CHASE CORP - Annual Report: 2015 (Form 10-K)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10‑K

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended August 31, 2015

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)

Securities registered pursuant to section 12(b) of the Act:

 

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark if the registrant is a well‑known seasoned issuer (as defined in Rule 405 of the Securities Act). YES ☐  NO ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. YES ☐  NO ☒

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

Indicate by check mark whether the registrant has submitted electronically 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 ☒  NO ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S‑K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10‑K or any amendment to this Form 10‑K. ☒

Indicate by checkmark 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.

 

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

The aggregate market value of the common stock held by non‑affiliates of the registrant, as of February 28, 2015 (the last business day of the registrant’s second quarter of fiscal 2015), was approximately  $296,955,000.

As of October 31, 2015, the Company had outstanding 9,211,603 shares of common stock, $0.10 par value, which is its only class of common stock.

Documents Incorporated By Reference:

Portions of the registrant’s definitive proxy statement for the Annual Meeting of Shareholders, which is expected to be filed within 120 days after the registrant’s fiscal year ended August 31, 2015, are incorporated by reference into Part III hereof.

 

 

CHASE CORPORATION

INDEX TO ANNUAL REPORT ON FORM 10-K

 

For the Year Ended August 31, 2015

 

 

PART I

 

Item 1 – Business

 

Primary Operating Divisions and Facilities and Industry Segments

 

Chase Corporation (the “Company,” “Chase,” “we,” or “us”), founded in 1946, is a leading manufacturer of protective materials for high reliability applications.  Our strategy is to maximize the performance of our core businesses and brands while seeking future opportunities through strategic acquisitions.  We are organized into two operating segments, an Industrial Materials segment and a Construction Materials segment.  The segments are distinguished by the nature of the products we manufacture and how they are delivered to their respective markets. The Industrial Materials segment includes specified products that are used in, or integrated into, another company’s product, with demand typically dependent upon general economic conditions.   The Construction Materials segment is composed of typically project-oriented product offerings that are primarily sold and used as "Chase" branded products.  Our manufacturing facilities are distinct to their respective segments with the exception of our O’Hara Township, PA and Blawnox, PA facilities, which produce products related to both operating segments.  A summary of our operating structure as of August 31, 2015 is as follows:

 

 

 

 

Other Business Developments

 

On January 30, 2015, the Company acquired two product lines from Henkel Corporation (the “Seller”) for a purchase price of $33.3 million, after working capital adjustments and excluding any acquisition related costs.  As part of this transaction, Chase acquired the Seller’s microspheres product line, sold under the Dualite® brand, located in Greenville, SC, and obtained exclusive distribution rights and intellectual property related to the Seller’s polyurethane dispersions product line, operating in the Elgin, IL location. We refer to these collectively as our specialty chemical intermediates product line. Under the agreement, Chase entered into a ten-year facility operating lease at the Seller’s Greenville, SC location.  The Seller will perform certain manufacturing and application services for Chase at the Seller’s Elgin, IL location for three years. The purchase was funded entirely with available cash on hand. Since the effective date for this acquisition, the financial results of the specialty chemical intermediates product line have been included in the Company's financial statements within the Company’s Industrial Materials operating segment. Purchase accounting was completed in the quarter ended May 31, 2015 with no material adjustments made to the initial amounts recorded at the end of the second fiscal quarter.  

 

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 continues to fully consolidate the assets, liabilities and results of operations of the JV, but no longer records an offsetting amount for a non-controlling interest subsequent to October 31, 2014. The ($95,000) recorded in the Consolidated Statement of Operations as net (gain) loss attributable to non-controlling interest for the year ended August 31, 2015, 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.

 

Products and Markets

 

Our principal products are specialty tapes, laminates, sealants, coatings and chemical intermediates that are sold by our salespeople, manufacturers' representatives and distributors.  In our Industrial Materials segment, these products consist of: 

 

 

 

 

 

 

 

 

 

 

In our Construction Materials segment, these products consist of:

 

 

 

 

 

There is some seasonality in selling products into the construction market. Higher demand is often experienced when temperatures are warmer in most of North America (April through October), with less demand occurring when temperatures are colder (typically our second fiscal quarter).  Other than the acquisition of the two product lines from Henkel Corporation, we did not introduce any new products requiring an investment of a material amount of our assets during fiscal year 2015.

 

Employees

 

As of October 31, 2015, we employed approximately 671 people (including union employees).  We consider our employee relations to be good.  In the U.S., we offer our employees a wide array of company-paid benefits, which we believe are competitive relative to others in our industry. In our operations outside the U.S., we offer benefits that may vary from those offered to our U.S. employees due to customary local practices and statutory requirements.

 

Backlog, Customers and Competition

 

As of October 31, 2015, the backlog of customer orders believed to be firm was approximately $12,717,000.  This compared with a backlog of $15,453,000 as of October 31, 2014.  The decrease in backlog from the prior year amount is primarily due to a decrease in pipeline products, partially offset by the current period inclusion of the specialty chemical intermediates’ backlog. During fiscal 2015, 2014 and 2013, no customer accounted for more than 10% of sales.  No material portion of our business is subject to renegotiation or termination of profits or contracts at the election of the United States Federal Government.

 

There are other companies that manufacture or sell products and services similar to those made and sold by us.  Many of those companies are larger and have greater financial resources than we have.  We compete principally on the basis of technical performance, service reliability, quality and price. 

 

Raw Materials

 

We obtain raw materials from a wide variety of suppliers with alternative sources of most essential materials available within reasonable lead times.

 

Patents, Trademarks, Licenses, Franchises and Concessions 

 

We own the following trademarks that we believe are of material importance to our business: Chase Corporation®, C-Spray (Logo), a trademark used in conjunction with most of the Company’s business segment and product line marketing material and communications; HumiSeal®, a trademark for moisture protective coatings sold to the electronics industry; Chase & Sons®, a trademark for barrier and insulating tapes sold to the wire and cable industry;

Chase BLH2OCK®, a trademark for a water blocking compound sold to the wire and cable industry; Rosphalt50®, a trademark for an asphalt additive used predominantly on bridge decks for waterproofing protection; PaperTyger®, a trademark for laminated durable papers sold to the envelope converting and commercial printing industries; Tapecoat®, a trademark for corrosion preventative surface coatings and primers; Maflowrap®, a trademark for anti-corrosive tapes incorporating self-adhesive mastic or rubber backed strips, made of plastic materials;  Royston®, a trademark for corrosion inhibiting coating composition for use on pipes; Ceva®, a trademark for epoxy pastes/gels/mortars and elastomeric concrete used in the construction industry; CIM® trademarks for fluid applied coating and lining systems used in the water and wastewater industry; ServiWrap®  trademarks for pipeline protection tapes, coatings and accessories; NEPTCO®, a trademark used in conjunction with most of NEPTCO’s business and product line marketing material and communications; NEPTAPE®, a trademark for coated shielding and insulation materials used in the wire and cable industry; Muletape®, a trademark for pulling and installation tapes sold to the telecommunications industry; Trace-Safe®, a trademark for detection tapes sold to the water and gas industry; and Dualite®, a trademark for polymeric microspheres utilized for density reduction and sound dampening by various industries.  We do not have any other material trademarks, licenses, franchises, or concessions.  While we do hold various patents, we do not believe that they are material to the success of our business.

