CHASE CORP - Quarter Report: 2014 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, 2014

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, 2014 was 9,129,427.

 

 

Table of Contents

 

CHASE CORPORATION

INDEX TO FORM 10-Q

 

For the Quarter Ended November 30, 2014

 

Part I - FINANCIAL INFORMATION
Item 1 — Unaudited Financial Statements
Consolidated Balance Sheets as of November 30, 2014 and August 31, 2014	3
Consolidated Statements of Operations for the three months ended November 30, 2014 and 2013	4
Consolidated Statements of Comprehensive Income for the three months ended November 30, 2014 and 2013	5
Consolidated Statement of Equity for the three months ended November 30, 2014	6
Consolidated Statements of Cash Flows for the three months ended November 30, 2014 and 2013	7
Notes to Consolidated Financial Statements	8
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations	20
Item 3 — Quantitative and Qualitative Disclosures About Market Risk	27
Item 4 — Controls and Procedures	27
Part II — OTHER INFORMATION
Item 1 — Legal Proceedings	28
Item 1A — Risk Factors	28
Item 6 — Exhibits	28
SIGNATURES	29

 

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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,
		2014			2014
ASSETS
Current Assets
Cash & cash equivalents		$	53,131		$	53,222
Accounts receivable, less allowance for doubtful accounts of $721 and $670		34,632			35,601
Inventories		32,632			31,539
Prepaid expenses and other current assets		2,698			2,437
Due from sale of product line		739			739
Deferred income taxes		2,315			2,315
Total current assets		126,147			125,853
Property, plant and equipment, net		43,018			44,085
Other Assets
Goodwill		37,948			38,280
Intangible assets, less accumulated amortization of $23,575 and $22,941		25,737			27,215
Cash surrender value of life insurance		7,256			7,249
Restricted investments		1,300			1,256
Funded pension plan		953			962
Deferred income taxes		443			470
Other assets		165			175
		$	242,967		$	245,545
LIABILITIES AND EQUITY
Current Liabilities
Accounts payable		$	13,850		$	15,121
Accrued payroll and other compensation		2,701			7,754
Accrued expenses		6,062			4,842
Accrued income taxes		1,016			1,377
Dividends payable		5,477			—
Current portion of long-term debt		7,350			7,000
Total current liabilities		36,456			36,094
Long-term debt, less current portion		49,700			51,800
Deferred compensation		2,061			2,037
Accumulated pension obligation		10,489			10,418
Other liabilities		115			126
Deferred income taxes		7,578			7,580
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; 9,129,427 shares at November 30, 2014 and 9,103,292 shares at August 31, 2014 issued and outstanding		913			910
Additional paid-in capital		14,174			13,620
Accumulated other comprehensive loss		(6,219		)	(4,250		)
Retained earnings		127,700			126,272
Chase Corporation stockholders’ equity		136,568			136,552
Non-controlling interest		—			938
Total equity		136,568			137,490
Total liabilities and equity		$	242,967		$	245,545

 

See accompanying notes to the consolidated financial statements

 

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CHASE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

In thousands, except share and per share amounts

 

		Three Months Ended November 30,
		2014			2013
Revenues
Sales		$	55,290		$	53,655
Royalties and commissions		643			528
		55,933			54,183
Costs and Expenses
Cost of products and services sold		34,480			35,478
Selling, general and administrative expenses		10,795			10,439
Operating income		10,658			8,266
Interest expense		(274		)	(303		)
Gain on sale of product line (Note 8)		—			5,706
Other (expense) income		385			(105		)
Income before income taxes		10,769			13,564
Income taxes		3,769			4,747
Net income		$	7,000		$	8,817
Net (gain) loss attributable to non-controlling interest		(95		)	(42		)
Net income attributable to Chase Corporation		$	6,905		$	8,775
Net income available to common shareholders, per common and common equivalent share
Basic		$	0.76		$	0.96
Diluted		$	0.74		$	0.94
Weighted average shares outstanding
Basic		9,050,048			8,938,149
Diluted		9,221,796			9,149,677
Annual cash dividends declared per share		$	0.60		$	0.45

 

See accompanying notes to the consolidated financial statements

 

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CHASE CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

 

Dollars in thousands

 

