CHASE CORP - Annual Report: 2017 (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, 2017

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”, “smaller reporting company” and "emerging growth company" in Rule 12b‑2 of the Exchange Act.

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

The aggregate market value of the common stock held by non‑affiliates of the registrant, as of February 28, 2017 (the last business day of the registrant’s second quarter of fiscal 2017), was approximately $653,152,000.

As of October 31, 2017, the Company had outstanding 9,364,936 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, 2017, are incorporated by reference into Part III hereof.

 

 

CHASE CORPORATION

INDEX TO ANNUAL REPORT ON FORM 10-K

 

For the Year Ended August 31, 2017

 

 

Cautionary Note Concerning Forward-Looking Statements

 

This Annual Report on Form 10-K contains "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements made by Chase Corporation (the “Company,” “Chase,” “we,” or “us”), including without limitation forward-looking statements made under the caption “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” involve risks and uncertainties. Any statements contained in this Annual Report that are not statements of historical fact may be deemed to be forward-looking statements.  Forward-looking statements include, without limitation, statements as to our future operating results; seasonality expectations; plans for the development, utilization or disposal of manufacturing facilities; future economic conditions; our expectations as to legal proceedings; the effect of our market and product development efforts; and expectations or plans relating to the implementation or realization of our strategic goals and future growth, including through potential future acquisitions. Forward-looking statements may include, among other things, statements relating to future sales, earnings, cash flow, results of operations, use of cash and other measures of financial performance, as well as statements relating to future dividend payments. Other forward-looking statements may be identified through the use of words such as “believes,” “anticipates,” “may,” “should,” “will,” “plans,” “projects,” “expects,” “expectations,” “estimates,” “predicts,” “targets,” “forecasts,” “strategy,” and other words of similar meaning in connection with the discussion of future operating or financial performance. These statements are based on current expectations, estimates and projections about the industries in which we operate, and the beliefs and assumptions made by management. Because forward-looking statements relate to the future, they are subject to inherent risks, uncertainties and changes in circumstances that are difficult to predict. Accordingly, the Company’s actual results may differ materially from those contemplated by the forward-looking statements. Investors, therefore, are cautioned against relying on any of these forward-looking statements, which speak only as of the date the statement was made. They are neither statements of historical fact nor guarantees or assurances of future performance.  Readers should refer to the discussions under Item 1A “Risk Factors” of this Annual Report on Form 10-K.

PART I

 

Item 1 – Business

 

Primary Operating Divisions and Facilities and Industry Segments

 

Chase Corporation, 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, 2017 is as follows:

 

 

Other Business Developments

On April 3, 2017, Chase executed an agreement with an unrelated party to sell all inventory, machinery and equipment and intangible assets of the Company’s fiber optic cable components product line for proceeds of $3,858,000 net of transaction costs and following certain working capital adjustments. The resulting pre-tax gain on sale of $2,013,000 was recognized in the third quarter of fiscal 2017 as gain on sale of businesses within the consolidated statement of operations.  Further, the purchaser entered a multiyear lease for a portion of the manufacturing space at the Company’s Granite Falls, NC facility. Chase will provide ongoing manufacturing and administrative support to the purchaser for which the Company will receive additional consideration upon the performance of services. The Company’s fiber optic cable components product line was formerly a part of the Company’s Industrial Materials operating segment.

On September 30, 2016, 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 $30,270,000 after final working capital adjustments and excluding acquisition-related costs. As part of this transaction, Chase acquired all working capital and fixed assets of the business, and entered multiyear leases at both locations. The Company expensed $584,000 of acquisition-related costs during the first quarter of fiscal 2017 associated with this acquisition. 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 acquisition broadens the Company’s adhesives and sealants product offering and manufacturing capabilities, and expands its market reach. Since

the effective date of the acquisition, the financial results of Resin Designs’ operations have been included in the Company’s financial statements within the electronic and industrial coatings product line, contained within the Industrial Materials operating segment.

On June 23, 2016 (the fourth quarter of fiscal 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® coating 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 and industrial coatings product line. Effective December 2016, Spray Products (India) Private Limited was renamed HumiSeal India Private Limited.

In November 2015 (the first quarter of fiscal 2016), the Company sold its RodPack® wind energy business, contained within its structural composites product line, to an otherwise unrelated party for proceeds of $2,186,000. The Company’s structural composites product line is a part of the Company’s Industrial Materials operating segment. The Company will provide ongoing development support to the Buyer for which it will receive additional consideration upon the completion of services.

 

Products and Markets

 

Our principal products are specialty tapes, laminates, adhesives, sealants, coatings and chemical intermediates which 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).  Other than the acquisition of the operations of Resin Designs,  we did not introduce any new products requiring an investment of a material amount of our assets during fiscal year 2017.

