amount |
| Capital |
| Income (Loss) |
| Earnings |
| Equity | ||||||
Balance at August 31, 2020 | | $ | $ | $ | ( | $ | $ | ||||||||||
Restricted stock grants, net of forfeitures | | ( | — | ||||||||||||||
Amortization of restricted stock grants | | ||||||||||||||||
Amortization of stock option grants | | ||||||||||||||||
Exercise of stock options | | — | | ||||||||||||||
Common stock received for payment of stock option exercises | ( | — | ( | ( | |||||||||||||
Common stock retained to pay statutory minimum withholding taxes on common stock | ( | — | ( | ( | |||||||||||||
Cash dividend on common stock, $ | ( | ( | |||||||||||||||
Change in funded status of pension plans, net of tax $ | | ||||||||||||||||
Foreign currency translation adjustment | | ||||||||||||||||
Net unrealized gain (loss) on restricted investments, net of tax $ | | ||||||||||||||||
Net income | | ||||||||||||||||
Balance at May 31, 2021 | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Balance at August 31, 2021 | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Restricted stock grants, net of forfeitures | | | ( | — | |||||||||||||
Amortization of restricted stock grants | | | |||||||||||||||
Amortization of stock option grants | | | |||||||||||||||
Cash dividend on common stock, $ | ( | ( | |||||||||||||||
Change in funded status of pension plans, net of tax $ | | | |||||||||||||||
Foreign currency translation adjustment | ( | ( | |||||||||||||||
Net unrealized gain (loss) on restricted investments, net of tax ($ | ( | ( | |||||||||||||||
Net income | | | |||||||||||||||
Balance at May 31, 2022 | | $ | | $ | | $ | ( | $ | | $ | | ||||||
See accompanying notes to the unaudited condensed consolidated financial statements
8
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 | $ | | $ | ||||||
Adjustments to reconcile net income to net cash provided by operating activities | |||||||||
(Gain) Loss on contingent consideration | ( | | |||||||
Depreciation | | ||||||||
Amortization | | ||||||||
Provision for allowance for doubtful accounts | | ( | |||||||
Stock-based compensation | | ||||||||
Realized gain on restricted investments | ( | ( | |||||||
Deferred taxes | ( | — | |||||||
Increase (decrease) from changes in assets and liabilities | |||||||||
Accounts receivable | ( | ( | |||||||
Inventory | ( | ||||||||
Prepaid expenses and other assets | ( | ( | |||||||
Accounts payable | ( | ||||||||
Accrued compensation and other expenses | ( | ||||||||
Accrued income taxes | ( | ( | |||||||
Net cash provided by operating activities | | | |||||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||||
Purchases of property, plant and equipment | ( | ( | |||||||
Payments for acquisitions | — | ( | |||||||
Changes in restricted investments | ( | ( | |||||||
Net cash used in investing activities | ( | ( | |||||||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||||
Dividend paid | ( | ( | |||||||
Proceeds from exercise of common stock options | — | | |||||||
Payments of taxes on stock options and restricted stock | — | ( | |||||||
Net cash used in financing activities | ( | ( | |||||||
INCREASE IN CASH & CASH EQUIVALENTS | | | |||||||
Effect of foreign exchange rates on cash | ( | | |||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | | ||||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | | $ | | |||||
Non-cash Investing and Financing Activities | |||||||||
Common stock received for payment of stock option exercises | $ | — | $ | ||||||
Property, plant and equipment additions included in accounts payable | $ | | $ |
See accompanying notes to the unaudited condensed consolidated financial statements
9
CHASE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In thousands, except share and per share amounts
Note 1 — Basis of Financial Statement Presentation
Description of Business
Chase Corporation (the “Company,” “Chase,” “we,” or “us”), a global specialty chemicals company founded in 1946, is a leading manufacturer of protective materials for high-reliability applications across diverse market sectors. The Company’s strategy is to maximize the performance of its core businesses and brands while seeking future opportunities through strategic acquisitions. Through investments in facilities, systems and organizational consolidation, the Company seeks to improve performance and gain economies of scale.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“U.S. GAAP”) for interim financial reporting, and instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Therefore, they do not include all information and footnote disclosures necessary for a complete presentation of Chase Corporation’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The year-end condensed balance sheet was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. Chase Corporation filed audited consolidated financial statements which included all information and notes necessary for such a complete presentation for the three years ended August 31, 2021 in conjunction with its 2021 Annual Report on Form 10-K. Certain immaterial reclassifications have been made to the prior year amounts to conform to the current year’s presentation.
The results of operations for the interim period ended May 31, 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, 2021 which are contained in the Company’s 2021 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, 2022, and the results of its operations, comprehensive income, changes in equity and cash flows for the interim periods ended May 31, 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 are measured using the euro as the functional currency. The financial position and results of the Company’s HumiSeal India Private Limited business are measured using the Indian rupee as the functional currency. The functional currency for all Chase Corporation’s other operations is the U.S. dollar. Foreign currency translation gains and losses are determined using current exchange rates for monetary items and historical exchange rates for other balance sheet items and are recorded as a change in other comprehensive income. Transaction gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of each applicable operation are included in other income (expense) on the condensed consolidated statements of operations, and were $
10
Other Business Developments
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 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 $
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 $
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 $
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 $
11
On September 1, 2020 (the first day of fiscal 2021), the Company acquired all the capital stock of ABchimie for €
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. 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 Issued Accounting Pronouncements
In November 2021, 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 start 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.
Recently Adopted Accounting Pronouncements
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 dependent on the magnitude and nature of future acquired entities.