 

Working Capital

 

We fund our business operations through a combination of available cash and cash equivalents, short-term investments and cash flows generated from operations.  In addition, our revolving credit facility is available for additional working capital needs or investment opportunities.  We have historically funded acquisitions through both available cash on hand and through additional borrowings and term loans from our bank lenders.

 

Research and Development

 

Approximately $2,690,000, $2,599,000 and $3,395,000 was spent for Company-sponsored research and development during fiscal 2015, 2014 and 2013, respectively,  and recorded within selling, general and administrative expenses.  Research and development increased by $91,000 in fiscal 2015 due to an overall increase in activity, including activity related to our newly acquired specialty chemical intermediates product line. These increased activity costs were partially offset by cost-saving efforts, including our continued emphasis on streamlining processes.

 

Available Information

 

Chase maintains a website at http://www.chasecorp.com.  Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to such reports filed or furnished pursuant to section 13(a) or 15(d) of the Securities Exchange Act of 1934, as well as section 16 reports on Form 3, 4, or 5, are available free of charge on this site as soon as is reasonably practicable after they are filed or furnished with the SEC.  Our Code of Conduct and Ethics and the charters for the Audit Committee, the Nominating and Governance Committee and the Compensation and Management Development Committee of our Board of Directors are also available on our Internet website.  The Code of Conduct and Ethics and charters are also available in print to any shareholder upon request.  Requests for such documents should be directed to Paula Myers, Shareholder and Investor Relations Department, at 26 Summer Street, Bridgewater, Massachusetts 02324.  Our Internet website and the information contained on it or connected to it are not part of nor incorporated by reference into this Form 10-K. Our filings with the SEC are also available on the SEC’s website at http://www.sec.gov.

 

Financial Information regarding Segment and Geographic Areas

 

Please see Notes 11 and 12 to the Company’s Consolidated Financial Statements for financial information about the Company’s operating segments and domestic and foreign operations for each of the last three fiscal years.

 

Item 1A – Risk Factors 

 

The following risk factors should be read carefully in connection with evaluating our business and the forward-looking information contained in this Annual Report on Form 10-K. We feel that any of the following risks could materially

adversely affect our business, operations, industry, financial position or our future financial performance. While we believe that we have identified and discussed below the key risk factors affecting our business, there may be additional risks and uncertainties that are not presently known or that are not currently believed to be significant that may adversely affect our business, operations, industry, financial position and financial performance in the future.

 

We currently operate in mature markets where increases or decreases in market share could be significant.    

 

Our sales and net income are largely dependent on sales from a consistent and well established customer base.  Organic growth opportunities are minimal; however, we have used and will continue to use strategic acquisitions as a means to build and grow the business.   In this business environment, increases or decreases in market share could have a material effect on our business condition or results of operation.  We face intense competition from a diverse range of competitors, including operating divisions of companies much larger and with far greater resources than we have.  If we are unable to maintain our market share, our business could suffer.

 

Our business strategy includes the pursuit of strategic acquisitions, which may not be successful if they happen at all.    

 

From time to time, we engage in discussions with potential target companies concerning potential acquisitions.  In executing our acquisition strategy, we may be unable to identify suitable acquisition candidates.  In addition, we may face competition from other companies for acquisition candidates, making it more difficult to acquire suitable companies on favorable terms. 

 

Even if we do identify a suitable acquisition target and are able to negotiate and close a transaction, the integration of an acquired business into our operations involves numerous risks, including potential difficulties in integrating an acquired company’s product line with ours; the diversion of our resources and management’s attention from other business concerns; the potential loss of key employees; limitations imposed by antitrust or merger control laws in the United States or other jurisdictions; risks associated with entering a new geographical or product market; and the day-to-day management of a larger and more diverse combined company. 

 

We may not realize the synergies, operating efficiencies, market position or revenue growth we anticipate from acquisitions and our failure to effectively manage the above risks could have a material adverse effect on our business, growth prospects and financial performance.

 

Our results of operations could be adversely affected by uncertain economic and political conditions and the effects of these conditions on our customers’ businesses and levels of business activity. 

 

Global economic and political conditions can affect the businesses of our customers and the markets they serve. A severe or prolonged economic downturn or a negative or uncertain political climate could adversely affect, among others, the automotive, housing, construction, pipeline, energy, transportation infrastructure and electronics industries. This may reduce demand for our products or depress pricing of those products, either of which may have a material adverse effect on our results of operations. Changes in global economic conditions could also shift demand to products for which we do not have competitive advantages, and this could negatively affect the amount of business that we are able to obtain. In addition, if we are unable to successfully anticipate changing economic and political conditions, we may be unable to effectively plan for and respond to those changes and our business could be negatively affected. 

 

General economic factors, domestically and internationally, may also adversely affect our financial performance through increased raw material costs or other expenses and by making access to capital more difficult.  

 

The cumulative effect of higher interest rates, energy costs, inflation, levels of unemployment, healthcare costs, unsettled financial markets, and other economic factors could adversely affect our financial condition by increasing our manufacturing costs and other expenses at the same time that our customers may be scaling back demand for our products.  Prices of certain commodity products, including oil and petroleum-based products, are historically volatile and are subject to fluctuations arising from changes in domestic and international supply and demand, labor costs, competition, weather events, market speculation, government regulations and periodic delays in delivery. Rapid and

significant changes in commodity prices may affect our sales and profit margins. These factors can increase our merchandise costs and/or selling, general and administrative expenses, and otherwise adversely affect our operating results. Disruptions in the credit markets may limit our ability to access debt capital for use in acquisitions or other purposes on advantageous terms or at all.  If we are unable to manage our expenses in response to general economic conditions and margin pressures, or if we are unable to obtain capital for strategic acquisitions or other needs, then our results of operations would be negatively affected.

 

Fluctuations in the supply and prices of raw materials may negatively impact our financial results. 

 

We obtain raw materials needed to manufacture our products from a number of suppliers. Many of these raw materials are petroleum-based derivatives. Under normal market conditions, these materials are generally available on the open market and from a variety of producers. From time to time, however, the prices and availability of these raw materials fluctuate, which could impair our ability to procure necessary materials, or increase the cost of manufacturing our products. If the prices of raw materials increase, and we are unable to pass these increases on to our customers, we could experience reduced profit margins.

 

If our products fail to perform as expected, or if we experience product recalls, we could incur significant and unexpected costs and lose existing and future business.

 

Our products are complex and could have defects or errors presently unknown to us, which may give rise to claims against us, diminish our brands or divert our resources from other purposes. Despite testing, new and existing products could contain defects and errors and may in the future contain manufacturing or design defects, errors or performance problems when first introduced, or even after these products have been used by our customers for a period of time. These problems could result in expensive and time-consuming design modifications or warranty charges, changes to our manufacturing processes, product recalls, significant increases in our maintenance costs, or exposure to liability for damages, any of which may result in substantial and unexpected expenditures, require significant management attention, damage our reputation and customer relationships, and adversely affect our business, our operating results and our cash flow.

 

We are dependent on key personnel.

 

We depend significantly on our executive officers including our President and Chief Executive Officer, Adam P. Chase, and our Executive Chairman, Peter R. Chase, and on other key employees. The loss of the services of any of these key employees could have a material impact on our business and results of operations. In addition, our acquisition strategy will require that we attract, motivate and retain additional skilled and experienced personnel. The inability to satisfy such requirements could have a negative impact on our ability to remain competitive in the future. 

 

If we cannot successfully manage the unique challenges presented by international markets, we may not be successful in expanding our international operations.