		Three Months Ended November 30,
		2014			2013
Net income		$	7,000		$	8,817
Other comprehensive income:
Net unrealized loss on restricted investments, net of tax		13			71
Change in funded status of pension plans, net of tax		110			48
Foreign currency translation adjustment		(2,092		)	1,578
Total other comprehensive income		(1,969		)	1,697
Comprehensive income		5,031			10,514
Comprehensive income attributable to non-controlling interest		(95		)	(42		)
Comprehensive income attributable to Chase Corporation		$	4,936		$	10,472

 

See accompanying notes to the consolidated financial statements

 

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CHASE CORPORATION

CONSOLIDATED STATEMENT OF EQUITY

(UNAUDITED)

 

Dollars in thousands

 

							Additional			Accumulated Other						Chase
		Common Stock					Paid-In			Comprehensive			Retained			Stockholders’			Non-controlling			Total
		Shares		Amount			Capital			Income (loss)			Earnings			Equity			Interest			Equity
Balance at August 31, 2014		9,103,292		$	910		$	13,620		$	(4,250	)	$	126,272		$	136,552		$	938		$	137,490
Restricted stock grants, net of forfeitures		8,424		1			(1		)							—						—
Amortization of restricted stock grants				1			231									232						232
Amortization of stock option grants							64									64						64
Exercise of stock options		65,000		7			1,068									1,075						1,075
Common stock received for payment of stock option exercises		(30,795	)	(4		)	(1,071		)							(1,075		)				(1,075		)
Excess tax benefit from stock based compensation							304									304						304
Common stock retained to pay statutory minimum withholding taxes on common stock		(16,494	)	(2		)	(574		)							(576		)				(576		)
Cash dividend accrued, $0.60 per share													(5,477		)	(5,477		)				(5,477		)
Purchase of outstanding non-controlling interest							533									533			(1,033		)	(500		)
Change in funded status of pension plan, net of tax of $59										110						110						110
Foreign currency translation adjustment										(2,092		)				(2,092		)				(2,092		)
Net unrealized gain on restricted investments, net of tax of $7										13						13						13
Net income													6,905			6,905			95			7,000
Balance at November 30, 2014		9,129,427		$	913		$	14,174		$	(6,219	)	$	127,700		$	136,568		$	—		$	136,568

 

See accompanying notes to the consolidated financial statements

 

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CHASE CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

 

Dollars in thousands

 

		Three Months Ended November 30,
		2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	7,000		$	8,817
Adjustments to reconcile net income to net cash provided by operating activities
Gain on sale of assets		—			(6		)
Gain on sale of product line		—			(5,706		)
Depreciation		1,417			1,426
Amortization		1,183			1,194
Provision (recovery) for allowance for doubtful accounts		68			(38		)
Stock based compensation		296			329
Realized gain on restricted investments		(1		)	(5		)
Decrease in cash surrender value life insurance		45			30
Excess tax expense from stock based compensation		(304		)	—
Increase (decrease) from changes in assets and liabilities
Accounts receivable		507			1,619
Inventories		(1,366		)	(4,032		)
Prepaid expenses & other assets		(307		)	(2,112		)
Accounts payable		(1,074		)	3,074
Accrued compensation and other expenses		(3,527		)	(4,522		)
Accrued income taxes		(28		)	1,792
Deferred compensation		24			123
Net cash provided by operating activities		3,933			1,983
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment		(592		)	(781		)
Cost to acquire intangible assets		(3		)	(22		)
Proceeds from sale of fixed assets		—			11
Net proceeds from sale of product line		—			6,655
Contributions from restricted investments		(23		)	(21		)
Payments for cash surrender value life insurance		(46		)	(46		)
Net cash (used in) provided by investing activities		(664		)	5,796
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of principal on debt		(1,750		)	(1,400		)
Payments of statutory minimum taxes on stock options and restricted stock		(576		)	—
Excess tax benefit from stock based compensation		304			—
Payment for acquisition of non-controlling interest		(500		)	—
Net cash used in financing activities		(2,522		)	(1,400		)
INCREASE IN CASH & CASH EQUIVALENTS		747			6,379
Effect of foreign exchange rates on cash		(838		)	552
CASH & CASH EQUIVALENTS, BEGINNING OF PERIOD		53,222			29,997
CASH & CASH EQUIVALENTS, END OF PERIOD		$	53,131		$	36,928
Non-cash Investing and Financing Activities
Property, plant & equipment additions included in accounts payable		$	16		$	90
Annual cash dividend declared		$	5,477		$	4,093

 

See accompanying notes to the consolidated financial statements

 

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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 presentation for the three years ended August 31, 2014 in conjunction with its 2014 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 periods ended November 30, 2014 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, 2014, which are contained in the Company’s 2014 Annual Report on Form 10-K.