Note 3 — Inventory
Inventory consisted of the following as of May 31, 2022 and August 31, 2021:
May 31, | August 31, | ||||||
|
| 2022 |
| 2021 | |||
Raw materials | $ | | $ | | |||
Work in process | | | |||||
Finished goods | | | |||||
Total Inventory | $ | | $ | |
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, |
| ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||||
Basic Earnings per Share | ||||||||||||||
Net income |
| $ | |
| $ | |
| $ | |
| $ | | ||
Less: Allocated to participating securities | ||||||||||||||
Net income available to common shareholders |
| $ | |
| $ | |
| $ | |
| $ | | ||
Basic weighted average shares outstanding | ||||||||||||||
Net income per share - Basic |
| $ | |
| $ | |
| $ | |
| $ | | ||
Diluted Earnings per Share | ||||||||||||||
Net income |
| $ | |
| $ | |
| $ | |
| $ | | ||
Less: Allocated to participating securities | ||||||||||||||
Net income available to common shareholders |
| $ | |
| $ | |
| $ | |
| $ | | ||
Basic weighted average shares outstanding | ||||||||||||||
Additional dilutive common stock equivalents | ||||||||||||||
Diluted weighted average shares outstanding | ||||||||||||||
Net income per share - Diluted |
| $ | |
| $ | |
| $ | |
| $ | |
Included in the calculation of dilutive common stock equivalents are the unvested portion of restricted stock and stock options. For the three- and nine-month periods ended May 31, 2022, stock options to purchase
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
Based on the fiscal year 2021 results,
In August 2021, the Board of Directors of the Company approved the fiscal year 2022 Long Term Incentive Plan (“2022 LTIP”) for executive officers and other members of management. The 2022 LTIP is an equity-based plan with a grant date of September 1, 2021 and contains the following equity components:
Restricted Shares — (a) a performance and service-based restricted stock grant of
Stock Options — options to purchase
Restricted stock from fiscal 2020 grants in the amount of
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
In February 2022, as part of their standard compensation for board service, non-employee members of the Board received a total grant of
15
Note 6 — Segment Data and Foreign Operations
The Company is organized into
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, polymeric microspheres, polyurethane dispersions and superabsorbent polymers. Beginning September 1, 2020, the Adhesives, Sealants and Additives segment includes the acquired operations of ABchimie, within the electronic and industrial coatings product line and beginning February 5, 2021, the acquired operations of ETi, within the functional additives product line.
The Industrial Tapes segment features wire and cable materials, specialty tapes and other laminated and coated products. The segment derives its competitive advantage through its proven chemistries, its diverse specialty offerings and the reliability its supply chain offers to end customers. These products are generally used in the assembly of other manufacturers’ products, with demand typically dependent upon general economic conditions. The Industrial Tapes segment sells mostly to established markets, with some exposure to growth opportunities through further development of existing products. Markets served include wire and cable manufacturing, utilities and telecommunications, and electronics packaging. The segment’s offerings include insulating and conducting materials for wire and cable manufacturers, laminated durable papers, laminates for the packaging and industrial laminate markets, custom manufacturing services, pulling and detection tapes used in the installation, measurement and location of fiber optic cables and water and natural gas lines and cover tapes essential to delivering semiconductor components via tape-and-reel packaging.
The Corrosion Protection and Waterproofing segment is principally composed of project-oriented product offerings that are primarily sold and used as “Chase” branded products. End markets include new and existing infrastructure projects on oil, gas, water and wastewater pipelines, highways and bridge decks, water and wastewater containment systems, and commercial 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, | ||||||||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 |
|
| |||||||||
Revenue | |||||||||||||||||
Adhesives, Sealants and Additives | $ | | $ | $ | | $ | | ||||||||||
Industrial Tapes | | | | ||||||||||||||
Corrosion Protection and Waterproofing | | | | ||||||||||||||
Total | $ | | $ | | $ | | $ | | |||||||||
Income before income taxes | |||||||||||||||||
Adhesives, Sealants and Additives | $ | | (a) | $ | (c) | $ | | (a) | $ | | (c) | ||||||
Industrial Tapes | | | | ||||||||||||||
Corrosion Protection and Waterproofing | | | | ||||||||||||||
Total for reportable segments | | | | | |||||||||||||
Corporate and common costs | ( | (b) | ( | (c) | ( | (b) | ( | (c) | |||||||||
Total | $ | | $ | | $ | | $ | | |||||||||
Includes the following costs by segment: | |||||||||||||||||
Adhesives, Sealants and Additives | |||||||||||||||||
Interest | $ | | $ | $ | | $ | | ||||||||||
Depreciation | | | | ||||||||||||||
Amortization | | | | ||||||||||||||
Industrial Tapes | |||||||||||||||||
Interest | $ | | $ | $ | | $ | | ||||||||||
Depreciation | | | | ||||||||||||||
Amortization | | | | ||||||||||||||
Corrosion Protection and Waterproofing | |||||||||||||||||
Interest | $ | | $ | $ | | $ | | ||||||||||
Depreciation | | | | ||||||||||||||
Amortization | | | |
(a) | Includes a $ |
(b) | Includes $ |
(c) | Includes $ |
17
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 | $ | | $ | | ||||
Industrial Tapes | | | ||||||
Corrosion Protection and Waterproofing | | | ||||||
Total for reportable segments | | | ||||||
Corporate and common assets | | | ||||||
Total | $ | | $ | |
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 | $ | | $ | | $ | | $ | | |||||||||
United Kingdom | | | | | |||||||||||||
All other foreign (1) | | | | | |||||||||||||
Total | $ | | $ | | $ | | $ | | |||||||||
