CHASE CORP - Quarter Report: 2013 November (Form 10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended November 30, 2013

 

Commission File Number: 1-9852

 

CHASE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

26 Summer Street, Bridgewater, Massachusetts 02324

(Address of Principal Executive Offices, Including Zip Code)

 

(508) 819-4200

(Registrant’s Telephone Number, Including Area Code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  YES x  NO o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o	Accelerated filer x
Non-accelerated filer o (Do not check if a smaller reporting company)	Smaller reporting company o

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  YES o  NO x

 

The number of shares of Common Stock outstanding as of December 31, 2013 was 9,097,078.

 

 

Table of Contents

 

CHASE CORPORATION

INDEX TO FORM 10-Q

 

For the Quarter Ended November 30, 2013

 

Part I — FINANCIAL INFORMATION
Item 1 — Unaudited Financial Statements
Consolidated Balance Sheets as of November 30, 2013 and August 31, 2013	3
Consolidated Statements of Operations for the three months ended November 30, 2013 and 2012	4
Consolidated Statements of Comprehensive Income for the three months ended November 30, 2013 and 2012	5
Consolidated Statement of Equity for the three months ended November 30, 2013	6
Consolidated Statements of Cash Flows for the three months ended November 30, 2013 and 2012	7
Notes to Consolidated Financial Statements	8
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3 — Quantitative and Qualitative Disclosures About Market Risk	25
Item 4 — Controls and Procedures	25
Part II — OTHER INFORMATION
Item 1 — Legal Proceedings	27
Item 1A — Risk Factors	27
Item 6 — Exhibits	27
SIGNATURES	28

 

2

Table of Contents

 

Part 1 — FINANCIAL INFORMATION

 

Item 1 — Unaudited Financial Statements

 

CHASE CORPORATION

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

In thousands, except share and per share amounts

 

		November 30,			August 31,
		2013			2013
ASSETS
Current Assets
Cash & cash equivalents		$	36,928		$	29,997
Accounts receivable, less allowance for doubtful accounts of $672 and $696		30,691			32,084
Inventories		33,983			32,048
Prepaid expenses and other current assets		3,987			1,826
Due from sale of product line		3,255			—
Assets held for sale, net		—			1,905
Deferred income taxes		2,115			2,115
Total current assets		110,959			99,975
Property, plant and equipment, net		44,835			45,192
Other Assets
Goodwill		38,092			37,815
Intangible assets, less accumulated amortization of $19,179 and $17,554		30,932			31,781
Cash surrender value of life insurance		7,300			7,278
Restricted investments		1,229			1,094
Funded pension plan		1,226			1,014
Other assets		202			211
		$	234,775		$	224,360
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable		$	15,588		$	12,416
Accrued payroll and other compensation		2,885			7,046
Accrued expenses		5,125			5,171
Accrued income taxes		4,009			2,161
Dividends payable		4,093			—
Current portion of long-term debt		5,950			5,600
Total current liabilities		37,650			32,394
Long-term debt, less current portion		57,050			58,800
Deferred compensation		2,020			1,897
Accumulated pension obligation		7,895			7,834
Other liabilities		104			108
Deferred income taxes		9,446			9,467
Commitments and Contingencies (Note 10)
Equity
First Serial Preferred Stock, $1.00 par value: Authorized 100,000 shares; none issued		—			—
Common stock, $.10 par value: Authorized 20,000,000 shares; 9,094,868 shares at November 30, 2013 and 9,066,115 shares at August 31, 2013 issued and outstanding		910			907
Additional paid-in capital		13,662			13,336
Accumulated other comprehensive loss		(3,466		)	(5,163		)
Retained earnings		108,416			103,734
Chase Corporation stockholders’ equity		119,522			112,814
Non-controlling interest related to NEPTCO joint venture		1,088			1,046
Total equity		120,610			113,860
Total liabilities and equity		$	234,775		$	224,360

 

See accompanying notes to the consolidated financial statements

 

3

Table of Contents

 

CHASE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

In thousands, except share and per share amounts

 

