CHASE CORP - Annual Report: 2016 (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, 2016

Commission File Number: 1‑9852

CHASE CORPORATION

(Exact name of registrant as specified in its charter)

 

295 University Avenue, Westwood, Massachusetts 02090

(Address of Principal Executive Offices, Including Zip Code)

(781) 332-0700

(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 29, 2016 (the last business day of the registrant’s second quarter of fiscal 2016), was approximately $329,518,000.

As of October 31, 2016, the Company had outstanding 9,322,282 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, 2016, are incorporated by reference into Part III hereof.

 

 

CHASE CORPORATION

INDEX TO ANNUAL REPORT ON FORM 10-K

 

For the Year Ended August 31, 2016

 

 

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 principally composed of 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, 2016 is as follows:

 

 

Other Business Developments

 

On September 30, 2016, subsequent to the fiscal year end, the Company acquired certain assets of Resin Designs, LLC (“Resin Designs”), an advanced adhesives and sealants manufacturer, with locations in Woburn, MA and Newark, CA. The business was acquired for a purchase price of $30,435,000, pending any final working capital adjustment and excluding acquisition-related costs. As part of this transaction, Chase is acquiring all working capital and fixed assets of the business, and entering into multi-year leases at both locations. The purchase was funded entirely with available cash on hand. Resin Designs is a formulator of customized adhesive and sealant systems used in high-reliability electronic applications. The Company anticipates the acquisition will broaden its adhesives and sealants product offering and manufacturing capabilities, and expand its market reach. The Company is currently in the process of finalizing purchase accounting, and anticipates completion within the first half of fiscal 2017. For periods subsequent to the effective date of the acquisition, the financial results of Resin Designs operations will be included in the Company’s financial statements within the electronic coatings product line, contained within the Industrial Materials operating segment.

 

On June 23, 2016, the Company acquired all the capital stock of Spray Products (India) Private Limited for $1,161,000, net of cash acquired. This acquired business works closely with our HumiSeal manufacturing operation in Winnersh, Wokingham, England. The acquisition in India enhances the Company’s ability to provide technical, sales, manufacturing, chemical handling, and packaging services in the region. Since the effective date for this acquisition, the financial results of the business have been included in the Company's financial statements within the Company’s

Industrial Materials operating segment in the electronic coatings product line. Purchase accounting was completed in the quarter ended August 31, 2016.

 

In November 2015, the Company sold its RodPack® wind energy business, contained within its structural composites product line, to an otherwise unrelated party (“Buyer”) for proceeds of $2,186,000. The Company’s structural composites product line is a part of the Company’s Industrial Materials operating segment. At August 31, 2015 (prior year end), the related RodPack assets were recorded as assets held for sale on the consolidated balance sheet.

 

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 lower demand occurring when temperatures are colder (typically our second fiscal quarter).  We did not introduce any new products requiring an investment of a material amount of our assets during fiscal year 2016.

 

Employees

 

As of October 31, 2016, we employed approximately 677 people (including union employees).  We consider our employee relations to be good.  In the US, 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 US, we offer benefits that may vary from those offered to our US employees due to customary local practices and statutory requirements.

 

Backlog, Customers and Competition

 

As of October 31, 2016, the backlog of customer orders believed to be firm was approximately $17,583,000.  This compared with a backlog of $12,717,000 as of October 31, 2015.  The increase in backlog from the prior year amount is primarily due to current period increases in wire and cable, pipeline coatings and pulling and detection products, in addition to the inclusion of the Resin Designs LLC backlog. During fiscal 2016, 2015 and 2014, 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; DuraDocument®, a trademark for durable, laminated papers sold to the digital print industry; Defender® a trademarked and patent-pending RFID protective material sold to the personal accessories and paper 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 and weight 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, as well as other trademarks, 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 financing agreements with our bank lenders.