 

The accompanying unaudited 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, 2014, the results of operations, comprehensive income and cash flows for the interim periods ended November 30, 2014 and 2013, and changes in equity for the interim period ended November 30, 2014.

 

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 US 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 UK pound sterling 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.  Transaction 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.

 

On October 31, 2014, the Company purchased the 50% non-controlling membership interest of NEPTCO JV LLC (the “JV”) owned by its now-former joint venture partner, an otherwise unrelated party. Because of the Company’s controlling financial interest, the JV’s assets, 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. The Company will continue to fully consolidate the assets, liabilities and results of operations of the JV, but will no longer record an offsetting amount for a non-controlling interest subsequent to October 31, 2014. The ($95) recorded in the Consolidated Statement of Operations as Net (gain) loss attributable to non-controlling interest, represents the now-former joint venture partner’s share of the results of operations of the JV for the period from September 1, 2014 through October 31, 2014.

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

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 May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers”, which will replace most of the existing revenue recognition guidance under U.S. Generally Accepted Accounting Principles. The core principle of the ASU is that an entity should recognize revenue for the transfer of goods or services equal to the amount that it expects to be entitled to receive for those goods or services. The ASU requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments. The ASU will be effective for the Company beginning September 1, 2017 (fiscal 2018), including interim periods in its fiscal year 2018, and allows for both retrospective and prospective methods of adoption. The Company is in the process of determining the method of adoption and assessing the impact of this ASU 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, 2014 and August 31, 2014:

 

		November 30, 2014			August 31, 2014
Raw materials		$	12,889		$	13,785
Work in process		7,904			7,359
Finished goods		11,839			10,395
Total Inventories		$	32,632		$	31,539

 

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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,
		2014			2013
Basic Earnings per Share
Net income attributable to Chase Corporation		$	6,905		$	8,775
Less: Allocated to participating securities		52			151
Net income available to common shareholders		$	6,853		$	8,624
Basic weighted average shares outstanding		9,050,048			8,938,149
Net income per share - Basic		$	0.76		$	0.96
Diluted Earnings per Share
Net income attributable to Chase Corporation		$	6,905		$	8,775
Less: Allocated to participating securities		51			148
Net income available to common shareholders		$	6,854		$	8,627
Basic weighted average shares outstanding		9,050,048			8,938,149
Additional dilutive common stock equivalents		171,748			211,528
Diluted weighted average shares outstanding		9,221,796			9,149,677
Net income per share - Diluted		$	0.74		$	0.94

 

For the three months ended November 30, 2014, stock options to purchase 32,974 shares of common stock were outstanding, but were not included in the calculation of diluted income per share because their inclusion would be anti-dilutive.  There were no anti-dilutive shares for the three months ended November 30, 2013. 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 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 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.  Based on the fiscal year 2014 financial results, 5,485 additional shares of restricted stock (total of 13,014 shares) were earned and granted subsequent to the end of fiscal year 2014 in accordance with the performance measurement criteria.  No further performance-based measurements apply to this award.  Compensation expense is being recognized on a ratable basis over the vesting period.

 

In August 2014, the Board of Directors of the Company approved the fiscal year 2015 Long Term Incentive Plan (“2015 LTIP”) for the executive officers and other members of management.  The 2015 LTIP is an equity based plan with a grant date of September 1, 2014 and contains the following equity components:

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Restricted Shares — (a) performance and service based restricted stock grant of 6,993 shares in the aggregate, subject to adjustment, with a vesting date of August 31, 2017.  Compensation expense is recognized on a ratable basis over the vesting period based on quarterly probability assessments for those with a vesting date of August 31, 2017; (b) time-based restricted stock grant of 8,132 shares in the aggregate, with a vesting date of August 31, 2017.  Compensation expense is recognized on a ratable basis over the vesting period.