 

Our strategy includes expansion of our operations in existing and new international markets by selective acquisitions and strategic alliances. Our ability to successfully execute our strategy in international markets is affected by many of the same operational risks we face in expanding our U.S. operations. In addition, our international expansion may be adversely affected by our ability to identify and gain access to local suppliers as well as by local laws and customs, legal and regulatory constraints, political and economic conditions and currency regulations of the countries or regions in which we currently operate or intend to operate in the future. Risks inherent in our international operations also include, among others, the costs and difficulties of managing international operations, adverse tax consequences and greater difficulty in enforcing intellectual property rights. Additionally, foreign currency exchange rates and fluctuations may have an impact on future costs or on future cash flows from our international operations.

 

We may experience difficulties in the redesign and consolidation of our manufacturing facilities which could impact shipments to customers, product quality, and our ability to realize cost savings.

 

We currently have several ongoing projects to streamline our manufacturing operations, which include the redesign and consolidation of certain manufacturing facilities.  We anticipate a reduction of overhead costs as a result of these projects, to the extent that we can effectively leverage assets, personnel, and business processes in the transition of production among manufacturing facilities. However, uncertainty is inherent within the facility redesign and consolidation process, and unforeseen circumstances could offset the anticipated benefits, disrupt service to customers, and impact product quality.

 

Financial market performance may have a material adverse effect on our pension plan assets and require additional funding requirements.

 

Significant and sustained declines in the financial markets may have a material adverse effect on the fair market value of the assets of our pension plans.  While these pension plan assets are considered non-financial assets since they are not carried on our balance sheet, the fair market valuation of these assets could impact our funding requirements, funded status or net periodic pension cost.  Any significant and sustained declines in the fair market value of these pension assets could require us to increase our funding requirements, which would have an impact on our cash flow, and could also lead to additional pension expense.  

 

Regulations related to conflict minerals could adversely impact our business.

 

The Dodd-Frank Wall Street Reform and Consumer Protection Act contains provisions to improve transparency and accountability concerning the supply of certain minerals, known as “conflict minerals” (tin, tungsten, tantalum, and gold). As a result, the SEC has adopted annual disclosure and reporting requirements concerning the supply chain for those public companies that use conflict minerals that are necessary to the functionality or production of their products. These requirements require companies to perform certain reasonable country of origin inquiry and due diligence exercises to determine if any of their sourced conflict minerals originated from the Democratic Republic of Congo (DRC) or adjoining countries.  We filed our annual report under these rules in May 2015, to cover calendar year 2014, and anticipate filing reports on this matter on or prior to the annual May 31 due date going forward.

 

There are costs associated with complying with these annual disclosure requirements, including ongoing due diligence to determine the sources of conflict minerals used in our products and other potential changes to products, processes or sources of supply as a consequence of such verification activities. Continued adherence to these rules, and Chase’s desire to obtain and maintain a DRC Conflict Free status, could adversely affect the sourcing, supply and pricing of materials used in our products. As there may be only a limited number of suppliers offering conflict free conflict minerals, we cannot be sure that we will be able to obtain necessary conflict minerals from such suppliers in sufficient quantities or at competitive prices. Also, we may face reputational challenges if we determine that certain of our products contain minerals not determined to be conflict free or if we are unable to sufficiently verify the origins for all conflict minerals used in our products through the procedures we may implement.  In addition, some of our customers may choose to disqualify us as a supplier if we are unable to verify that any conflict minerals used in our products are not sourced from the covered countries or are not done so by conflict free certified refiners and smelters.

 

Failure or compromise of security with respect to an operating or information system or portable electronic device could adversely affect our results of operations and financial condition or the effectiveness of our internal controls over operations and financial reporting.

 

We are highly dependent on automated systems to record and process our daily transactions and certain other components of our financial statements.  We could experience a failure of one or more of these systems, or a compromise of our security due to technical system flaws, data input or record-keeping errors, or tampering or manipulation of our systems by employees or unauthorized third parties.  Information security risks also exist with respect to the use of portable electronic devices, such as laptops and smartphones, which are particularly vulnerable to loss and theft. We may also be subject to disruptions of any of these systems arising from events that are wholly or partially beyond our control (for example, natural disasters, acts of terrorism, epidemics, computer viruses, cyber-attacks

and electrical/telecommunications outages). All of these risks are also applicable wherever we rely on outside vendors to provide services.  Operating system failures, disruptions, or the compromise of security with respect to operating systems or portable electronic devices could subject us to liability claims, harm our reputation, interrupt our operations, or adversely affect our internal control over financial reporting, business, results from operations, financial condition or cash flow.

 

Item 1B – Unresolved Staff Comments

 

Not applicable

 

Item 2 – Properties  

 

We own and lease office and manufacturing properties as outlined in the table below. 

 

 

The above facilities range in age from new to about 100 years, are generally in good condition and, in the opinion of management, adequate and suitable for present operations.  We also own equipment and machinery that is in good repair and, in the opinion of management, adequate and suitable for present operations.  We could significantly add to our capacity by increasing shift operations.  Availability of machine hours through additional shifts would provide expansion of current production volume without significant additional capital investment.

 

Item 3 – Legal Proceedings 

 

We are involved from time to time in litigation incidental to the conduct of our business.  Although we do not expect that the outcome in any of these matters, individually or collectively, will have a material adverse effect on our financial condition, results of operations or cash flows, litigation is inherently unpredictable.  Therefore, judgments could be rendered or settlements entered into, that could adversely affect our operating results or cash flows in a particular period.  We routinely assess all of our litigation and threatened litigation as to the probability of ultimately incurring a liability, and record our best estimate of the ultimate loss in situations where we assess the likelihood of loss as probable.

item 4 – mine safety disclosures

Not applicable.

Item 4a – Executive Officers of the Registrant

The following table sets forth information concerning our Executive Officers as of October 31, 2015.  Each of our Executive Officers is selected by our Board of Directors and holds office until his successor is elected and qualified.

 

 

PART II

Item 5 – Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the NYSE MKT under the symbol CCF.  As of October 30, 2015, there were 363 shareholders of record of our Common Stock and we believe there were approximately 3,689 beneficial shareholders who held shares in nominee name.  On that date, the closing price of our common stock was $44.41 per share as reported by the NYSE MKT.

 

The following table sets forth the high and low daily sales prices for our common stock as reported by the NYSE MKT for each quarter in the fiscal years ended August 31, 2015 and 2014:

 

 

 

Single annual cash dividend payments were declared and scheduled to be paid subsequent to year end in the amounts of $0.65, $0.60, and $0.45 per common share, for the years ended August 31, 2015, 2014 and 2013, respectively.  Certain of our borrowing facilities contain financial covenants which may have the effect of limiting the amount of dividends that we can pay.

Comparative Stock Performance

 

The following line graph compares the yearly percentage change in our cumulative total shareholder return on the Common Stock for the last five fiscal years with the cumulative total return on the Standard & Poor's 500 Stock Index (the “S&P 500 Index”), and a composite peer index that is weighted by market equity capitalization (the “Peer Group Index”).  The companies included in the Peer Group Index are American Biltrite Inc., Circor International Inc., H.B. Fuller Company, Quaker Chemical Corporation and RPM International, Inc.  Cumulative total returns are calculated assuming that $100 was invested on August 31, 2010 in each of the Common Stock, the S&P 500 Index and the Peer Group Index, and that all dividends were reinvested.