 

Research and Development

 

Approximately $2,792,000, $2,690,000 and $2,599,000 was expensed for Company-sponsored research and development during fiscal 2016, 2015 and 2014, respectively, and recorded within selling, general and administrative expenses.  Research and development increased by $102,000 in fiscal 2016 due to continued focused development work on certain product lines, and twelve full months of research and development related to our specialty chemical intermediates product line, acquired in the second quarter of fiscal 2015.

 

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 295 University Avenue, Westwood, Massachusetts 02090.  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 (including changes in foreign currency exchange rates) 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 cost of products and services sold 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 US 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 (such as those experienced following the June 23, 2016 “Brexit” referendum vote in the United Kingdom) 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 2016, to cover calendar year 2015, 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 potential changes to products, processes or sources of supply as a consequence of such verification activities. Continued adherence to these rules 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 conflict 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 business, results from operations, financial condition, cash flow or internal control over financial reporting.

 

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 vary in age, are 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 believe that 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 agreed to, 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, 2016.  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 31, 2016, there were 351 shareholders of record of our Common Stock and we believe there were approximately 4,299 beneficial shareholders who held shares in nominee name.  On that date, the closing price of our common stock was $68.35 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, 2016 and 2015:

 

 

 

Single annual cash dividend payments were declared and scheduled to be paid subsequent to year end in the amounts of $0.70, $0.65, and $0.60 per common share, for the years ended August 31, 2016, 2015 and 2014, 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 two composite peer indexes that are weighted by market equity capitalization (the “New Peer Group Index” and the “Old Peer Group Index”).  The companies included in the New Peer Group Index are Henkel AG & Co KGaA, H.B. Fuller Company, Intertape Polymer Group, Rogers Corporation and RPM International, Inc., while the companies included in the Old Peer Group Index are American Biltrite Inc., Circor International Inc., H.B. Fuller Company, Quaker Chemical Corporation and RPM International, Inc. (and are consistent with the Peer Group utilized in prior year’s Comparative Stock Performance disclosure). The change to the New Peer Index in fiscal 2016 was due to a desire to provide a more aligned peer group given recent acquisitions and expansions in product offerings of the Company.  Cumulative total returns are calculated assuming that $100 was invested on August 31, 2011 in each of the Common Stock, the S&P 500 Index and the Peer Group Indexes, 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

 

*    Denotes less than one percent

 

Overview

 

The Company’s positive results in fiscal 2016 were attributable to our continued focus on our key strategies and initiatives: dedication to our core brands, strategic acquisitions, and diligent cost management practices, inclusive of our facility consolidation and rationalization initiative. In the current year, our products with exposure to the telecommunications, bridge and highway infrastructure and general and architectural waterproofing markets saw year-over-year gains, while those with direct and indirect dependency on the domestic and international oil and gas markets saw decreases from the prior year. Our prior year acquisition of the specialty chemical intermediates product line, which completed its first full year of operations under Chase in fiscal 2016, was also a strong contributor of year-over-year growth.  This year again proved the importance of the strategic diversification of our product offerings.

 

In November 2015 we completed the sale of our RodPack® wind energy business. In June 2016 we acquired a manufacturing operation in Pune, India, which provides us with a strategic physical presence in the region, through which we can better serve and grow our existing customer base. During 2016, we initiated and substantially completed the demolition of our idle Randolph, MA facility (in preparation for an eventual sale), and committed to a plan to sell our Paterson, NJ location.

 

Revenue from the Industrial Materials segment increased over the prior year on greater demand for our pulling and detection and electronic coatings product lines. The segment’s organic increases in these legacy product lines was complemented by the January 2015 acquisition of the specialty chemical intermediates product line; the new product line completed its first full fiscal year of operations under Chase in fiscal 2016, with increased revenue over fiscal 2015. The segment’s overall revenue increase was negatively impacted by a reduction in demand for our wire and cable and fiber optic cable components products.