(1) | Comprises sales orders originated from the Company’s French locations, royalty revenue attributable to its licensed manufacturer in Asia, and Chase foreign manufacturing operations. |
As of May 31, 2022 and August 31, 2021 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, | |||||||
2022 |
| 2021 | ||||||
Long-Lived Assets | ||||||||
United States | ||||||||
Property, plant and equipment, net | $ | | $ | | ||||
Goodwill and Intangible assets, less accumulated amortization | | | ||||||
United Kingdom | ||||||||
Property, plant and equipment, net | | | ||||||
Goodwill and Intangible assets, less accumulated amortization | | | ||||||
All other foreign | ||||||||
Property, plant and equipment, net | | | ||||||
Goodwill and Intangible assets, less accumulated amortization | | | ||||||
Total | ||||||||
Property, plant and equipment, net | $ | | $ | | ||||
Goodwill and Intangible assets, less accumulated amortization | $ | | $ | |
18
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 |
| |||||
Balance at August 31, 2021 | $ | $ | $ | $ | |||||||||
Foreign currency translation adjustment | ( | — | ( | ( | |||||||||
Balance at May 31, 2022 | $ | | $ | | $ | | $ | | |||||
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
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, 2022 and August 31, 2021:
Weighted Average | Gross Carrying | Accumulated | Net Carrying | |||||||||
| Amortization Period |
| Value |
| Amortization |
| Value |
| ||||
May 31, 2022 | ||||||||||||
Patents and agreements | years | $ | | $ | | $ | | |||||
Formulas and technology | years | | | | ||||||||
Trade names | years | | | | ||||||||
Customer lists and relationships | years | | | | ||||||||
$ | | $ | | $ | | |||||||
August 31, 2021 | ||||||||||||
Patents and agreements | years | $ | | $ | | $ | | |||||
Formulas and technology | years | | | | ||||||||
Trade names | years | | | | ||||||||
Customer lists and relationships | years | | | | ||||||||
$ | | $ | | $ | |
19
Aggregate amortization expense related to intangible assets for the nine months ended May 31, 2022 and 2021 was $
Years ending August 31, |
| |||
2022 (remaining 3 months) | $ | |
| |
2023 | | |||
2024 | | |||
2025 | | |||
2026 | | |||
2027 | |
Note 8 — Leases
The Company accounts for leases in accordance to 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 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, 2022 and August 31, 2021:
May 31, | August 31, | |||||
2022 | 2021 | |||||
Assets |
|
| ||||
Operating lease right-of-use asset | $ | | $ | | ||
Liabilities | ||||||
$ | | $ | | |||
Operating lease long-term liabilities | | | ||||
Total lease liability | $ | | $ | | ||
20
Lease cost
The components of lease costs for the three and nine months ended May 31, 2022 and 2021 are as follows:
Three Months Ended May 31, | Nine Months Ended May 31, | ||||||||||||
2022 | 2021 | 2022 | 2021 | ||||||||||
Operating lease cost (a) | $ | | $ | | $ | | $ | |
(a) | Includes short-term leases and variable lease costs (e.g. common area maintenance), which are immaterial. |
Maturity of lease liability
The maturity of the Company's lease liabilities at May 31, 2022 was as follows:
Future Operating | |||
Year ending August 31, |
| Lease Payments | |
2022 (remaining 3 months) | | ||
2023 | | ||
2024 | | ||
2025 | | ||
2026 | | ||
2027 and thereafter | | ||
Less: Interest | ( | ||
Present value of lease liabilities | $ | |
The weighted average remaining lease term and discount rates are as follows:
May 31, | August 31, | ||||||
2022 | 2021 | ||||||
Lease Term and Discount Rate |
|
| |||||
Weighted average remaining lease term (years) | |||||||
Operating leases | |||||||
Weighted average discount rate (percentage) | |||||||
Operating leases | | % | | % |
Other Information
Supplemental cash flow information related to leases is as follows:
Nine Months Ended May 31, | ||||||
2022 | 2021 | |||||
Operating cash outflows from operating leases | $ | | $ | | ||
Total cash paid for amounts included in the measurement of lease liabilities | $ | | $ | |
21
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, 2022 and August 31, 2021:
May 31, | August 31, | |||||
| 2022 |
| 2021 | |||
Contract Assets | ||||||
Adhesives, Sealants and Additives | $ | | $ | | ||
Industrial Tapes | | | ||||
Corrosion Protection and Waterproofing | | | ||||
Total | $ | | $ | |
The Company did
22
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, 2022 and 2021 was as follows:
Three Months Ended May 31, 2022 | ||||||||||||||
Adhesives, Sealants | Industrial | Corrosion Protection | Consolidated | |||||||||||
and Additives |
| Tapes | and Waterproofing | Revenue | ||||||||||
Revenue | ||||||||||||||
North America | $ | | $ | | $ | | $ | | ||||||
Asia\Middle East | | | | | ||||||||||
Europe | | | | | ||||||||||
All other foreign | | | | | ||||||||||
Total Revenue | $ | | $ | | $ | | $ | | ||||||
Nine Months Ended May 31, 2022 | ||||||||||||||
Adhesives, Sealants | Industrial | Corrosion Protection | Consolidated | |||||||||||
and Additives |
| Tapes | and Waterproofing | Revenue | ||||||||||
Revenue | ||||||||||||||
North America | $ | | $ | | $ | | $ | | ||||||
Asia\Middle East | | | | | ||||||||||
Europe | | | | | ||||||||||
All other foreign | | | | | ||||||||||
Total Revenue | $ | | $ | | $ | | $ | | ||||||
Three Months Ended May 31, 2021 | ||||||||||||||
Adhesives, Sealants | Industrial | Corrosion Protection | Consolidated | |||||||||||
and Additives |
| Tapes | and Waterproofing | Revenue | ||||||||||
Revenue | ||||||||||||||
North America | $ | | $ | | $ | | $ | | ||||||
Asia\Middle East | | | | | ||||||||||
Europe | | | | | ||||||||||
All other foreign | | | | | ||||||||||
Total Revenue | $ | | $ | | $ | | $ | | ||||||
Nine Months Ended May 31, 2021 | ||||||||||||||
Adhesives, Sealants | Industrial | Corrosion Protection | Consolidated | |||||||||||
and Additives |
| Tapes | and Waterproofing | Revenue | ||||||||||
Revenue | ||||||||||||||
North America | $ | | $ | | $ | | $ | | ||||||
Asia\Middle East | | | | | ||||||||||
Europe | | | | | ||||||||||
All other foreign | | | | | ||||||||||
Total Revenue | $ | | $ | | $ | | $ | | ||||||
23
Note 10 — Commitments and Contingencies