 

The information under the caption “Comparative Stock Performance” above is not deemed to be “filed” as part of this Annual Report, and is not subject to the liability provisions of Section 18 of the Securities Exchange Act of 1934. Such information will not be deemed to be incorporated by reference into any filing we make under the Securities Act of 1933 unless we explicitly incorporate it into such a filing at the time.

Item 6 – Selected Financial Data

 

the following selected financial data should be read in conjunction with “Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8 – Financial Statements and Supplementary Data.”

 

 

 

Item 7 – Management's Discussion and Analysis of Financial Condition and Results of Operations

The following discussion provides an analysis of our financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Item 8 of this Annual Report on Form 10-K. 

 

Selected Relationships within the Consolidated Statements of Operations

 

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 *   Denotes less than 1%

 

Overview

 

A combination of strong demand for our legacy products, the current year acquisition of the specialty chemical intermediates product line and a favorable sales mix all contributed to the Company’s increased revenue and operating income over the prior year.  Our strategic diversification again proved itself to be a core strength of the business, as gains in certain product lines more than trumped observed decreases in others.  Further, our ongoing efforts with production facility consolidation, efficiency improvements and streamlining overhead costs have improved our profitability.   The reduction in net income attributable to Chase Corporation from the prior year is primarily the result of the non-recurring $5,706,000 pre-tax gain recognized in fiscal 2014 related to the sale of the Company’s Insulfab product line.

 

Revenue from the Industrial Materials segment surpassed prior year results due to an increase in sales volume for our pulling and detection products and an increased demand for both our domestically and internationally produced electronic coatings products. These gains in legacy products were further bolstered by the January 2015 acquisition of the specialty chemical intermediates product line, which positively affected revenue and earnings in the current year. These increased sales were partially offset by a reduction in demand for our wire and cable, durable paper products and electronic materials product lines.

 

Revenue from the Construction Materials segment surpassed the prior year primarily due to increased demand for pipeline coatings products produced at our Rye, UK facility to satisfy Middle East water infrastructure project demand, as well as increased sales of our building envelope products. These increases were partially offset by decreased sales of our coating and lining system and bridge and highway products.

 

Streamlining processes and consolidation efforts will remain priorities. Key strategies focus on our marketing and product development efforts, and on identifying potential acquisition targets.  We have now fully integrated the specialty chemical intermediates product line acquired during fiscal 2015.  Our balance sheet continues to remain strong, with cash on hand of $43.8 million and a current ratio of 3.2.  Our $15.0 million line of credit is fully available, while the balance of our term debt, including current portion, is $51.8 million. 

 

The Company has two reportable segments summarized below:

 

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Results of Operations

 

Revenue and Operating Profit by Segment are as follows:

 

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Total Revenue

 

Total revenue in fiscal 2015 increased $14,040,000 or 6% to $238,046,000 from $224,006,000 in the prior year.

 

Revenue in our Industrial Materials segment increased $6,890,000 or 4% to $176,547,000 for the year ended August 31, 2015 compared to $169,657,000 in fiscal 2014.  The increase in revenue from our Industrial Materials segment in fiscal 2015 was primarily due to: (a) the first seven months of  sales from our newly acquired specialty chemical intermediates product line totaling $12,449,000;  (b) increased sales volume of $2,963,000 from our pulling and detection products reflecting continuing higher demand in product volume by the utility and telecom industries; and (c) $2,471,000 in increased sales volume from our global electronic coatings product line, primarily due to higher sales volume into the Americas, Europe and Asia.  These increases were partially offset by decreased sales of $7,154,000 from our wire and

cable products, reflecting a decrease in demand from energy-related markets, as well as lower sales of $2,242,000 from our durable paper products.

 

Revenue from our Construction Materials segment increased $7,150,000 or 13% to $61,499,000 for the year ended August 31, 2015 compared to $54,349,000 for fiscal 2014.  The increased sales from our Construction Materials segment in fiscal 2015 was primarily due to a net increase in sales volume of $6,397,000 in pipeline products, primarily driven by continued high Middle East water infrastructure project demand for products produced at our Rye, UK facility. This international growth in pipeline products was partially offset by decreased domestic sales of pipeline products, which are primarily sold into the oil and gas markets. Our building envelope products also had increased sales volume of $1,358,000 in fiscal 2015.

 

Royalties and commissions in the Industrial Materials segment were $3,156,000, $2,972,000 and $2,414,000 for the years ended August 31, 2015, 2014 and 2013, respectively.  The increase in royalties and commissions in fiscal 2015 over both fiscal 2014 and 2013 was primarily due to increased sales of electronic coating products by our licensed manufacturer in Asia.

 

Export sales from domestic operations to unaffiliated third parties were $27,955,000, $21,212,000 and $22,827,000 for the years ended August 31, 2015, 2014 and 2013, respectively.  The increase in export sales in fiscal 2015 over both fiscal 2014 and 2013 was primarily due to increased sales volume into developing markets in Asia Pacific in fiscal 2015, as well as growth in sales to Canada.  We do not anticipate any material changes to export sales during fiscal 2016.

 

Total revenue in fiscal 2014 increased $7,944,000 or 4% to $224,006,000 from $216,062,000 in fiscal 2013.  Revenue in our Industrial Materials segment increased $6,183,000 or 4% to $169,657,000 for the year ended August 31, 2014 compared to $163,474,000 in fiscal 2013.  The increase in revenue from our Industrial Materials segment in fiscal 2014 was primarily due to increased sales of: (a) $3,465,000 from our global electronic coatings product line primarily due to higher sales volume into Europe and Asia; (b) $2,015,000 from our pulling and detection tape products; (c) $1,447,000 from electronic cover tapes; and (d) $1,072,000 from our wire and cable products that are used in energy-related applications.  These increases were partially offset by decreased sales of $975,000 from our specialty materials products as well as lower sales of $520,000 from our then joint venture fiber optic cable products. Revenue from our Construction Materials segment increased $1,761,000 or 3% to $54,349,000 for the year ended August 31, 2014 compared to $52,588,000 for fiscal 2013.  The increased sales from our Construction Materials segment in fiscal 2014 was primarily due to increased sales of $5,563,000 in pipeline products produced at our Rye, UK facility as a result of higher project related demands in the Middle East.  These increases were partially offset by decreased sales of $2,032,000 from our bridge and highway products as well as lower sales of $1,733,000 from our building envelope products as both experienced slower demand earlier in fiscal 2014 during the winter and spring months due to the impact of the harsh winter across the U.S. on these businesses.

 

Cost of Products and Services Sold

 

Cost of products and services sold increased $4,009,000 or 3% to $149,202,000 for the fiscal year ended August 31, 2015 compared to $145,193,000 in fiscal 2014.  As a percentage of revenue, cost of products and services sold decreased to 63% in fiscal 2015 compared to 65% for fiscal 2014. 

 

The following table summarizes the relative percentages of costs of products and services sold to revenue for both of our operating segments:

 

 

Cost of products and services sold in our Industrial Materials segment was $110,729,000 for the fiscal year ended August 31, 2015 compared to $108,121,000 in fiscal 2014.  As a percentage of revenue, cost of products and services sold in this segment decreased to 63% in fiscal 2015 compared to 64% in for fiscal 2014.  Cost of products and services

sold in our Construction Materials segment was $38,473,000 for the fiscal year ended August 31, 2015 compared to $37,072,000 in fiscal 2014.  As a percentage of revenue, cost of products and services sold in this segment decreased to 63% in fiscal 2015 compared to 68% in for fiscal 2014.   As a percentage of revenue, cost of products and services sold in both segments decreased primarily due to product mix as we had decreased sales volume from our lower margin products within the segments.  To facilitate improvement in margins in both segments, we will continue to closely monitor raw material pricing across all product lines, while effectively managing fixed overhead and assessing opportunities for the further streamlining of costs.