 

Stock options — options to purchase 22,750 shares of common stock in the aggregate with an exercise price of $35.50 per share.  The options will vest in three equal annual installments beginning on August 31, 2015 and ending on August 31, 2017. Of the options granted, 7,438 will expire on August 31, 2024 and 15,312 will expire on September 1, 2024.  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 segments are 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 typically 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, 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 glass-based strength elements products, designed to allow fiber optic cables to withstand mechanical and environmental strain and stress, which operated as a joint venture prior to the Company’s purchase of its now-former joint venture partner’s 50% non-controlling interest on October 31, 2014.

 

The Construction Materials segment comprises of typically 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, adhesives and sealants used in architectural and building envelope water proofing applications, high performance polymeric asphalt additives, and expansion and control joint systems for use in the transportation and architectural markets.

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

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

 

		Three Months Ended November 30,
		2014			2013
Revenues from external customers
Industrial Materials		$	42,395		$	41,670
Construction Materials		13,538			12,513
Total		$	55,933		$	54,183
Income before income taxes
Industrial Materials		$	12,615		$	16,742	(a), (b)
Construction Materials		3,873			2,437		(a)
Total for reportable segments		16,488			19,179
Corporate and Common Costs		(5,719		)	(5,615		)(a)
Total		$	10,769		$	13,564
Includes the following costs by segment:
Industrial Materials
Interest		$	230		$	240
Depreciation		977			1,046
Amortization		770			761
Construction Materials
Interest		$	44		$	46
Depreciation		289			246
Amortization		413			432

 

(a)         Includes the reclassification of $3,135 and $846 of Selling, general and administrative expense from Industrial Materials and Construction Materials segments, respectively, into Corporate and Common Costs for the first fiscal quarter of 2014. The reclassification reflects the methodology with which the Company internally reviews expenses in the current year

(b)         Includes $5,706 gain on sale of Insulfab product line, for the quarter ended November 30, 2013

 

The Company’s products are sold world-wide.  For the three months ended November 30, 2014 and 2013, sales from its operations located in the United Kingdom accounted for 11% and 8% of consolidated revenues, respectively.  No other foreign geographic area accounted for more than 10% of consolidated revenues for the three months ended November 30, 2014 or 2013.

 

		November 30, 2014			August 31, 2014
Total assets
Industrial Materials		$	125,131		$	127,820
Construction Materials		49,988			50,972
Total for reportable segments		175,119			178,792
Corporate and Common Assets		67,848			66,753
Total		$	242,967		$	245,545

 

As of November 30, 2014 and August 31, 2014, 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 $4,074 and $4,349, respectively, located

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

in the United Kingdom.  These balances exclude goodwill and intangibles associated with the United Kingdom operations of $9,090 and $9,924, as of November 30, 2014 and August 31, 2014, respectively.

 

Note 7 — Goodwill and Other Intangibles

 

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

 

		Construction Materials			Industrial Materials			Consolidated
Balance at August 31, 2014		$	10,752		$	27,528		$	38,280
Foreign currency translation adjustment		(15		)	(317		)	(332		)
Balance at November 30, 2014		$	10,737		$	27,211		$	37,948

 

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.

 

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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, 2014 and August 31, 2014:

 

		Weighted-Average		Gross Carrying			Accumulated			Net Carrying
		Amortization Period		Value			Amortization			Value
November 30, 2014
Patents and agreements		12.0 years		$	3,095		$	2,270		$	825
Formulas		9.1 years		5,779			2,934			2,845
Trade names		5.7 years		6,350			3,348			3,002
Customer lists and relationships		10.2 years		34,088			15,023			19,065
				$	49,312		$	23,575		$	25,737
August 31, 2014
Patents and agreements		11.9 years		$	3,104		$	2,281		$	823
Formulas		9.1 years		5,849			2,851			2,998
Trade names		5.7 years		6,406			3,153			3,253
Customer lists and relationships		10.2 years		34,797			14,656			20,141
				$	50,156		$	22,941		$	27,215

 

Aggregate amortization expense related to intangible assets for the three months ended November 30, 2014 and 2013 was $1,183 and $1,194, respectively.  Estimated amortization expense for the remainder of fiscal year 2015 and for each of the five succeeding fiscal years is as follows:

 

Years ending August 31,
2015 (remaining 9 months)		$	3,520
2016		4,675
2017		4,238
2018		4,007
2019		3,309
2020		2,440
		$	22,189

 

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 were subject to certain post-closing adjustments based on the change in the final net book value compared to the bid date net book value.  In the quarter ending 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 was settled and paid by the Buyer to the Company in the quarter ending February 28, 2014, net of amounts held in escrow.  The net proceeds from the sale are available for debt reduction, investment in the Company’s core businesses and future acquisitions.