The Company is involved from time to time in litigation incidental to the conduct of its business. Although the Company does not expect that the outcome in any of these matters, individually or collectively, will have a material adverse effect on its financial condition, results of operations or cash flows, litigation is inherently unpredictable. Therefore, judgments could be rendered, or settlements agreed to that could adversely affect the Company’s operating results or cash flows in a particular period. The Company routinely assesses all its litigation and threatened litigation as to the probability of ultimately incurring a liability and records its best estimate of the ultimate loss in situations where it assesses the likelihood of loss as probable.
Note 11 — Pensions and Other Postretirement Benefits
The components of net periodic benefit cost for the three and nine months ended May 31, 2022 and 2021 were as follows:
Three Months Ended May 31, | Nine Months Ended May 31, | ||||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
|
| ||||||
Components of net periodic benefit cost | |||||||||||||||
Service cost | $ | | $ | | $ | | $ | | |||||||
| | | | ||||||||||||
( | ( | ( | ( | ||||||||||||
| | | | ||||||||||||
| | | | ||||||||||||
Net periodic benefit cost | $ | | $ | | $ | | $ | |
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 $
24
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, 2022 and August 31, 2021 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, 2022 and August 31, 2021:
Fair value measurement category | |||||||||||||||
Quoted prices | Significant other | Significant | |||||||||||||
Fair value | in active markets | observable inputs | unobservable inputs | ||||||||||||
| measurement date |
| Total |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| |||||
Assets: | |||||||||||||||
Restricted investments | May 31, 2022 | $ | | $ | | $ | | $ | — | ||||||
Restricted investments | August 31, 2021 | $ | | $ | | $ | | $ | — |
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, 2022 and August 31, 2021:
Fair value measurement category | |||||||||||||||
Quoted prices | Significant other | Significant | |||||||||||||
Fair value | in active markets | observable inputs | unobservable inputs | ||||||||||||
| measurement date |
| Total |
| (Level 1) |
| (Level 2) |
| (Level 3) |
| |||||
Liabilities: | |||||||||||||||
Long-term debt | May 31, 2022 | $ | — | $ | — | $ | — | $ | — | ||||||
Contingent consideration | May 31, 2022 | $ | | $ | — | $ | — | $ | | ||||||
Long-term debt | August 31, 2021 | $ | — | $ | — | $ | — | $ | — | ||||||
Contingent consideration | August 31, 2021 | $ | | $ | — | $ | — | $ | |
The long-term debt (including any current portion of long-term debt) had
In connection with accounting for the ABchimie acquisition on September 1, 2020, the Company recorded a contingent consideration liability included within Other liabilities on the condensed consolidated balance sheet of €
25
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 | ||||||||||||
Restricted | Status of | Translation | |||||||||||
| Investments |
| Pension Plans |
| Adjustment |
| Total |
| |||||
Balance at August 31, 2020 | $ | | $ | ( | $ | ( | $ | ( | |||||
Other comprehensive gains (losses) before reclassifications (1) | | — | | | |||||||||
Reclassifications to net income of previously deferred (gains) losses (2) | ( | | — | | |||||||||
Other comprehensive income (loss) | | | | | |||||||||
Balance at May 31, 2021 | $ | | $ | ( | $ | ( | $ | ( | |||||
Balance at August 31, 2021 | $ | | $ | ( | $ | ( | $ | ( | |||||
Other comprehensive gains (losses) before reclassifications (3) | ( | — | ( | ( | |||||||||
Reclassifications to net income of previously deferred (gains) losses (4) | ( | | — | | |||||||||
Other comprehensive income (loss) | ( | | ( | ( | |||||||||
Balance at May 31, 2022 | $ | | $ | ( | $ | ( | $ | ( |
(1) | Net of tax benefit of $ |
(2) | Net of tax expense of $ |
(3) | Net of tax expense of $ |
(4) | Net of tax expense of $ |
The following table summarizes the reclassifications from accumulated other comprehensive income (loss) to the unaudited condensed consolidated statements of income:
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive | |||||||||||||||||||
Income (Loss) into Income | |||||||||||||||||||
Three Months Ended May 31, | Nine Months Ended May 31, | Location of Gain (Loss) Reclassified from Accumulated | |||||||||||||||||
|
|
| 2022 |
| 2021 |
|
| 2022 |
| 2021 | Other Comprehensive Income (Loss) into Income |
| |||||||
Gains on Restricted Investments: | |||||||||||||||||||
Realized loss (gain) on sale of restricted investments | $ | ( | $ | ( | $ | ( | $ | ( | Selling, general and administrative expenses | ||||||||||
Tax expense (benefit) | | | | | |||||||||||||||
Gain net of tax | $ | ( | $ | ( | $ | ( | $ | ( | |||||||||||
Loss on Funded Pension Plan adjustments: | |||||||||||||||||||
Amortization of prior pension service costs and unrecognized losses | | | | | Other income (expense) | ||||||||||||||
Tax expense (benefit) | ( | ( | ( | ( | |||||||||||||||
Loss net of tax | $ | | $ | | $ | | $ | | |||||||||||
Total net loss reclassified for the period | $ | | $ | | $ | | $ | |
26
Note 14 — Income Taxes
For the three and nine months ended May 31, 2022, the Company’s recognized effective tax rate was
The Company has applied the U.S. statutory Federal rate of
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 fiscal periods ended May 31, 2022 and 2021. Additionally, the Company concluded that the Base Erosion and Anti Abuse Tax (“BEAT”) provision of the Tax Act, which also became applicable to the Company in fiscal 2019, had no effect on its effective tax rate for the third quarter and year-to-date fiscal periods ended May 31, 2022 and 2021.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act, among other things, included a technical correction to the Tax Act which will allow accelerated deductions for qualified improvement property. The Company 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 fiscal periods ended May 31, 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 periods ended May 31, 2022, FDII had a favorable impact on the Company’s effective tax rate.