 

In fiscal 2014, cost of products and services sold in our Industrial Materials segment was $108,121,000 compared to $110,051,000 in fiscal 2013.  As a percentage of revenue, cost of products and services sold in this segment decreased to 64% in fiscal 2014 compared to 67% in for fiscal 2013.  As a percentage of revenue, cost of products and services sold in the Industrial Materials segment decreased primarily due to sales mix as well as cost savings realized from the Company’s plant consolidation efforts.  This segment has benefitted from exiting the Randolph, MA (operations relocated in December 2012) and Taylorsville, NC (Insulfab product line sold in October 2013) facilities and transitioning the remaining manufacturing activities from those two facilities to other domestic Chase facilities.   Additionally, in the first three months of fiscal 2013, this segment was impacted by incremental cost of products sold of $564,000 due to the sale of inventory which had a stepped up valuation as part of the NEPTCO acquisition.  Cost of products and services sold in our Construction Materials segment was $37,072,000 for the fiscal year ended August 31, 2014 compared to $35,984,000 in fiscal 2013.  As a percentage of revenue, cost of products and services sold in the Construction Materials segment remained relatively flat despite increased sales of lower margin products primarily due to management’s ability to leverage its fixed overhead costs on a higher revenue base coupled with continued focus and scrutiny on material purchases that helped stabilize margins on many of our key product lines.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased $3,375,000 or 8% to $46,015,000 during fiscal 2015 compared to $42,640,000 in fiscal 2014.  As a percentage of revenue, selling, general and administrative expenses were consistent at 19% of total revenue in both fiscal 2015 and fiscal 2014.  The year-over-year increase in expenses is primarily attributable to: (a) increased amortization expense on acquired intangible assets of $1,940,000 for the year, primarily attributable to the specialty chemical intermediates product line acquisition in the second quarter; (b) increased international sales commission expenses of $1,051,000 over the prior  year, incurred related to increased revenue generated by sales in those regions; (c) increased pension costs of $399,000 in the current year against the prior year,  inclusive of a $188,000 settlement loss charge; and (d) a year-over-year decrease of $375,000 in the capitalization of internal labor, most notably related to our multiyear companywide single ERP system rollout, which was substantially completed as to our previously existing locations in December 2014. These increases in cost were partially offset by our ongoing efforts with production facility consolidation, efficiency improvements and streamlining overhead costs.

 

During fiscal 2014, selling, general and administrative expenses decreased $596,000 or 1% to $42,640,000 compared to $43,236,000 in fiscal 2013. As a percentage of revenue, selling, general and administrative expenses decreased to 19% of total revenue in 2014, compared to 20% in fiscal 2013.  The decrease is primarily attributable to our continued emphasis on controlling costs, as well as the increased benefit in 2014 due to the capitalization of internal costs related to our global ERP implementation project.

 

Acquisition Related Costs

 

In fiscal 2015, we incurred $584,000 of acquisition costs related to our acquisition of the specialty chemical intermediates product line.   This acquisition was accounted for as a business combination in accordance with applicable accounting standards, and as such all related professional service fees (i.e., banking, legal, accounting, actuarial, etc.) were expensed as incurred during the year ended August 31, 2015.    

 

Interest Expense

Interest expense decreased $80,000 or 7% to $1,063,000 in fiscal 2015 compared to $1,143,000 in fiscal 2014.  Interest expense decreased $151,000 or 12% to $1,143,000 in fiscal 2014 compared to $1,294,000 in fiscal 2013.  The decrease

in interest expense in both fiscal 2015 and 2014 as compared to their respective prior years was a direct result of the reduction in our overall debt balance through required principal payments made from operating cash flow over those periods.   Our debt balance is attributable to our term note related to the June 2012 acquisition of NEPTCO.    

Gain on Sale of Product Line

 

On October 7, 2013, we sold substantially all of our property and assets, including intellectual property, comprising the Insulfab product line, to an unrelated buyer.   This transaction resulted in a pre-tax book gain of $5,706,000, which was recorded in our fiscal quarter ended November 30, 2013 (the first quarter of our fiscal 2014).

 

Other (Expense) Income

 

Other income was  $44,000 in fiscal 2015 compared to other expense of $246,000 in fiscal 2014, a difference of $290,000.  Other (expense) income primarily includes interest income and foreign exchange gains and losses caused by changes in exchange rates on transactions or balances denominated in currencies other than the functional currency of our subsidiaries.    

 

Other expense was $246,000 in fiscal 2014 compared to other income of $313,000 in fiscal 2013, a decrease of $559,000.    The decrease in fiscal 2014 as compared to the prior year was primarily due to foreign exchange losses driven by the strengthening of the pound sterling against both the euro and the US dollar throughout fiscal 2014.  

 

Income Taxes

 

The effective tax rate for fiscal 2015 was 35.9% as compared to 34.5% and 35.1% in fiscal 2014 and 2013, respectively.  In all three years, we have received the benefit of the domestic production deduction and foreign rate differential.  The increased effective tax rate in fiscal 2015 was primarily due to a less favorable effective state income tax rate, a less favorable domestic production deduction effect and a less favorable tax effect of undistributed earnings than realized in fiscal 2014.    The effective tax rate of 34.5% for fiscal 2014 compared favorably to 2013 primarily due to a more favorable effective state income tax rate and foreign rate differential than realized in the prior fiscal year.    

 

Non-controlling Interest

 

The income (loss) from non-controlling interest relates to a joint venture in-which we had, prior to October 2014, a 50% controlling ownership interest. We acquired the 50% outstanding non-controlling membership interest in October 2014.  The joint venture between the Company and its now-former joint venture partner (an otherwise unrelated party) was managed and operated on a day-to-day basis by the Company.

 

Net Income attributable to Chase Corporation

 

Net income attributable to Chase Corporation in fiscal 2015 decreased $313,000 or 1% to $26,318,000 compared to $26,631,000 in fiscal 2014.  The decrease in net income in 2015 is primarily due to the $5,706,000 ($3,709,000 after-tax) gain on the Company’s Insulfab product line sold in October 2013, which significantly contributed to earnings and cash flows in the prior fiscal year, and which did not recur in fiscal 2015.

 

Net income attributable to Chase Corporation in fiscal 2014 increased $9,417,000 or 55% to $26,631,000 compared to $17,214,000 in fiscal 2013.  The increase in net income in fiscal 2014 is primarily due to the previously mentioned $5,706,000 pre-tax gain that resulted from the sale of the Insulfab product line in October 2013, numerous cost containment initiatives including plant consolidation efforts, and the incremental benefit of $236,000 from capitalized internal labor used in our on-going global ERP implementation project.  We capitalized $719,000 of internal costs related to our ERP implementation project for fiscal 2014, compared to $483,000 in fiscal 2013.  Additionally, net income in fiscal 2013 was negatively impacted by expenses of $564,000 in inventory fair value step up related to the NEPTCO acquisition, and the acceleration of defined benefit plan settlement costs of $1,223,000 resulting from the timing of lump sum distributions to participants.