 

Revenue from the Construction Materials segment fell short of the prior year primarily due to the decreased demand for both our domestic and UK-produced pipeline coatings products. The overall decrease in sales experienced by the segment was lessened by increased sales of our coating and lining systems and bridge and highway products.

 

Chase’s core strategies continue to focus on marketing and product development efforts and the identification and pursuit of potential acquisition targets; while our operating strategy places a premium on increasing efficiencies and striving for continuous improvement.  Our $15,000,000 line of credit is fully available, while the balance of our term debt is $43,400,000. The entire outstanding balance of our term debt became current in the fourth fiscal quarter of 2016, with final payment due June 2017 (the fourth quarter of fiscal 2017). Chase expects to refinance its debt within the coming year.

 

The Company has two reportable segments summarized below:

 

 

 

Results of Operations

 

Revenue and Operating Profit by Segment are as follows:

 

 

Total Revenue

 

Total revenue in fiscal 2016 increased $48,000 or less than one percent to $238,094,000 from $238,046,000 in the prior year.

 

Revenue in our Industrial Materials segment increased $5,181,000 or 3% to $181,728,000 for the year ended August 31, 2016 compared to $176,547,000 in fiscal 2015.  The increase in revenue from our Industrial Materials segment in fiscal 2016 was primarily due to: (a) increased sales volume of specialty chemical intermediates products totaling $7,755,000, aided by a full year of operations in fiscal 2016;  (b) increased sales volume of $3,356,000 from our pulling and detection products, which continued to experience increased demand in product volume by the utility and telecom industries; and (c) $574,000 in increased sales volume from our electronic coatings product line, primarily due to a higher rate of acceptance and use in the automotive and appliance industries.  These increases were partially offset by decreased sales of $4,077,000 from our wire and cable products, reflecting a decrease in demand for products with

exposure to energy-related markets (inclusive of the oil exploration and mining markets), as well as lower sales volume of $1,744,000 from our fiber optic cable components product line.

 

Revenue from our Construction Materials segment decreased $5,133,000 or 8% to $56,366,000 for the year ended August 31, 2016 compared to $61,499,000 for fiscal 2015.  The decreased sales from our Construction Materials segment in fiscal 2016 was primarily due to a decrease in sales volume of $7,708,000 in pipeline coatings products. The anticipated slowdown in Middle East water infrastructure project demand, for products produced at our Rye, UK facility, drove the majority of this decrease, while domestic pipeline coatings sales, which have a largely repair and maintenance focus, had a more tempered year-over-year decease. Partially offsetting the overall decrease in sales for the segment, were: (a) a $1,793,000 year-over-year increase in our coating and lining systems products sales volume, resulting from increased market acceptance and project demand; and (b) bridge and highway products, which capitalized on the weather-lengthened road construction seasons to obtain a $1,193,000 year-over-year sales volume increase.   

 

Royalties and commissions in the Industrial Materials segment were $3,644,000, $3,156,000 and $2,972,000 for the years ended August 31, 2016, 2015 and 2014, respectively.  The increase in royalties and commissions in fiscal 2016 over both fiscal 2015 and 2014 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 $28,826,000, $27,955,000 and $21,212,000 for the years ended August 31, 2016, 2015 and 2014, respectively.  The increase in export sales in fiscal 2016 against fiscal 2015 came as a result of increased export sales to the Middle East tempered by decreases in sales to the UK, Canada and certain Asia-Pacific countries. The increase in fiscal 2015 export sales over 2014 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 2017.

 

In fiscal 2015, total revenue increased $14,040,000 or 6% to $238,046,000 from $224,006,000 in fiscal 2014. 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 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.

Cost of Products and Services Sold

 

Cost of products and services sold decreased $4,764,000 or 3% to $144,438,000 for the fiscal year ended August 31, 2016 compared to $149,202,000 in fiscal 2015.  As a percentage of revenue, cost of products and services sold decreased to 61% in fiscal 2016 compared to 63% for fiscal 2015. 