0Note 15 — Operations Optimization Costs
Relocation of Chase Corporate Headquarters
The Company substantially completed the relocation of its Corporate Headquarters to another location within Westwood, MA during the second quarter of the fiscal year 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 expenses related to the Westwood move of $
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
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 $
28
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 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, and to provide for additional liquidity to finance acquisitions, working capital and capital expenditures, and for other general corporate purposes. Under the New Credit Agreement, Chase obtained an increased revolving credit loan (the “New Revolving Facility”), with borrowing capabilities not to exceed $
The New Credit Agreement has a
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 $
The Prior Credit Agreement was an all-revolving credit facility with a borrowing capacity of $
29
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 $
The excess of the purchase price over the net tangible and intangible assets acquired resulted in goodwill of $
Acquisition of ABchimie
On September 1, 2020 (first day of fiscal 2021), the Company acquired all the capital stock of ABchimie for €
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 $
30
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. 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.
Overview
General
The Company’s revenue grew in the third fiscal quarter and nine months ended May 31, 2022, with all three of its reportable operating segments surpassing sales achieved in the prior year quarter and year-to-date fiscal periods. Despite the ongoing challenges of the global operating environment 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.
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 half of fiscal 2022], the Company continues to have a less favorable gross margin percentage in the current quarter and year-to-date period compared to the prior year periods. Lower operating costs seen in the current quarter resulted in higher operating income over the comparable 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 to be negatively impacted by both: a.) increased input costs caused by continued global raw material inflationary pressures, increased logistics costs and a more competitive labor market; and b.) a less favorable sales mix, with sales increases in 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.
The Company continues to work with our customers and suppliers in an effort to counteract margin compression. However, given the delay experienced due to notification period requirements with certain customers and 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.
31
Revenue by Segment
Chase Corporation has three reportable operating segments as summarized below:
Segment |
| Product Lines |
| Manufacturing Focus and Products |
Adhesives, Sealants and Additives | Electronic and Industrial Coatings | Protective coatings, including moisture protective coatings and cleaning chemistries, and customized sealant and adhesive systems for electronics; polyurethane dispersions, polymeric microspheres and superabsorbent polymers. | ||
Industrial Tapes | Cable Materials Specialty Products Pulling and Detection Electronic Materials | Protective tape and coating products and services, including insulating and conducting materials for wire and cable manufacturers; laminated durable papers, packaging and industrial laminate products and custom manufacturing services; pulling and detection tapes used in the installation, measurement and location of fiber optic cables and water and natural gas lines; cover tapes essential to delivering semiconductor components via tape-and-reel packaging. | ||
Corrosion Protection and Waterproofing | Coating and Lining Systems Pipeline Coatings Building Envelope Bridge and Highway | Protective coatings and tape products, including coating and lining systems for use in liquid storage and containment applications; protective coatings for pipeline and general construction applications; adhesives and sealants used in architectural and building envelope waterproofing applications; high-performance polymeric asphalt additives and expansion and control joint systems for use in the transportation and architectural markets. |
Revenue for our Adhesives, Sealants and Additives segment increased for the third quarter and year-to-date periods against the comparable prior year periods with increased demand for 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.
Revenue for our Industrial Tapes segment surpassed the COVID-19 impacted third quarter and year-to-date prior year sales with continued increased demand for our North American-focused cable materials, and pulling and detection product lines. Tempering the 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 increase in sales over the prior year-to-date comparable period.
Revenue for our Corrosion Protection and Waterproofing segment surpassed the prior year quarter and year-to-date periods with increased demand from our pipeline coatings line benefiting in the current quarter, and our building envelope lines benefitting both in the current quarter and year-to-date periods. Partially offsetting these increases in revenue were current quarter and year-to-date reductions in net sales volume from our bridge and highway product lines. The coatings and lining systems product line also experienced reduction 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.
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Balance Sheet and Cash Flow
Chase Corporation’s balance sheet remained strong as of May 31, 2022, with cash on hand of $124,683,000, and a current ratio of 8.1. The Company’s cash position remained healthy, as did cash flow from operations. Chase continued its strategic inventory build during the third 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 the second fiscal quarter Chase Corporation paid out its largest ever annual cash dividend of $9,460,000 on December 9, 2021.