		Three Months Ended November 30,
		2013			2012
Revenues
Sales		$	53,655		$	52,976
Royalties and commissions		528			424
		54,183			53,400
Costs and Expenses
Cost of products and services sold		35,478			37,271
Selling, general and administrative expenses		10,439			10,539
Operating income		8,266			5,590
Interest expense		(303		)	(362		)
Gain on sale of product line (Note 8)		5,706			—
Other (expense) income		(105		)	69
Income before income taxes		13,564			5,297
Income taxes		4,747			1,820
Net income		$	8,817		$	3,477
Net (gain) loss attributable to non-controlling interest		(42		)	63
Net income attributable to Chase Corporation		$	8,775		$	3,540
Net income available to common shareholders, per common and common equivalent share
Basic		$	0.96		$	0.39
Diluted		$	0.94		$	0.39
Weighted average shares outstanding
Basic		8,938,149			8,851,314
Diluted		9,149,677			8,927,970
Annual cash dividends declared per share		$	0.45		$	0.40

 

See accompanying notes to the consolidated financial statements

 

4

Table of Contents

 

CHASE CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

Dollars in thousands

 

		Three Months Ended November 30,
		2013			2012
Net income		$	8,817		$	3,477
Other comprehensive income:
Net unrealized loss on restricted investments, net of tax		71			—
Change in funded status of pension plans, net of tax		48			272
Foreign currency translation adjustment		1,578			404
Total other comprehensive income		1,697			676
Comprehensive income		10,514			4,153
Comprehensive (income) loss attributable to non-controlling interest		(42		)	63
Comprehensive income attributable to Chase Corporation		$	10,472		$	4,216

 

See accompanying notes to the consolidated financial statements

 

5

Table of Contents

 

CHASE CORPORATION

CONSOLIDATED STATEMENT OF EQUITY

(UNAUDITED)

 

Dollars in thousands

 

							Additional			Accumulated Other						Chase
		Common Stock					Paid-In			Comprehensive			Retained			Stockholders’			Non-conrolling			Total
		Shares		Amount			Capital			Income (loss)			Earnings			Equity			Interest			Equity
Balance at August 31, 2013		9,066,115		$	907		$	13,336		$	(5,163	)	$	103,734		$	112,814		$	1,046		$	113,860
Restricted stock grants, net of forfeitures		28,753		3			(3		)							—						—
Amortization of restricted stock grants							265									265						265
Amortization of stock option grants							64									64						64
Cash dividend accrued, $0.45 per share													(4,093		)	(4,093		)				(4,093		)
Change in funded status of pension plan, net of tax of $26										48						48						48
Foreign currency translation adjustment										1,578						1,578						1,578
Net unrealized gain on restricted investments, net of tax of $38										71						71						71
Net income													8,775			8,775			42			8,817
Balance at November 30, 2013		9,094,868		$	910		$	13,662		$	(3,466	)	$	108,416		$	119,522		$	1,088		$	120,610

 

See accompanying notes to the consolidated financial statements

 

6

Table of Contents

 

CHASE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

Dollars in thousands

 

		Three Months Ended November 30,
		2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	8,817		$	3,477
Adjustments to reconcile net income to net cash provided by operating activities
Gain on sale of assets		(6		)	(4		)
Gain on sale of product line		(5,706		)	—
Depreciation		1,426			1,508
Amortization		1,194			1,217
Cost of sale of inventory step-up		—			564
Recovery on allowance for doubtful accounts		(38		)	(130		)
Stock based compensation		329			419
Realized gain on restricted investments		(5		)	(25		)
Decrease in cash surrender value life insurance		30			82
Pension curtailment and settlement loss		—			352
Increase (decrease) from changes in assets and liabilities
Accounts receivable		1,619			839
Inventories		(4,032		)	(4,818		)
Prepaid expenses & other assets		(2,112		)	(623		)
Accounts payable		3,074			3,753
Accrued compensation and other expenses		(4,522		)	(4,131		)
Accrued income taxes		1,792			(399		)
Deferred compensation		123			35
Net cash provided by operating activities		1,983			2,116
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment		(781		)	(544		)
Cost to acquire intangible assets		(22		)	(101		)
Contingent purchase price paid for acquisition		—			84
Proceeds from sale of fixed assets		11			11
Net proceeds from sale of product line		6,655			—
Contributions from restricted investments		(21		)	(22		)
Payments for cash surrender value life insurance		(46		)	(24		)
Net cash provided by (used in) investing activities		5,796			(596		)
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of principal on debt		(1,400		)	(1,400		)
Net cash used in financing activities		(1,400		)	(1,400		)
INCREASE IN CASH & CASH EQUIVALENTS		6,379			120
Effect of foreign exchange rates on cash		552			73
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		29,997			15,180
CASH & CASH EQUIVALENTS, END OF PERIOD		$	36,928		$	15,373
Non-cash Investing and Financing Activities
Property, plant & equipment additions included in accounts payable		$	90		$	157
Annual cash dividend declared		$	4,093		$	3,626