 

The following table summarizes the relative percentages of cost 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 $111,424,000 for the fiscal year ended August 31, 2016 compared to $110,729,000 in fiscal 2015.  As a percentage of revenue, cost of products and services sold in this segment decreased to 61% for fiscal 2016 compared to 63% in fiscal 2015. Cost of products and services sold in our Construction Materials segment was $33,014,000 for the fiscal year ended August 31, 2016 compared to $38,473,000 in fiscal 2015.  As a percentage of revenue, cost of products and services sold in this segment decreased to 59% in fiscal 2016 compared to 63% for fiscal 2015.   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. We purchase a wide variety of commodity items, including petroleum-based solvents, films, yarns, and nonwovens, along with base metals of aluminum and copper, as well as many other substrates. To facilitate continued improvement in margins, we closely monitor pricing of our commodities-based raw materials across all product lines, as their price volatility can have short and long term effects on our sales volume and margins. We also remain focused on reducing fixed overhead spend, as consolidation and the further leveraging of current resources continue as key facets of our core operating strategy.

 

In fiscal 2015, cost of products and services sold in our Industrial Materials segment was $110,729,000 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% 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% 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.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses decreased $1,411,000 or 3% to $44,574,000 during fiscal 2016 compared to $46,015,000 in fiscal 2015.  As a percentage of revenue, selling, general and administrative expenses were consistent at 19% of total revenue in both fiscal 2016 and fiscal 2015.  The year-over-year decrease in expenses is primarily attributable to: (a) decreased international sales commission expenses of $938,000 over the prior year, due to a commission structure change relating to sales in certain geographic regions in the current year; (b) a $877,000 gain on the write-down of an annuity previously owed to a related party; and (c) decreased pension costs of $228,000 in the current year against the prior year, given lower settlement loss charges recognized in the current year. These decreases in cost were partially offset by increased amortization expense on acquired intangible assets of $1,074,000 for the year, primarily attributable to the specialty chemical intermediates product line acquisition in the second quarter of fiscal 2015.

 

During fiscal 2015, selling, general and administrative expenses increased $3,375,000 or 8% to $46,015,000 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 of fiscal 2015; (b)

increased international sales commission expenses of $1,051,000 in fiscal 2015 over fiscal 2014, incurred related to increased revenue generated by sales in those regions; (c) increased pension costs of $399,000 in fiscal 2015 against fiscal 2014, 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.

 

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 $9,000 or 1% to $1,054,000 in fiscal 2016 compared to $1,063,000 in fiscal 2015.  Interest expense decreased $80,000 or 7% to $1,063,000 in fiscal 2015 compared to $1,143,000 in fiscal 2014.  The continued decrease in interest expense is a result of the reduction in our overall average debt balance through principal payments made from operating cash flow over the applicable periods.   Our debt balance is attributable to our term note related to the June 2012 acquisition of NEPTCO, which will mature in the fourth quarter of fiscal 2017.    

Gain on Sale of Business

 

In the first quarter of fiscal 2016, the Company sold the RodPack wind energy business formerly contained within its structural composites product line. This transaction resulted in a pre-tax book gain of $1,031,000, which was recorded in fiscal 2016. The Company will provide ongoing development support to the buyer for which it will receive additional consideration upon the completion of services.

 

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 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 Income (Expense)

 

Other income was $2,351,000 in fiscal 2016 compared to other income of $44,000 in fiscal 2015, a difference of $2,307,000.  Other income (expense) primarily includes interest income, rental 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.  Income in the current year-to-date period was primarily the result of sales made from our UK-based operations but denominated in either US dollars or euros. This income was most predominantly observed in our fourth fiscal quarter following the June 23, 2016 referendum by British voters to exit the European Union (“Brexit”), which impacted global currency markets and resulted in a decline in the value of the British pound, as compared to the US dollar and euro.

 

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, rental 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. 