The Company held no outstanding balance on its $200,000,000 revolving credit facility as of May 31, 2022. 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):
| % of |
|
| % of |
|
| % of |
|
| % of |
| |||||||||||
Three Months Ended | Total | Three Months Ended | Total | Nine Months Ended | Total | Nine Months Ended | Total |
| ||||||||||||||
| May 31, 2022 |
| Revenue |
| May 31, 2021 |
| Revenue |
| May 31, 2022 |
| Revenue |
| May 31, 2021 |
| Revenue | |||||||
Revenue | ||||||||||||||||||||||
Adhesives, Sealants and Additives | $ | 36,771 | 41 | % | $ | 33,861 | 43 | % | $ | 99,600 | 42 | % | $ | 95,507 | 44 | % | ||||||
Industrial Tapes | 38,329 | 43 | % | 32,249 | 41 | % | 104,420 | 44 | % | 87,085 | 40 | % | ||||||||||
Corrosion Protection and Waterproofing |
| 13,519 | 15 | % |
| 13,483 | 17 | % |
| 33,562 | 14 | % |
| 32,624 | 15 | % | ||||||
Total | $ | 88,619 | $ | 79,593 | $ | 237,582 | $ | 215,216 | ||||||||||||||
% of |
| % of |
| % of | % of | |||||||||||||||||
Three Months Ended | Segment | Three Months Ended | Segment | Nine Months Ended | Segment | Nine Months Ended | Segment | |||||||||||||||
May 31, 2022 | Revenue | May 31, 2021 | Revenue | May 31, 2022 | Revenue | May 31, 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 | % | ||
Industrial Tapes | 10,985 | 29 | % | 10,945 | 34 | % | 30,525 | 29 | % | 27,273 | 31 | % | ||||||||||
Corrosion Protection and Waterproofing |
| 5,353 | 40 | % |
| 5,098 | 38 | % |
| 12,683 | 38 | % |
| 11,599 | 36 | % | ||||||
Total for reportable segments |
| 28,658 | 32 | % |
| 27,025 | 34 | % |
| 70,927 | 30 | % |
| 69,970 | 33 | % | ||||||
Corporate and Common Costs |
| (9,310) | (b) |
| (9,282) | (c) |
| (26,095) | (b) |
| (25,385) | (c) | ||||||||||
Total | $ | 19,348 | 22 | % | $ | 17,743 | 22 | % | $ | 44,832 | 19 | % | $ | 44,585 | 21 | % | ||||||
Note: Some percentage of total revenue amounts may not sum to 100% due to rounding.
(a) | Includes a $474 gain in the third quarter and a $199 year-to-date gain on the adjustment of the performance-based earn-out contingent consideration associated with the September 2020 acquisition of ABchimie and $27 and $328 in operation optimization costs in the third quarter and year-to-date period, respectively, related to the move from Woburn, MA to O’Hara Township, PA and $0 and $147 of operations optimization costs in the third quarter and year-to-date period related to the move from Newark, CA to Hickory, NC |
(b) | Includes $32 and $232 of operations optimization costs in the three- and nine-month period, respectively, related to the Company’s move to the new Corporate Headquarters to another location in Westwood, MA substantially completed in the second quarter of the fiscal year |
(c) | Includes $262 and $995 loss on the upward adjustment of the performance-based earn out contingent consideration associated with the September 2020 acquisition of ABchimie in the third quarter and year-to-date fiscal 2021 periods and $22 and $120 operations optimization in exit costs related to the movement of the sealants system business out of the Newark, CA location and into the Hickory, NC location during the third and year-to-date period of fiscal 2021. Also includes $128 in acquisition-related expense in the nine month period in corporate and common costs attributable to the February 2021 acquisition of the operations of ETi |
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Total Revenue
Total revenue increased $9,026,000, or 11% to $88,619,000 for the quarter ended May 31, 2022, compared to $79,593,000 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, or 9% and $4,093,000, or 4% in the current quarter and year-to-date period, respectively. Positively impacting sales for both the current quarter and year-to-date period were demand-driven sales increases of $3,416,000 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.
Compared to the prior year quarter and year-to-date period, revenue in the Company’s Industrial Tapes segment increased $6,080,000, or 19% and $17,335,000, or 20%, respectively. Positively impacting sales for both the current quarter and year-to-date period were sales price and volume-driven increases of $6,351,000 and $17,063,000, respectively due to its wire and cable, pulling and detection, and 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.
Revenue in the Company’s Corrosion Protection and Waterproofing segment increased $36,000, or less than 1% for the current quarter and increased $938,000, or 3% in the year-to-date period, respectively. Positively impacting segment sales for the current quarter was the demand-driven sales price and volume increases in its pipeline coatings and building envelope product lines totaling $728,000 and $299,000, respectively, due to continued recovery in our oil and gas pipeline business attributable to our pipeline coatings product line and increased construction demand attributable to our building envelope product lines. Negatively impacting the segment’s sales was a decrease in revenue from its bridge and highway product lines 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 compared to the prior year comparable period.