 

See accompanying notes to the consolidated financial statements

 

7

Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Note 1 - Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles 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 disclosure necessary for a complete presentation of Chase Corporation’s financial position, results of operations and cash flows, in conformity with generally accepted accounting principles.  Chase Corporation (the “Company,” “Chase,” “we,” or “us”) filed audited consolidated financial statements, which included all information and notes necessary for such complete presentation for the three years ended August 31, 2013 in conjunction with its 2013 Annual Report on Form 10-K.

 

The results of operations for the interim period ended November 30, 2013 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.  These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended August 31, 2013, which are contained in the Company’s 2013 Annual Report on Form 10-K.

 

The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring items) which are, in the opinion of management, necessary for a fair statement of the Company’s financial position as of November 30, 2013, the results of operations, comprehensive income and cash flows for the interim periods ended November 30, 2013 and 2012, and changes in equity for the interim period ended November 30, 2013.

 

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 UK-based operations are measured using the British Pound as the functional currency and the financial position and results of operations of the Company’s operations based in France are measured using the euro as the functional currency.  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.  Translation gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of our foreign operations are included in other (expense) / income on the consolidated statements of operations.

 

During the third quarter of fiscal 2013, an immaterial error was identified in the presentation of two line items within the operating activities section of the Company’s previously reported statement of cash flows for the comparing period ended November 30, 2012.  The Company revised the statement of cash flows to correct the presentation of two line items within the operating activities section.  This revision to the statement of cash flows results in pension curtailment and settlement loss changing from ($352) to $352 and accrued compensation and other expenses changing from ($3,427) to ($4,131) for the three months ended November 30, 2012. There was no impact on the comparing balance sheet or the related statement of operations, statement of comprehensive income, total cash provided by operating activities or overall cash flows.

 

During the fourth quarter of fiscal 2013, the Company identified an immaterial error in the statement of comprehensive income within the Company’s previously reported unaudited financial statements for the first three quarters of fiscal 2013.  In those fiscal quarters, the Company properly recorded pension

 

8

Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

settlement losses that resulted from lump sum distributions to pension plan participants in earnings, but did not properly reclassify the amount out of Equity—Accumulated Other Comprehensive Income (Loss).  As a result, the Company revised the reclassification adjustment for the change in funded status of pension plans line item from $58 to $272 for the three months ended November 30, 2012.  There was no impact on the comparing balance sheet or the related statement of operations, and statement of cash flows.

 

The Company has evaluated events and transactions subsequent to the balance sheet date.  Based on this evaluation, the Company is not aware of any events or transactions that occurred subsequent to the balance sheet date but prior to filing that would require recognition or disclosure in its consolidated financial statements.

 

Note 2 — Recent Accounting Policies

 

Recently Adopted Accounting Pronouncements

 

In February 2013, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2013-02, “Comprehensive Income (Topic 220):  Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”.  This ASU expands the presentation of changes in accumulated other comprehensive income.  The new guidance requires an entity to disaggregate the total change of each component of other comprehensive income either on the face of the net income statement or as a separate disclosure in the notes. ASU 2013-02 is effective for fiscal years beginning after December 15, 2012.  The Company adopted this ASU in the first quarter of fiscal 2014 (See Note 13 for additional details).  The provisions of ASU 2013-02 did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

 

Note 3 — Inventories

 

Inventories consist of the following as of November 30, 2013 and August 31, 2013:

 

		November 30, 2013			August 31, 2013
Raw materials		$	15,032		$	14,545
Work in process		6,665			5,967
Finished goods		12,286			11,536
Total Inventories		$	33,983		$	32,048

 

9

Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Note 4 — Net Income Per Share

 

The Company has unvested share-based payment awards with a right to receive nonforfeitable dividends which are considered participating securities under ASC Topic 260, “Earnings Per Share”.  The Company allocates earnings to participating securities and computes earnings per share using the two class method.  The determination of earnings per share under the two-class method is as follows:

 

		Three Months Ended November 30,
		2013			2012
Basic Earnings per Share
Net income attributable to Chase Corporation		$	8,775		$	3,540
Less: Allocated to participating securities		151			77
Net income available to common shareholders		$	8,624		$	3,463
Basic weighted average shares outstanding		8,938,149			8,851,314
Net income per share - Basic		$	0.96		$	0.39
Diluted Earnings per Share
Net income attributable to Chase Corporation		$	8,775		$	3,540
Less: Allocated to participating securities		148			76
Net income available to common shareholders		$	8,627		$	3,464
Basic weighted average shares outstanding		8,938,149			8,851,314
Additional dilutive common stock equivalents		211,528			76,656
Diluted weighted average shares outstanding		9,149,677			8,927,970
Net income per share - Diluted		$	0.94		$	0.39

 

Included in the calculation of dilutive common stock equivalents are the unvested portion of restricted stock and stock options.

 

Note 5 — Stock Based Compensation

 

In October 2012, the Board of Directors of the Company approved the fiscal year 2013 Long Term Incentive Plan (“2013 LTIP”) for the executive officers.  The 2013 LTIP is an equity based plan with a grant date of October 22, 2012 and contains a performance and service based restricted stock grant of 11,861 shares in the aggregate, subject to adjustment, with a vesting date of August 31, 2015.  Based on the fiscal year 2013 financial results, 11,861 additional shares of restricted stock (total of 23,722 shares) were earned and granted subsequent to the end of fiscal year 2013 in accordance with the performance measurement criteria.  No further performance-based measurements apply to this award.  Compensation expense is being recognized on a ratable basis over the vesting period.

 

In September 2013, the Board of Directors of the Company approved the fiscal year 2014 Long Term Incentive Plan (“2014 LTIP”) for the executive officers and other members of management.  The 2014 LTIP is an equity based plan with a grant date of September 1, 2013 and contains the following equity components:

 

Restricted Shares — (a) performance and service based restricted stock grant of 7,529 shares in the aggregate, subject to adjustment, with a vesting date of August 31, 2016.  Compensation expense is recognized on a ratable basis over the vesting period based on quarterly probability assessments; (b) time-based restricted stock grant of 8,323 and 1,040 shares in the aggregate, with vesting dates of August 31, 2016 and August 31,

 

10

Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

2014, respectively.  Compensation expense is recognized on a ratable basis over the vesting period.

 

Stock options — options to purchase 25,969 shares of common stock in the aggregate with an exercise price of $29.72 per share.  The options will vest in three equal annual allotments beginning on August 31, 2014 and ending on August 31, 2016. The options will expire on August 31, 2023.  Compensation expense is recognized over the period of the award on an annual basis consistent with the vesting terms.

 

Note 6 — Segment Data and Foreign Operations

 

The Company is organized into two operating segments, an Industrial Materials segment and a Construction Materials segment.  The basis for this segmentation is distinguished by the nature of the products and how they are delivered to their respective markets.  The Industrial Materials segment reflects specified products that are used in or integrated into another company’s product with demand dependent upon general economic conditions.  Industrial Materials products include insulating and conducting materials for wire and cable manufacturers, moisture protective coatings for electronics and printing services, laminated durable papers, and flexible composites, laminates for the packaging and industrial laminate markets, pulling and detection tapes used in the installation, measurement and location of fiber optic cables, water and natural gas lines, cover tapes essential to delivering semiconductor components via tape and reel packaging, and wind energy composite materials and elements.  Additionally, the Industrial Materials segment includes a joint venture which produces glass based strength elements designed to allow fiber optic cables to withstand mechanical and environmental strain and stress. The Construction Materials segment reflects construction project oriented product offerings that are primarily sold and used as “Chase” branded products.   Construction Materials products include protective coatings for pipeline applications, coating and lining systems for use in liquid storage and containment applications, high performance polymeric asphalt additives, and expansion and control joint systems for use in the transportation and architectural markets.