 

Other Important Performance Measures

 

We believe that EBITDA and Adjusted EBITDA are useful performance measures.  They are used by our executive management team and Board of Directors to measure operating performance, to allocate resources, to evaluate the effectiveness of our business strategies and to communicate with our Board of Directors and investors concerning our financial performance. The Company believes EBITDA and Adjusted EBITDA are commonly used by financial analysts and others in the industries in which the Company operates and, thus, provide useful information to investors. EBITDA and Adjusted EBITDA are non-GAAP financial measures.

 

We define EBITDA as follows:  net income attributable to Chase Corporation before interest expense from borrowings, income tax expense, depreciation expense from fixed assets, and amortization expense from intangible assets.  We define Adjusted EBITDA as EBITDA excluding costs and (gains)/losses related to our acquisitions and divestitures, costs of products sold related to inventory step-up to fair value, settlement (gains)/losses resulting from lump sum distributions to participants from our defined benefit plan, and other significant nonrecurring items.

 

The use of EBITDA and Adjusted EBITDA has limitations and these performance measures should not be considered in isolation from, or as an alternative to, U.S. GAAP measures such as net income.  Our measurement of EBITDA and Adjusted EBITDA may not be comparable to similarly-titled measures used by other companies.

 

The following table provides a reconciliation of net income attributable to Chase Corporation, the most directly comparable financial measure presented in accordance with U.S. GAAP, to EBITDA and Adjusted EBITDA for the periods presented:

 

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Liquidity and Sources of Capital 

 

Our cash balance decreased $9,403,000 to $43,819,000 at August 31, 2015 from $53,222,000 at August 31, 2014.  The decreased cash balance is primarily attributable to the $33,285,000 purchase of the specialty chemical intermediates product line in January 2015, and payment of $5,477,000 for the annual dividend in December 2014, partially offset by cash from operations.  Of the above noted amounts, $18,659,000 and $14,575,000 were held outside the U.S. by our foreign subsidiaries as of August 31, 2015 and 2014, respectively.  Given our cash position and borrowing capability in the U.S. and the potential for increased investment and acquisitions in foreign jurisdictions, we do not have a history of repatriating a significant portion of our foreign cash.  However, we do not currently take the position that undistributed foreign subsidiaries’ earnings are considered to be permanently reinvested.   Accordingly, we recognize a deferred tax liability for the estimated future tax effects attributable to temporary differences due to these unremitted earnings.  In the

event that circumstances should change in the future and we decide to repatriate these foreign amounts to fund U.S. operations, the Company would pay the applicable U.S. taxes on these repatriated foreign amounts to satisfy all previously recorded tax liabilities.

 

Our cash balance at August 31, 2014 increased $23,225,000 to $53,222,000 compared to $29,997,000 at August 31, 2013.  The increased cash balance was primarily attributable to the proceeds from the sale of the Insulfab product line in October 2013, as well as from cash from operations, partially offset by payments on:  our fiscal 2013 annual dividend, outstanding debt, income taxes, annual incentive compensation and equipment purchases. Of the above noted amounts, $14,575,000 and $10,013,000 were held outside the U.S. by our foreign subsidiaries as of August 31, 2014 and 2013, respectively.    

 

Cash provided by operations was $40,959,000 for the year ended August 31, 2015 compared to $28,606,000 in fiscal 2014.  Cash provided by operations during fiscal 2015 was primarily due to operating income and decreased inventories and increased accrued income taxes, offset by an increase in accounts receivable. The decrease in inventories related primarily to efficiencies in purchasing and inventory management, while the increase in accounts receivable primarily related to overall increased sales, including the addition of the specialty chemical intermediates product line in the current year, as well as an overall increase in international sales, which customarily have longer collection terms.

 

Cash provided by operations was $28,606,000 during fiscal 2014 compared to $28,157,000 in fiscal 2013.  Cash provided by operations during fiscal 2014 was primarily due to operating income and increased accounts payable due to the timing of vendor payments, offset by increased inventory resulting from strategic purchases of raw materials and increased accounts receivable balances due to higher sales volumes.   Cash provided by operations during fiscal 2013 was primarily due to operating income, offset by decreased accrued expenses and increased inventory balances.

 

The ratio of current assets to current liabilities was 3.2 as of August 31, 2015 compared to 3.5 as of August 31, 2014.  The decrease in our current ratio at August 31, 2015 was primarily attributable to the January 2015 purchase of the specialty chemical intermediates product line, with cash on hand, and a year-over-year increase in the portion of long-term debt classified as current.

 

Cash used in investing activities was $35,713,000 for the year ended August 31, 2015 compared to cash provided by investing activities of $4,443,000 in fiscal 2014.  During fiscal 2015, cash used in investing activities was primarily due to the acquisition of the specialty chemical intermediates product line in January 2015, in addition to cash paid for purchases of machinery and equipment at our manufacturing locations during fiscal 2015.    During fiscal 2014, cash provided by investing activities was $4,443,000, compared to cash used in investing activities of $3,580,000 in fiscal 2013. Cash provided by investing activities in 2014 was primarily due to the proceeds from the sale of the Insulfab product line in October 2013, which was partially offset by cash paid for purchases of machinery and equipment at our manufacturing locations

 

Cash used in financing activities was $13,498,000 for the year ended August 31, 2015 compared to $10,501,000 in fiscal 2014 and $9,614,000 in fiscal 2013.  During fiscal 2015, 2014 and 2013, cash used in financing activities was primarily due to our annual dividend payment and payments made on the term debt used to finance our acquisition of NEPTCO.   

 

On October 28, 2015, we announced a cash dividend of $0.65 per share (totaling approximately  $5,988,000) to shareholders of record on November 9, 2015 and payable on December 4, 2015.    

 

On October 23, 2014, we announced a cash dividend of $0.60 per share (resulting in payment of $5,477,000), composed of $0.50 related to earnings from continuing operations and $0.10 related to the sale of the Insulfab business, to shareholders of record on November 3, 2014 and paid on December 4, 2014. 

 

On October 23, 2013, we announced a cash dividend of $0.45 per share (resulting in payment of $4,093,000) to shareholders of record on November 5, 2013 and paid on December 4, 2013. 

In June 2012, in connection with our acquisition of NEPTCO, we borrowed $70,000,000 under a five year term debt financing arrangement led and arranged by Bank of America, with participation from RBS Citizens (the “Credit

Facility”). The applicable interest rate is based on the effective LIBOR plus a range of 1.75% to 2.25%, depending on our consolidated leverage ratio.  At August 31, 2015, the applicable interest rate was 1.95% per annum and the outstanding principal amount was $51,800,000.  We are required to repay the principal amount of the term loan in quarterly installments.  Installment payments of $1,400,000 began in September 2012 and continued through June 2014, increased to $1,750,000 per quarter thereafter through June 2015, and increased to $2,100,000 per quarter thereafter through March 2017.  The Credit Facility matures in June 2017 and prepayment of the Credit Facility is allowed at any time.

We also have a revolving line of credit with Bank of America (the “Revolver”) totaling $15,000,000, which bears interest at LIBOR plus a range of 1.75% to 2.25%, depending on our consolidated leverage ratio, or, at our option, at the bank’s base lending rate.  As of August 31, 2015 and October 31, 2015, the entire amount of $15,000,000 was available for use.  The Revolver is scheduled to mature in June 2017.  This Revolver allows for increased flexibility for working capital requirements going forward, and we plan to use this availability to help finance our cash needs, including potential acquisitions, in fiscal 2016 and future periods.