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Cost of Products and Services Sold
Cost of products and services sold increased $8,126,000, or 18% to $54,438,000 for the quarter ended May 31, 2022, compared to $46,312,000 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, | ||||||||||||
Cost of products and services sold |
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| ||||
Adhesives, Sealants and Additives | 57 | % | 56 | % | 60 | % | 55 | % | |||||
Industrial Tapes | 67 | 62 | 67 | 64 | |||||||||
Corrosion Protection and Waterproofing | 56 | 55 | 56 | 57 | |||||||||
Total Company | 61 | % | 58 | % | 63 | % | 59 | % |
Cost of products and services sold in the Adhesives, Sealants and Additives segment was $21,073,000 and $59,828,000 in the current quarter and year-to-date period compared to $18,850,000 and $52,461,000 in the comparable periods in the prior year. Cost of products and services sold in the Industrial Tapes segment was $25,836,000 and $69,845,000 in the current quarter and year-to-date period compared to $20,043,000 and $55,853,000 in the comparable periods in the prior year. Cost of products sold in the Corrosion Protection and Waterproofing segment was $7,529,000 and $18,957,000 in the current quarter and year-to-date period compared to $7,419,000 and $18,518,000 in the comparable periods in the prior year.
As a percentage of revenue, cost of products and services increased for the Adhesives, Sealants and Additives and Industrial Tapes segment in the current quarter and year-to-date period. As a percentage of revenue, costs of products and services sold for the Corrosion Protection and Waterproofing segment increased in the current quarter and decreased in the year-to-date period. The decrease in the relative gross margin for the Adhesives, Sealants and Additives and Industrial Tapes segment for the current quarter and year-to-date period was due to continued global raw material inflationary pressures, increased logistics and freight costs and a more competitive labor market. Additionally, 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 also experienced a less favorable sales mix within the segment itself, with historically less favorable margin products constituting a comparatively larger part of total segment sales. The Company has implemented and continues to implement customer price adjustments 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.
With the composition of the Company’s finished goods and the markets it serves, the costs of certain commodities (including petroleum-based solvents, films, yarns, polymers and nonwovens, aluminum and copper foils, specialty papers, and various resins, adhesives and inks) directly and indirectly affect both the purchase price of the raw materials and market demand for its product offerings. 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, or 1% to $13,807,000 for the quarter ended May 31, 2022 compared to $13,969,000 in the 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-date increase in activity is attributed to total increased selling and sales activity costs over the comparable prior year-to-date period. As a percentage of revenue, selling, general and administrative expenses represented 16% and 17% for the three- and nine-month periods of the fiscal year, respectively, and 18% in the comparable three- and nine-month periods of the prior year.
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Research and Product Development Costs
Research and product development costs increased $229,000, or 24% percent to $1,186,000 during the third quarter of fiscal 2022, compared to $957,000 in fiscal 2021. Research and product development costs increased $240,000, or 8% percent to $3,274,000 during the first nine months 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.
Operations Optimization Costs
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 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 facility will consolidate and house research and development operations previously conducted at the previous Westwood, MA and Woburn, MA locations. Operations optimization costs related to the Westwood move of $32,000 and $232,000 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 $27,000 and $328,000, 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 fourth quarter of the fiscal year.
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 $977,000 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.
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(Gain) loss on Contingent Consideration
As a component of the September 1, 2020 acquisition of ABchimie, the Company incurred a performance-based earn out liability potentially worth an additional €7,000,000 (approximately $8,330,000 at the time of the transaction) in consideration. Following its initial recording of an accrual for $928,000 at the acquisition date, $1,664,000 in expense related to adjustments to the performance-based earn out accrual was recorded during fiscal year ended August 31, 2021 (with $733,000 of expense recognized in the second quarter and first half of fiscal 2021). The Company recognized a gain of $474,000 in the third quarter and a net $199,000 gain over the fiscal year-to-date period related to the performance-based contingent consideration.
Interest Expense
Interest expense increased $21,000, or 31% to $89,000 for the quarter ended May 31, 2022, compared to $68,000 in the prior year comparable period. Interest expense increased $58,000, or 28% for the first nine months 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.
Other Income (Expense)
Other income (expense) was expense of $166,000 in the quarter ended May 31, 2022, compared to an expense of $260,000 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. 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 fiscal 2022 compared to fiscal 2021 for both the quarter-to-date and year-to-date periods was largely due to the recognition of net foreign exchange gains in fiscal 2022 as compared to a net losses in fiscal 2021.
Income Taxes
For the three 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% and 23.1%, respectively.
For fiscal 2022 and 2021, 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, or 9% to $15,545,000 in the quarter ended May 31, 2022 compared to $14,289,000 in the comparable prior year third 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 increase in net income in the third quarter 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.
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Liquidity and Sources of Capital
The Company’s overall cash and cash equivalents balance increased $5,254,000 to $124,683,000 at May 31, 2022, from $119,429,000 at August 31, 2021. The increase cash balance is primarily attributable to 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. Of the above-noted amounts, $30,402,000 and $26,309,000 were held outside the United States by Chase Corporation and its foreign subsidiaries as of May 31, 2022 and August 31, 2021, respectively. Given the Company’s cash position and borrowing capability in the United States and the potential for increased investment and acquisitions in foreign jurisdictions, prior to the second quarter of fiscal 2018 the Company did not have a history of repatriating a significant portion of its foreign cash. With the passage of the Tax Cuts and Jobs Act (the “Tax Act”) in the second fiscal quarter of 2018, significant changes in the Internal Revenue Code were enacted, changing the U.S. taxable nature of previously unrepatriated foreign earnings. Following the passage of the Tax Act, the Company repatriated $10,499,000 in U.K. foreign earnings in fiscal 2018 and $17,230,000 in fiscal 2019. No additional amounts were repatriated in fiscal year 2020, 2021 and year-to-date fiscal period 2022. Please see Note 14 — “Income Taxes” to the Condensed Consolidated Financial Statements for further discussion of the effects of the Tax Act.