 

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

 

		Three Months Ended November 30,
		2013			2012
Revenues from external customers
Industrial Materials		$	41,670		$	39,850
Construction Materials		12,513			13,550
Total		$	54,183		$	53,400
Income before income taxes
Industrial Materials		$	13,607		$	5,530
Construction Materials		1,591			1,430
Total for reportable segments		15,198			6,960
Corporate and Common Costs		(1,634		)	(1,663		)
Total		$	13,564		$	5,297

 

The Company’s products are sold world-wide.  For the three months ended November 30, 2013 and 2012, sales from its operations located in the United Kingdom accounted for 8% of consolidated revenues in each period.  No foreign geographic area accounted for more than 10% of consolidated revenues for the three months ended November 30, 2013 and 2012.

 

11

Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

		November 30, 2013			August 31, 2013
Total assets
Industrial Materials		$	136,686		$	133,110
Construction Materials		48,041			48,573
Total for reportable segments		184,727			181,683
Corporate and Common Assets		50,048			42,677
Total		$	234,775		$	224,360

 

As of November 30, 2013 and August 31, 2013, 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) of $4,212 and $4,063, respectively, located in the United Kingdom.   These balances exclude goodwill and intangibles of $10,618 and $10,333, as of November 30, 2013 and August 31, 2013, respectively.

 

Note 7 — Goodwill and Other Intangibles

 

The changes in the carrying value of goodwill, by reportable segment, are as follows:

 

		Construction			Industrial
		Materials			Materials			Consolidated
Balance at August 31, 2013		$	10,735		$	27,080		$	37,815
Foreign currency translation adjustment		13			264			277
Balance at November 30, 2013		$	10,748		$	27,344		$	38,092

 

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 identified several reporting units within each of its two operating segments that are used to evaluate the possible impairment of goodwill.  Goodwill impairment exists when the carrying amount of goodwill exceeds its fair value.  Assessments of possible impairment of goodwill are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations.  Additionally, testing for possible impairment of recorded goodwill and certain intangible asset balances is required annually.  The amount and timing of any impairment charges based on these assessments require the estimation of future cash flows and the fair market value of the related assets based on management’s best estimates of certain key factors, including future selling prices and volumes, operating, raw material and energy costs, and various other projected operating and economic factors.  When testing, fair values of the reporting units and the related implied fair values of their respective goodwill are established using public company analysis and discounted cash flows. The Company evaluates the possible impairment of goodwill annually each fourth quarter and whenever events or circumstances indicate the carrying value of goodwill may not be recoverable.

 

12

Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Intangible assets subject to amortization consist of the following as of November 30, 2013 and August 31, 2013:

 

		Weighted-Average		Gross Carrying			Accumulated			Net Carrying
		Amortization Period		Value			Amortization			Value
November 30, 2013
Patents and agreements		11.9 years		$	3,237		$	2,217		$	1,020
Formulas		9.1 years		5,834			2,423			3,411
Trade names		5.7 years		6,394			2,354			4,040
Customer lists and relationships		10.2 years		34,646			12,185			22,461
				$	50,111		$	19,179		$	30,932
August 31, 2013
Patents and agreements		11.9 years		$	3,198		$	2,200		$	998
Formulas		9.1 years		5,772			2,238			3,534
Trade names		5.7 years		6,345			2,055			4,290
Customer lists and relationships		10.2 years		34,020			11,061			22,959
				$	49,335		$	17,554		$	31,781

 

Aggregate amortization expense related to intangible assets for the three months ended November 30, 2013 and 2012 was $1,194 and $1,217, respectively.  Estimated amortization expense for the remainder of fiscal year 2014 and for each of the five succeeding fiscal years is as follows:

 