 

Our credit agreement with Bank of America, which outlines the terms of both the Credit Facility and the Revolver, contains customary affirmative and negative covenants that, among other things, restrict our ability to incur additional indebtedness.  It also requires us to maintain a ratio of consolidated indebtedness to consolidated EBITDA (each as defined in the credit agreement) of no more than 3.00 to 1.00, and to maintain a consolidated fixed charge coverage ratio (as calculated in the credit agreement) of at least 1.25 to 1.00.  We were in compliance with our debt covenants as of August 31, 2015. 

 

We currently have several on-going capital projects that are important to our long term strategic goals.  Machinery and equipment will also be added as needed to increase capacity or enhance operating efficiencies in our other manufacturing plants. 

We may also consider the acquisition of companies or other assets this year or in future periods which are complementary to our business.  We believe that our existing resources, including cash on hand and our Revolver, together with cash generated from operations and additional bank borrowings, will be sufficient to fund our cash flow requirements through at least the next twelve months.  However, there can be no assurances that additional financing 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.

 

Contractual Obligations

 

The following table summarizes our contractual cash obligations at August 31, 2015 and the effect such obligations are expected to have on our liquidity and cash flow in future periods:    

 

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Recently Issued Accounting Standards

 

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, 2018 (fiscal 2019), including interim periods in its fiscal year 2019, and allows for either retrospective or modified retrospective 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 and cash flows.

 

In July 2015, the FASB issued ASU No. 2015-11, “Inventory (Topic 330): Simplifying the Measurement of Inventory.” Under this accounting guidance, inventory will be measured at the lower of cost and net realizable value and other options that currently exist for market value will be eliminated. ASU No. 2015-11 defines net realizable value as the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. No other changes were made to the current guidance on inventory measurement. This accounting guidance is effective for us in the first quarter of fiscal 2018. Early adoption is permitted. We are currently evaluating the impact of the adoption of this accounting standard update on our consolidated financial statements.

 

Critical Accounting Policies, Judgments, and Estimates

The U.S. Securities and Exchange Commission (“SEC”) requires companies to provide additional disclosure and commentary on their most critical accounting policies. The SEC has defined the most critical accounting policies as the ones that are most important to the portrayal of a company’s financial condition and operating results, and requires

management to make its most significant estimates and judgments in the preparation of its consolidated financial statements.  Our critical accounting policies are described below.

 

Accounts Receivable

 

We evaluate the collectability of accounts receivable balances based on a combination of factors. In cases where we are aware of circumstances that may impair a specific customer’s ability to meet its financial obligations to us, a specific allowance against amounts due to us is recorded, and thereby reduces the net recognized receivable to the amount we reasonably believe will be collected. For all other customers, we recognize allowances for doubtful accounts based on the length of time the receivables are past due, industry and geographic concentrations, the current business environment and our historical experience. If the financial condition of our customers deteriorates or if economic conditions worsen, additional allowances may be required in the future, which could have an adverse impact on our future operating results.

 

Inventory

 

We value inventory at the lower of cost or market using the first-in, first-out (FIFO) method.  Management assesses the recoverability of inventory based on types and levels of inventory held, forecasted demand and changes in technology. These assessments require management judgments and estimates, and valuation adjustments for excess and obsolete inventory may be recorded based on these assessments.  We estimate excess and obsolescence exposures based upon assumptions about future demand, product transitions, and market conditions and record adjustments to reduce inventories to their estimated net realizable value.  The failure to accurately forecast demand may lead to additional excess and obsolete inventory and future charges.

 

Business Combinations  

 

We assign the value of the consideration transferred to acquire a business to the tangible assets and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values at the date of acquisition.  We assess the fair value of assets, including intangible assets, using a variety of methods and each asset is measured at fair value from the perspective of a market participant.  The method used to estimate the fair values of intangible assets incorporates significant assumptions regarding the estimates a market participant would make in order to evaluate an asset, including a market participant’s use of the asset and the appropriate discount rates for a market participant.  Assets recorded from the perspective of a market participant that are determined to not have economic use for us are expensed immediately.  Any excess purchase price over the fair value of the net tangible and intangible assets acquired is allocated to goodwill. Transaction costs and restructuring costs associated with a transaction to acquire a business are expensed as incurred.

 

Goodwill, Intangible Assets, and Other Long-Lived Assets

 

Long-lived assets consist of goodwill, identifiable intangible assets, trademarks, patents and agreements and property, plant, and equipment.  Intangible assets and property, plant, and equipment, excluding goodwill, are amortized using the straight-line method over their estimated useful life. We review long-lived assets and all intangible assets for impairment whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable. 

 

Goodwill is also reviewed at least annually for impairment.  We perform our annual goodwill impairment assessment during the fourth fiscal quarter of each year. When evaluating the potential impairment of goodwill, we first assess a range of qualitative factors, including but not limited to, industry conditions, the competitive environment, changes in the market for our products and services, entity specific factors such as strategy and changes in key personnel, and the overall financial performance for each of our reporting units relative to historical or projected future operating results.  If after completing this assessment, it is determined that it is more likely than not that the fair value of a reporting unit is less than its carrying value, we then proceed to a two-step impairment testing methodology using the income approach (discounted cash flow method).

In the first step of this testing methodology, we compare the carrying value of the reporting unit, including goodwill, with its fair value, as determined by its estimated discounted cash flows. If the carrying value of a reporting unit exceeds its fair value, we then complete the second step of the impairment test to determine the amount of impairment to be recognized.

In the second step, we estimate an implied fair value of the reporting unit's goodwill by allocating the fair value of the reporting unit to all of the assets and liabilities other than goodwill (including intangible assets).  If the carrying value of a reporting unit's goodwill exceeds its implied fair value, we record an impairment loss equal to the difference in that period.

When required, we arrive at our estimates of fair value using a discounted cash flow methodology which includes estimates of future cash flows to be generated by particular assets, as well as selecting a discount rate to measure the present value of those anticipated cash flows. Estimating future cash flows requires significant judgment and includes making assumptions about projected growth rates, industry-specific factors, working capital requirements, current and anticipated operating conditions, and terminal sales value at the end of the period under review.  The cash flow estimates used to determine impairment, if any, contain management’s best estimates, using appropriate and customary assumptions and projections at the time.  See Note 4 to the Consolidated Financial Statements included in this Report.

 

Revenue

 

We recognize revenue when persuasive evidence of an arrangement exists, performance of our obligation is complete, our price to the buyer is fixed or determinable, and we are reasonably assured of collecting.  These four transaction elements are typically met at the time of shipment or upon receipt by the customer based on contractual terms.  If a loss is anticipated on any contract, a provision for the entire loss is made immediately.  Revenue recognition involves judgments and assessments of expected returns, and the likelihood of nonpayment by customers.  We analyze various factors, including a review of specific customer contracts and shipment terms, historical experience, creditworthiness of customers and current market and economic conditions in determining when to recognize revenue.  Changes in judgments on these factors could impact the timing and amount of revenue recognized with a resulting impact on the timing and amount of operating income.  For certain products, consigned inventory is maintained at customer locations; for these products, revenue is typically recognized in the period that the inventory is consumed. Commissions are recognized when earned and payments are received from the manufacturers represented.  Royalty revenue is recognized based on licensee production statements received from the authorized manufacturers. Billed shipping and handling fees are recorded as sales revenue with the associated costs recorded as costs of products and services sold.