 

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 portion of the sale price held in escrow of $739 is recorded as a current asset (Due from sale of product line) as of both November 30, 2014 and August 31, 2014, and is available to resolve any submitted claims or adjustments up to 18 months from the closing date of the Insulfab sale.

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Note 9 — Joint Venture

 

On October 31, 2014, the Company purchased the 50% non-controlling membership interest of NEPTCO JV LLC (the “JV”) owned by its now-former joint venture partner, an otherwise unrelated party. The purchase consideration is subject to certain contingent adjustments based on certain future events related to the JV. The purchase price, including these contingent adjustments are not, nor will be, material to the Company. Because of the Company’s controlling financial interest, the JV’s assets, 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. The Company will continue to fully consolidate the assets, liabilities and results of operations of the JV, but will no longer record an offsetting amount for a non-controlling interest. The ($95) recorded in the Consolidated Statement of Operations as Net (gain) loss attributable to non-controlling interest, represents the now-former joint venture partner’s share of the results of operations of the JV for the period from September 1, 2014 through October 31, 2014.

 

The 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 was 50% owned by each member, was 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 accounted 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 had determined that the JV qualified 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. Prior to the Company’s October 2014 acquisition of the 50% outstanding non-controlling membership interest in NEPTCO JV LLC, an offsetting amount equal to 50% of net assets and net income (loss) of the JV was 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.

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Under the JV agreement, which terminated with the Company’s October 2014 acquisition of the 50% outstanding non-controlling membership interest in NEPTCO JV LLC, the JV had agreed to purchase a minimum of 80% of its total glass fiber requirements from the other joint venture partner. Additionally, the JV agreed to purchase private-label products exclusively from an affiliate of the other joint venture partner; however, the JV was not subject to a minimum purchase requirement on private-label products. Purchases from the joint venture partner totaled $332 and $467 for the period from September 1, 2014 through October 31, 2014 and the three months ended November 30, 2013, respectively. The JV had amounts due to the other joint venture partner of $219 and $394 at November 30, 2014 and August 31, 2014, 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.

 

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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, 2014 and 2013 are as follows:

 

		Three Months Ended November 30,
		2014			2013
Service cost		$	91		$	81
Interest cost		170			161
Expected return on plan assets		(153		)	(178		)
Amortization of prior service cost		1			1
Amortization of unrecognized loss		167			73
Curtailment loss		—			—
Settlement loss		—			—
Net periodic benefit cost		$	276		$	138

 

When funding is required, the Company’s policy is to contribute amounts that are deductible for federal income tax purposes.  As of November 30, 2014, the Company has made contributions of $16 in the current fiscal year to fund its obligations under its pension plan and will make the necessary contributions over the remainder of fiscal 2015 to ensure the qualified plan continues to be adequately funded given the current market conditions. The Company made contributions of $200 in the first quarter of the prior year.

 

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 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 and Level 2 as of November 30, 2014 and August 31, 2014 represent investments that are restricted for use in a nonqualified retirement savings plan for certain key employees and directors.

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

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, 2014 and August 31, 2014:

 

							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, 2014		$	1,300		$	1,270		$	30		$	—
Restricted investments		August 31, 2014		$	1,256		$	1,216		$	40		$	—

 

The following table presents the fair value of the Company’s long-term debt as of November 30, 2014 and August 31, 2014, 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, 2014		$	57,050		$	—		$	57,050		$	—
Long-term debt		August 31, 2014		$	58,800		$	—		$	58,800		$	—

 

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, 2014		$	209		$	(4,785	)	$	326		$	(4,250	)
Other comprehensive gains (losses) before reclassifications (1)		14			—			(2,092		)	(2,078		)
Reclassifications to net income of previously deferred (gains) losses (2)		(1		)	110			—			109
Other comprehensive income (loss)		13			110			(2,092		)	(1,969		)
Balance at November 30, 2014		$	221		$	(4,675	)	$	(1,766	)	$	(6,219	)

 

Note: Accumulated other comprehensive income amounts may not sum for the quarter end due to rounding.

 

(1)         Net of tax benefit of $8, $0, $0, respectively.

(2)         Net of tax expense of $1, tax benefit of $59, $0, respectively.

 

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