Years ending August 31,
2014 (remaining 9 months)		$	3,700
2015		4,750
2016		4,687
2017		4,250
2018		4,019
2019		3,322
		$	24,728

 

Note 8 — Sale of Insulfab Product Line

 

On October 7, 2013, the Company sold substantially all of its property and assets, including intellectual property, comprising the Insulfab® product line, to an unrelated third party (“buyer”).  The Insulfab product line is primarily focused on manufacturing high quality, engineered barrier laminates used in aerospace applications.  The sale proceeds of $7,394 are subject to certain post-closing adjustments based on the change in the final net book value compared to the bid date net book value.  As of November 30, 2013, management determined these post-closing adjustments resulted in an increase in the sale proceeds of $2,516 based on the increase of inventory sold to the buyer at closing.  This adjustment is subject to final review by the buyer.  The net proceeds from the sale are available for debt reduction and investment in the Company’s core businesses.

 

This transaction resulted in a pre-tax book gain of $5,706 ($3,709 after-tax gain) which was recorded in the quarter ending November 30, 2013.  The additional proceeds of $2,516 and the portion of the sale price held in escrow of $739 are recorded as current assets (Due from sale of product line) as of November 30, 2013.

 

13

Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

The following table summarizes information about the Insulfab product line as of October 7, 2013 and August 31, 2013:

 

		October 7, 2013			August 31, 2013
Inventory		$	3,153		$	885
Property & equipment		1,062			1,060
Accrued expenses		(3		)	(40		)
		$	4,212		$	1,905

 

As a result of the efforts to market and sell this product line in the fourth quarter of fiscal 2013, the Company had classified the Insulfab assets (including inventory and equipment) as assets held for sale as of August 31, 2013.  This product line and related assets were part of the Company’s Industrial Materials segment.

 

Note 9 — Joint Venture

 

The NEPTCO JV LLC (“JV”) was originally formed in 2003 by NEPTCO and a joint venture partner, an otherwise unrelated party (collectively, the “members”), whereby each member’s fiber optic strength elements businesses were combined. This venture, which is 50% owned by each member, is managed and operated on a day-to-day basis by NEPTCO. The JV operates out of the Company’s Granite Falls, NC facility.

 

The Company accounts for the joint venture partner’s non-controlling interest in the JV under ASC Topic 810 “Consolidations” (“ASC 810”).  Based on the criteria in ASC 810, the Company determined that the JV qualifies as a variable interest entity (“VIE”).  Because of the Company’s controlling financial interest, the JV’s assets and liabilities and results of operations have been consolidated within the Company’s consolidated financial statements since June 27, 2012, the date the Company acquired NEPTCO.  An offsetting amount equal to 50% of net assets and net income (loss) of the JV has been recorded within the Company’s consolidated financial statements to the non-controlling interest, representing the joint venture partner’s 50% ownership interest and pro rata share in the JV.

 

14

Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

At November 30, 2013 and August 31, 2013, the following amounts were consolidated in the Company’s balance sheets related to the JV:

 

		November 30,			August 31,
		2013			2013
Assets
Cash		$	523		$	394
Accounts receivable, net		1,041			1,106
Inventories		1,747			1,510
Prepaid expenses and other assets		285			283
Property, plant and equipment, net		418			448
Intangible assets, net		699			706
Total assets		$	4,713		$	4,447
Liabilities and net assets
Accounts payable and accrued expenses		$	721		$	679
Due to Members		1,816			1,677
Total liabilities		$	2,537		$	2,356
Net assets		$	2,176		$	2,091
Non-controlling interest		$	1,088		$	1,046

 

Effective on the date of the JV’s inception, and for four years following the date on which the members no longer own any membership interest in the JV, non-compete agreements exist between the members. Each member retains the right to tender an offer to buy the other member’s share. Once an offer is tendered, the tendered member has the option to either sell, or match the initial offer to purchase the tendering member’s share.

 

Under the JV agreement, the JV is barred from issuing third party debt, other than customary accounts payable, resulting from its normal trade operations. The liabilities of the JV are not guaranteed by any portion of NEPTCO or the Company.