Income Taxes

 

Our effective tax rate for fiscal 2016 was 34.5% as compared to 35.9% and 34.5% in fiscal 2015 and 2014, respectively.  In all three years, we have received the benefit of the domestic production deduction.  The increased effective tax rate in fiscal 2015 (the prior year) was primarily due to a less favorable effective state income tax rate and a less favorable domestic production deduction effect than realized in both fiscal 2016 and 2014.    

 

Noncontrolling Interest

 

The income (loss) from noncontrolling interest relates to a joint venture in which we had, prior to October 2014, a 50% controlling ownership interest. We acquired the 50% outstanding noncontrolling membership interest in October 2014 (the first quarter of fiscal 2015).  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 2016 increased $6,489,000 or 25% to $32,807,000 compared to $26,318,000 in fiscal 2015.  The increase in net income in 2016 was primarily due to: (a) an improved gross margin based on sales mix, including increases in revenue and earnings provided by the specialty chemical intermediates product line which we acquired in the second quarter of fiscal 2015; (b) foreign exchange transaction gains recognized in other income (expense); and (c) a gain on the sale of our RodPack wind energy business in November 2015.

 

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 was 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 fiscal 2014, and which did not recur in fiscal 2015.

 

Other Important Performance Measures

 

We believe that EBITDA, Adjusted EBITDA and Free Cash Flow are useful performance measures.  They are used by our executive management team 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, Adjusted EBITDA and Free Cash Flow are commonly used by financial analysts and others in the industries in which the Company operates and thus provide useful information to investors. EBITDA, Adjusted EBITDA and Free Cash Flow are non-GAAP financial measures.

 

We define EBITDA as 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 plans, and other significant items. We define Free Cash Flow as Net cash provided by operating activities less purchases of property, plant and equipment.

 

The use of EBITDA, Adjusted EBITDA and Free Cash Flow has limitations and these performance measures should not be considered in isolation from, or as an alternative to, US GAAP measures such as net income and net cash provided by operating activities.  None of these measures should be interpreted as representing the residual cash flow of the Company available for discretionary expenditures or to invest in the growth of our business, since we have certain non-discretionary expenditures that are not deducted from these measures, including scheduled principal and (in the case of Free Cash Flow) interest payments on outstanding debt. Our measurement of EBITDA, Adjusted EBITDA and Free Cash Flow 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 US GAAP, to EBITDA and Adjusted EBITDA for the periods presented:

 

The following table provides a reconciliation of net cash provided by operating activities, the most directly comparable financial measure presented in accordance with US GAAP, to Free Cash Flow for the periods presented:

 

 

Liquidity and Sources of Capital 

 

Our cash balance increased $29,592,000 to $73,411,000 at August 31, 2016 from $43,819,000 at August 31, 2015.  The increased cash balance is primarily attributable to cash from operations, the sale of the RodPack wind energy business and proceeds from the cash surrender value of a life insurance policy. The overall increase was negatively impacted by: (a) principal payments made on our term debt; (b) payment of the annual dividend in December 2015; (c) cash paid for purchases of machinery and equipment at our manufacturing locations; and (d) cash paid for our acquisition of Spray Products (India) Private Limited.  Of the above noted amounts, $27,550,000 and $18,659,000 were held outside the US by Chase Corporation and our foreign subsidiaries as of August 31, 2016 and 2015, respectively.  Given our cash position and borrowing capability in the US 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 US operations, the Company would pay the applicable US taxes on these repatriated foreign amounts, less any tax credit offsets, to satisfy all previously recorded tax liabilities.

 

Our cash balance at August 31, 2015 decreased $9,403,000 to $43,819,000 from $53,222,000 at August 31, 2014.  The decreased cash balance was 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.  Approximately $14,575,000 was held outside the US by our foreign subsidiaries as of August 31, 2014.