Cash flow provided by operations was $20,286,000 in the first nine months of fiscal year 2022 compared to $43,000,000 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 8.0 as of May 31, 2022 compared to 6.5 as of August 31, 2021, 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.
Cash flow used in investing activities of $3,443,000 was largely due to the cash spent on capital purchases of machinery and equipment in the first nine months of fiscal 2022.
Cash flows used in financing activities of $9,460,000 was due to a cash dividend of $1.00 per share. The dividend was paid on December 9, 2021 to shareholders of record on November 30, 2021.
On July 27, 2021 (the fourth quarter of fiscal 2021), the Company entered into the Second Amended and Restated Credit Agreement (the “New Credit Agreement”) by and among the Company and NEPTCO Incorporated (“NEPTCO”), each of the borrowers, the subsidiary guarantors 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, to provide for additional liquidity to finance acquisitions, working capital and capital expenditures, and for other general corporate purposes. Under the New Credit Agreement, Chase obtained an increased revolving credit loan (the “New 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 of 1.00% to 1.75%, depending on the consolidated net leverage ratio of Chase and its subsidiaries. At May 31, 2022, there was no outstanding principal balance, and as such, no applicable interest rate. The New Credit Agreement has a five-year term with interest payments due at the end of the applicable LIBOR period (but in no event less frequently than the three-month anniversary of the commencement of such LIBOR period) and principal payment due at the expiration of the agreement, July 27, 2026. The New Credit Agreement contains provisions that may replace LIBOR as the benchmark index under certain circumstances. In addition, the Company 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 Loan”, and collectively with the
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New Revolving Facility, the “New Credit Facility”), which New Term Loan shall be payable quarterly in equal installments sufficient to amortize the original principal amount of such Term Loan on a ten year amortization schedule. The outstanding balance on the New Credit Facility is guaranteed by all of Chase’s direct and indirect domestic subsidiaries. The New Credit Facility is subject to restrictive covenants under the New Credit Agreement, and financial covenants that require Chase and its subsidiaries to maintain certain financial ratios on a consolidated basis, including a consolidated net leverage ratio of 3.25 to 1.00 and a consolidated interest coverage ratio of 3.50 to 1.00 (both defined in the New Credit Agreement). Chase Corporation was in compliance with the debt covenants as of May 31, 2022. The New Credit Agreement also places certain Lender-approval requirements as to the size of permitted acquisitions which may be entered into by the Company and its subsidiaries, and allows for a temporary step-up in the allowed consolidated leverage ratio for the four fiscal quarters ending after certain designated acquisitions. Prepayment is allowed by the New Credit Agreement at any time during the term of the agreement, subject to customary notice requirements and the payment of customary LIBOR breakage fees.
The Company has several ongoing capital projects, as well as its facility rationalization and consolidation initiative, which are important to its long-term strategic goals. Machinery and equipment may be added as needed to increase capacity or enhance operating efficiencies in the Company’s production facilities.
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, 2021 for a complete discussion of its contractual obligations.
Recent Accounting Standards
Please see Note 2 — “Recent Accounting Standards” to the Condensed Consolidated Financial Statements for a discussion of the effects of recently issued and recently adopted accounting pronouncements.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles generally accepted in the United States. 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 nine months ended May 31, 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.
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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, 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 its funds were either in demand deposit accounts or investment instruments that meet high credit quality standards, such as money market funds, government securities, or commercial paper.
Chase Corporation’s U.S. operations have limited currency exposure since substantially all transactions are denominated in U.S. dollars. However, the Company’s European and Asian operations are subject to currency exchange fluctuations. The Company continues to review its policies and procedures to control this exposure while maintaining the benefit from these operations and sales not denominated in U.S. dollars. The effect of an immediate hypothetical 10% change in the exchange rate between the British pound and the U.S. dollar would not have a material direct effect on the Company’s overall liquidity. As of May 31, 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 |
| |
GBP |
| British Pound | $ | 17,383 | ||
EUR |
| Euro | $ | 6,518 | ||
CAD |
| Canadian Dollar | $ | 2,528 | ||
CNY |
| Chinese Yuan | $ | 421 | ||
INR |
| Indian Rupee | $ | 223 | ||
The Company will continue to review its current cash balances denominated in foreign currency considering current tax guidelines, including the impact of the Tax Act to the U.S. Internal Revenue Code, working capital requirements, infrastructure improvements and potential acquisitions.
The Company recognized a foreign currency translation loss for the nine months ended May 31, 2022 in the amount of $5,178,000 related to Chase Corporation’s European and Indian operations, which is recorded in other comprehensive income (loss) within its Statement of Equity and Statement of Comprehensive Income. The Company does not have or utilize any derivative financial instruments.
The Company pays interest on its outstanding long-term debt at interest rates that fluctuate based upon changes in various base interest rates. There was no outstanding balance of long-term debt on May 31, 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 an 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’s reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to its management, including its Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
The Company carries out a variety of ongoing procedures under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of its disclosure controls and procedures. Based on the foregoing, the Company’s Chief Executive Officer and Chief Financial Officer concluded that its disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.
Changes in internal control over financial reporting
There have not been any changes in the Company’s internal control over financial reporting during the quarter ended May 31, 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 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, 2021 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: July 11, 2022 | By: | /s/ Adam P. Chase |
Adam P. Chase | ||
President and Chief Executive Officer | ||
Dated: July 11, 2022 | By: | /s/ Michael J. Bourque |
Michael J. Bourque | ||
Treasurer and Chief Financial Officer |
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