 

The JV agrees to purchase a minimum of 80% of its total glass fiber requirements from the other joint venture partner. Additionally, the JV agrees to purchase private-label products exclusively from an affiliate of the other joint venture partner; however, the JV is not subject to a minimum purchase requirement on private-label products. Purchases from the joint venture partner totaled $467 and $463 for the three months ended November 30, 2013 and 2012, respectively. The JV had amounts due to the other joint venture partner of $356 and $378 at November 30, 2013 and August 31, 2013, respectively.

 

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 cashflows, litigation is inherently unpredictable.  Therefore, judgments could be rendered or settlements entered that could adversely affect the Company’s operating results or cash flows in a particular period.  The Company routinely assesses all of its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where the Company assesses the likelihood of loss as probable.

 

15

Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Note 11 - Pensions and Other Post Retirement Benefits

 

The components of net periodic benefit cost for the three months ended November 30, 2013 and 2012 are as follows:

 

		Three Months Ended November 30,
		2013			2012
Service cost		$	81		$	103
Interest cost		161			114
Expected return on plan assets		(178		)	(149		)
Amortization of prior service cost		1			6
Amortization of unrecognized loss		73			84
Curtailment loss		—			25
Settlement loss		—			327
Net periodic benefit cost		$	138		$	510

 

When funding is required, the Company’s policy is to contribute amounts that are deductible for federal income tax purposes.  As of November 30, 2013, the Company has made contributions of $200 in the current fiscal year to fund its obligations under its pension plan and will make the necessary contributions over the remainder of fiscal 2014 to ensure the qualified plan continues to be adequately funded given the current market conditions.

 

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 in an orderly transaction between market participants at the measurement date (exit price).  The Company uses a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values. These tiers include: 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 as of November 30, 2013 and August 31, 2013 represent investments that are restricted for use in a nonqualified retirement savings plan 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 November 30, 2013 and August 31, 2013:

 

							Fair value measurement category
		Fair value measurement date		Total			Quoted prices in active  markets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
Assets:
Restricted investments		November 30, 2013		$	1,229		$	1,229		$	—		$	—
Restricted investments		August 31, 2013		$	1,094		$	1,094		$	—		$	—

 

16

Table of Contents

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

The following table presents the fair value of the Company’s long-term debt as of November 30, 2013 and August 31, 2013, which is recorded at its carrying value:

 

							Fair value measurement category
		Fair value measurement date		Total			Quoted prices in active markets (Level 1)			Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
Liabilities:
Long-term debt		November 30, 2013		$	63,000		$	—		$	63,000		$	—
Long-term debt		August 31, 2013		$	64,400		$	—		$	64,400		$	—

 

The carrying value of the long-term debt approximates its fair value, as the monthly interest rate is set based on the movement of the underlying market rates.

 

Note 13 — Accumulated Other Comprehensive Income

 

The changes in accumulated other comprehensive income (loss), net of tax, were as follows:

 

		Restricted Investments			Change in Funded Status of Pension Plan			Foreign Currency Translation Adjustment			Total
Balance at August 31, 2013		$	144		$	(3,578	)	$	(1,729	)	$	(5,163	)
Other comprehensive gains (losses) before reclassifications (1)		74			—			1,578			1,652
Reclassifications to net income of previously deferred (gains) losses (2)		(3		)	48			—			45
Other comprehensive income (loss)		71			48			1,578			1,697
Balance at November 30, 2013		$	215		$	(3,530	)	$	(151	)	$	(3,466	)

 

(1)              Net of tax benefit of $40, $0, $0, respectively.

(2)              Net of tax expense of $2, tax benefit of $26, $0, respectively.

 

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 November 30, 2013			Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Income
Gains on Restricted Investments:
Realized gain on sale of restricted investments		$	5		Selling, general and administrative expenses
Tax expense (benefit)		2
Gain net of tax		$	3
Loss on Funded Pension Plan adjustments:
Realized loss on amortization of prior pension service costs and unrecognized losses		$	(20	)	Cost of products and services sold
Realized loss on amortization of prior pension service costs and unrecognized losses		$	(54	)	Selling, general and administrative expenses
Tax expense (benefit)		26
(Loss) net of tax		$	(48	)
Total net (loss) reclassified for the period		$	(45	)

 

17