 

Cash provided by operations was $48,833,000 for the year ended August 31, 2016 compared to $40,959,000 in fiscal 2015.  Cash provided by operations during fiscal 2016 was primarily due to operating income and decreased accounts receivable and inventories. Decreased accounts receivable resulted from lower current year fourth quarter international sales, which customarily have longer collection terms, while decreased inventory is a result of the enhanced inventory management control the Company is exercising through the use of its companywide ERP system, whose roll out was substantially completed in the prior year. Partially offsetting the overall amount of cash provided by operations was a decrease in accounts payable, a direct result of the Company maintaining a lower inventory balance.

 

Cash provided by operations was $40,959,000 for fiscal 2015 compared to $28,606,000 in the year ended August 31, 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.

 

The ratio of current assets to current liabilities was 2.0 as of August 31, 2016 compared to 3.1 as of August 31, 2015.  The decrease in our current ratio at August 31, 2016 was primarily attributable to the entire outstanding balance of our term debt becoming current in the fourth fiscal quarter of 2016. Our term debt matures in June 2017 (the fourth quarter of fiscal 2017).

 

Cash used in investing activities was $612,000 for the year ended August 31, 2016 compared to $35,713,000 in fiscal 2015.  During fiscal 2016, cash used in investing activities was primarily due to the acquisition of the Spray Products (India) Private Limited business, in addition to cash paid for purchases of machinery and equipment at our manufacturing locations.  These uses were partially offset by cash received from both the sale of our RodPack wind energy business and in relation to a life insurance policy. During fiscal 2015, cash used in investing activities was $35,713,000 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

 

Cash used in financing activities was $15,299,000 for the year ended August 31, 2016 compared to $13,498,000 in fiscal 2015 and $10,501,000 in fiscal 2014.  During fiscal 2016, 2015 and 2014, cash used in financing activities was primarily due to our annual dividend payment and payments made on the term debt used to finance our fiscal 2012 acquisition of NEPTCO.   

 

On November 1, 2016, we announced a cash dividend of $0.70 per share (totaling approximately $6,500,000) to shareholders of record on November 11, 2016 and payable on December 7, 2016. 

On October 28, 2015, we announced a cash dividend of $0.65 per share (resulting in payment of $5,999,000) to shareholders of record on November 9, 2015 and paid 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.

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, 2016, the applicable interest rate was 2.27% per annum and the outstanding principal amount was $43,400,000.  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 (the fourth quarter of fiscal 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, 2016 and October 31, 2016, the entire amount of $15,000,000 was available for use.  The Revolver is scheduled to mature in June 2017 (the fourth quarter of fiscal 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 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, 2016. 

 

Currently, we have several on-going capital projects, as well as our facility consolidation and rationalization initiative, which are important to our long-term strategic goals. Further, machinery and equipment will be added as needed to increase capacity or enhance operating efficiencies in our other manufacturing plants. 

 

During fiscal 2016, we took action to market for sale two non-production properties owned by the Company. Included in this was the razing of our idle facility in Randolph, MA, which was done in part to make the location more attractive to a potential buyer. The demolition work was substantially completed in 2016, with the sale of the property anticipated to follow.   Our Paterson, NJ site was reclassified to assets held for sale during the second fiscal quarter of 2016, and we are currently working to execute a sales agreement with a potential buyer. Subsequent to fiscal year end, the Company entered a conditional agreement to sell its now former corporate headquarters and executive office in Bridgewater, MA.

 

In future periods, we may acquire companies or other assets 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.

 

Upon the June 2017 maturity date of our Credit Facility and Revolver, the outstanding loan balance of each, plus interest, will become due and payable. It is our intention to renew our Credit Facility and Revolver or replace them with a new facility from another financing source prior to the scheduled maturity date, and we currently expect that we will be able to do so. A failure to renew or replace our existing facility under similar terms and conditions could significantly impact our ability to manage our operations and fund working capital requirements and our acquisition program going forward. We can provide no assurance in our ability to renew or to replace this line under similar terms and conditions, 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. 