 

Contingent Income Tax Liabilities

 

We are subject to routine income tax audits that occur periodically in the normal course of business.  Our contingent income tax liabilities are estimated based on the methodology prescribed in the guidance for accounting for uncertain tax positions, which we adopted as of the beginning of fiscal 2008.  The guidance prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements.  Our liabilities related to uncertain tax positions require an assessment of the probability of the income-tax-related exposures and settlements. Our assessment is based on our historical audit experiences with various state and federal taxing authorities, as well as by current income tax trends.  If circumstances change, we may be required to record adjustments that could be material to our reported financial condition and results of operations. See Note 7 to the Consolidated Financial Statements included in this Report for more information on our accounting for uncertain tax positions.

 

Deferred Income Taxes

 

We evaluate the need for a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized.  We have considered future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for a valuation allowance.  Should we determine that we would not be able to realize all or part of our net deferred tax asset in the future, an adjustment to the deferred tax asset would be charged to income in the period such determination was made.

 

Stock Based Compensation

 

We measure compensation cost for share-based compensation at fair value, including estimated forfeitures, and recognize the expense over the period that the recipient is required to provide service in exchange for the award, which generally is the vesting period.  We use the Black-Scholes option pricing model to measure the fair value of stock options.  This model requires significant estimates related to the award’s expected life and future stock price volatility of

the underlying equity security.  In determining the amount of expense to be recorded, we are also required to estimate forfeiture rates for awards, based on the probability that employees will complete the required service period. We estimate the forfeiture rate based on historical experience.  If actual forfeitures differ significantly from our estimates, additional adjustments to compensation expense may be required in future periods.

 

Pension Benefits

 

We sponsor a non-contributory defined benefit pension plan covering employees of certain divisions of the Company.  In calculating our retirement plan obligations and related expense, we make various assumptions and estimates.  These assumptions include discount rates, benefits earned, expected return on plan assets, mortality rates, and other factors.  While we believe that the assumptions used are appropriate, differences in actual experience or changes in assumptions may affect our pension obligations and future expense.

 

Effective December 1, 2008, the Chase defined benefit pension plan was amended to include a soft freeze whereby any employee hired after the effective date of December 1, 2008 will not be admitted to the plan.  The only exception related to employees of the International Association of Machinists and Aerospace Workers Union whose contract was amended to include a soft freeze whereby any employees hired after the effective date of July 15, 2012 will not be admitted to the plan.  All eligible participants who were previously admitted to the plan prior to the applicable soft freeze dates will continue to accrue benefits as detailed in the plan agreements.

 

Through our wholly owned subsidiary NEPTCO, we have a defined benefit pension plan covering substantially all of our union employees at our Pawtucket, RI plant. This plan was frozen effective October 31, 2006, and as a result, no new participants can enter the plan and the benefits of current participants were frozen as of that date. The benefits are based on years of service and the employee’s average compensation during the earlier of five years before retirement, or October 31, 2006. 

 

We account for our pension plans following the requirements of ASC Topic 715, “Compensation – Retirement Benefits” (“ASC 715”).  ASC 715 requires an employer to: (a) recognize in its statement of financial position the funded status of a benefit plan; (b) measure defined benefit plan assets and obligations as of the end of the employer’s fiscal year (with limited exceptions); and (c) recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise but are not recognized as components of net periodic benefit costs pursuant to prior existing guidance.

 

Impact of Inflation

 

Inflation has not had a significant long-term impact on our earnings.  In the event of significant inflation, our efforts to recover cost increases would be hampered as a result of the competitive nature of the industries in which we operate.

 

Forward-Looking Information

 

From time to time, we may publish, verbally or in written form, forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, acquisition or consolidation strategies, anticipated sources of capital, research and development activities and similar matters.  In fact, this Form 10-K (or any other periodic reporting documents required by the Securities Exchange Act of 1934, as amended) may contain forward-looking statements reflecting our current views concerning potential or anticipated future events or developments, including our strategic goals for future fiscal periods.  The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements.  We caution investors that any forward-looking statements made by us are not guarantees of future performance and that a variety of factors could cause our actual results and experience to differ materially from the anticipated results or other expectations expressed in our forward-looking statements.  The risks and uncertainties which may affect the operations, performance, development and results of our business include, but are not limited to, the following:  uncertainties relating to economic conditions; uncertainties relating to customer plans and commitments; the pricing and availability of equipment, materials and inventories; the impact of acquisitions on our business and results of operations; technological developments; performance issues with suppliers and subcontractors; our ability to renew existing credit facilities or to obtain new or additional financing as

needed; economic growth; delays in testing of new products; our ability to comply with new regulatory requirements without undue expense or other difficulties; the impact of changes in accounting standards; rapid technology changes and the highly competitive environment in which we operate.   These risks and uncertainties also include those risks outlined under Item 1A (Risk Factors) of this Annual Report on Form 10-K.  Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statement was made.

 

Item 7a – Quantitative and Qualitative Disclosures about Market Risk

 

We limit the amount of credit exposure to any one issuer.  At August 31, 2015, other than our restricted investments (which are restricted for use in a non-qualified retirement savings plan for certain key employees and members of the Board of Directors), all of our 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.

 

Our domestic operations have limited currency exposure since substantially all transactions are denominated in U.S. dollars. However, our European operations are subject to currency exchange fluctuations.  We continue to review our policies and procedures to reduce this exposure while maintaining the benefit from these operations and sales to European currency denominated customers.    As of August 31, 2015, the Company had cash balances in the following foreign currencies (with USD equivalents):

 

 

We will continue to review our current cash balances denominated in foreign currency in light of current tax guidelines and potential acquisitions.

 

We recognized a foreign currency translation loss for the year ended August 31, 2015 in the amount of $2,425,000 related to our European operations, which is recorded in accumulated other comprehensive income (loss) within our Statement of Equity.  The functional currency for all our other operations is the U.S. Dollar. We do not have or utilize any derivative financial instruments.

We pay interest on our outstanding long-term debt at interest rates that fluctuate based upon changes in various base interest rates. The carrying value of our long-term debt, including the current portion, was $51,800,000 at August 31, 2015. See “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Sources of Capital” and Note 16 — “Fair Value Measurements” to the Consolidated Financial Statements for additional information regarding our 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.

Item 8 – Financial Statements and Supplementary Data

 

The following Consolidated Financial Statements of Chase Corporation are filed as part of this Annual Report on Form 10-K:

 

Index to Consolidated Financial Statements:

 

 

Report of Independent Registered Public Accounting Firm

 

To The Board of Directors and Shareholders of Chase Corporation:

 

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, comprehensive income, equity and cash flows present fairly, in all material respects, the financial position of Chase Corporation and its subsidiaries at August 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended August 31, 2015 in conformity with accounting principles generally accepted in the United States of America.  Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2015, based on criteria established in Internal Control - Integrated Framework 2013 issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).  The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in ‘Management’s report on internal control over financial reporting’ appearing on  Item 9A.  Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits.  We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects.  Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.  Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk.  Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.  A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.  Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP

Boston, Massachusetts

November 16, 2015

CHASE CORPORATION

CONSOLIDATED BALANCE SHEETS

In thousands, except share and per share amounts

 

See accompanying notes to the consolidated financial statements.