 

The June 23, 2016 referendum by British voters to exit the European Union (“Brexit”) impacted global currency markets. It resulted in a decline in the value of the British pound, as compared to the US dollar and other currencies, during our fourth fiscal quarter of 2016. Volatility in exchange rates could be expected to continue in the short term as the United Kingdom negotiates its exit from the European Union. A weaker British pound compared to the US dollar has caused local currency operational results of our United Kingdom locations to be translated into fewer US dollars for the affected period. Offsetting the decline in the value of the British pound, sales (and resulting accounts receivable and cash balances) from our United Kingdom locations denominated in currencies other than the British pound have resulted in significant transactional gains, recorded to other income (expense) on the consolidated statement of operations. In the longer term, any lasting impact from Brexit on our United Kingdom operations will depend, in part, on the outcome of tariff, trade, regulatory, and other negotiations.

 

We have no material off-balance sheet arrangements.

 

Contractual Obligations

 

The following table summarizes our contractual cash obligations at August 31, 2016 and the effect such obligations are expected to have on our liquidity and cash flow in future periods: 

 

 

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 US Generally Accepted Accounting Principles (“GAAP”). 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. In March, April and May 2016, the FASB issued ASU 2016-08 “Principal versus Agent Considerations (Reporting Revenue Gross versus Net)”, ASU 2016-10 “Identifying Performance Obligations and Licensing,” and ASU 2016-12, “Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients” all of which provide further clarification to be considered when implementing ASU 2014-09. 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 August 2014, the FASB issued ASU No. 2014-15 “Presentation of Financial Statements: Going Concern (Subtopic 205-40),” which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements are issued. An entity must provide certain disclosures if “conditions or events raise substantial doubt about the entity’s ability to continue as a going concern.” The guidance applies to all entities and is effective for annual periods ending after December 15, 2016, and interim periods thereafter (fiscal year 2017 for the Company). The adoption of ASU 2014-15, which will occur in the first quarter of fiscal 2017, is not expected to have a material effect on the Company’s consolidated financial statements.

 

In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance Costs," which requires that debt issue costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the amount of the debt liability, consistent with debt discounts and premiums. Amortization of such costs is still reported as interest expense. ASU 2015-03 is effective for fiscal years, and interim periods therein, beginning after December 15, 2015 (fiscal year 2017 for the Company). In August 2015, the FASB issued ASU 2015-15, "Presentation and Subsequent Measurement of Debt Issue Costs Associated with Line-of-Credit Arrangements." ASU 2015-15 supplements the requirements of ASU 2015-03 by allowing an entity to defer and present debt issue costs related to a line of credit arrangement as an asset and subsequently amortize the deferred costs ratably over the term of the line of credit arrangement.  The adoption of ASU 2015-03, which will occur in the first quarter of fiscal 2017, is not expected to have a material effect on the Company’s consolidated financial statements.

 

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. The Company adopted this standard, prospectively, as of August 31, 2016. The adoption’s effects on our consolidated financial position, results of operations and cash flows were not significant.

 

In November 2015, the FASB issued ASU No. 2015-17, “Income Taxes – Balance Sheet Classification of Deferred Taxes.” The purpose of the standard is to simplify the presentation of deferred taxes on a classified balance sheet.  Under current GAAP, deferred income tax assets and liabilities are separated into current and noncurrent amounts in the balance sheet.  The amendments in ASU 2015-17 require that all deferred tax assets and liabilities be classified as noncurrent in the balance sheet.  The Company adopted this standard, retrospectively, as of August 31, 2016. The changes in the effected income tax related balance sheet accounts at August 31, 2015 (the prior year end), were as follows (the adoption had no effect on the consolidated statement of operations, other comprehensive income, equity or cash flows):

 

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.  Changes were made to align lessor accounting with the lessee accounting model and ASU No. 2014-09, “Revenue from Contracts with Customers.”  The new lease guidance simplifies the accounting for