 

Employees

 

As of October 31, 2017, we employed approximately 695 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, 2017, the backlog of customer orders believed to be firm was approximately $19,719,000.  This compared with a backlog of $17,583,000 as of October 31, 2016.  The increase in backlog from the prior year amount is primarily due to current period increases in specialty chemical intermediates, pulling and detection and cable materials products. During fiscal 2017, 2016 and 2015, 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 preventive 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 a 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 industies; Dualite®, a trademark for polymeric microspheres utilized for density and weight reduction and sound dampening by various industries;  4EvaSeal®, a trademark for adhesive-backed tape utilized in various industries; Resin Designs®,  a trademark for adhesives and sealants sold into the microelectronics and semiconductor industries; SlickTape®, a trademark for a lubricated shielding tape sold to the wire and cable industry; and HighDraw®, a trademark for a highly extensible shielding tape sold to the wire and cable industry.  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 additional borrowings and financing agreements with our bank lenders.

 

Research and Development

 

Approximately $3,696,000, $2,792,000 and $2,690,000 was expensed for Company-sponsored research and development during fiscal 2017, 2016 and 2015, respectively, and recorded within selling, general and administrative expenses.  Research and development increased by $904,000 in fiscal 2017 due to continued focused development work on strategic product lines, and eleven months of operations related to the established research and development department of Resin Designs, acquired in the first quarter of fiscal 2017.

 

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 and at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. The public may obtain information on the operations of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

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 or foreign and domestic trade policy 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 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 (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.  

 

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 

 

The Company is involved from time to time in litigation incidental to the conduct of its business. Although the Company does not expect that the outcome in any of these matters, individually or collectively, will have a material adverse effect on its financial condition, results of operations or cash flows, litigation is inherently unpredictable. Therefore, judgments could be rendered or settlements agreed to that could adversely affect the Company’s operating results or cash flows in a particular period. The Company routinely assesses all its litigation and threatened litigation as to the probability of ultimately incurring a liability, and records its best estimate of the ultimate loss in situations where 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, 2017.  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 American under the symbol CCF.  As of October 31, 2017, there were 327 shareholders of record of our Common Stock and we believe there were approximately 5,010 beneficial shareholders who held shares in nominee name.  On that date, the closing price of our common stock was $118.75 per share as reported by the NYSE American.

 

The following table sets forth the high and low daily sales prices for our common stock as reported by the NYSE American (formerly the NYSE MKT) for each quarter in the fiscal years ended August 31, 2017 and 2016:  

 

 

 

Single annual cash dividend payments were declared and scheduled to be paid subsequent to year end in the amounts of $0.80, $0.70, and $0.65 per common share, for the years ended August 31, 2017, 2016 and 2015, 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 Henkel AG & Co KGaA, H.B. Fuller Company, Intertape Polymer Group, Rogers Corporation and RPM International, Inc.  Cumulative total returns are calculated assuming that $100 was invested on August 31, 2012 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

 

*    Denotes less than one percent

 

Overview

 

Continued strong demand for many of our product offerings, a significant acquisition and a favorable sales mix all contributed to increased revenue, operating income and net income over the prior year results. Our strategic diversification remained one of our core strengths, as several product lines in both of our segments exceeded prior year revenue, offsetting shortfalls from others.

 

In September 2016, we completed the acquisition of certain assets and the operations of Resin Designs, a formulator of customized adhesive and sealant systems used in high-reliability electronic applications. In November 2016 and December 2016, respectively, we sold our Paterson, NJ location and our former corporate headquarters in Bridgewater, MA. In April 2017, the Company divested its fiber optic cable components product line, after determining the low-margin business to not be part of Chase’s long-term strategy. 

 

Revenue from the Industrial Materials segment increased over the prior year on greater demand for our electronic and industrial coatings, specialty products, structural composites, pulling and detection, electronic materials, cable materials and specialty chemical intermediates product lines. The segment’s organic increases in these legacy product lines were complemented by the September 2016 acquisition of the operations of Resin Designs, which is now included within the electronic and industrial coatings product line. The segment’s overall revenue increase was negatively impacted by the April 2017 sale of our fiber optic cable components product line.

 

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

 

Through our active M&A program, our management of real estate and our marketing and product development efforts, the Company remains focused on its core strategies for sustainable growth.  At August 31, 2017, the Company’s cash on hand was $47,354,000 and there was no  outstanding balance under the Company’s $150,000,000 revolving debt facility.

 

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 2017 increased $14,466,000 or 6% to $252,560,000 from $238,094,000 in the prior year.

 

Revenue in our Industrial Materials segment increased $21,228,000 or 12% to $202,956,000 for the year ended August 31, 2017 compared to $181,728,000 in fiscal 2016.  The increase in revenue from our Industrial Materials segment in fiscal 2017 was primarily due to: (a) revenue from our electronic and industrial coatings product line, which included sales of $14,868,000 related to the acquired Resin Designs operations, had total increases in revenue of $20,108,000,

reflecting increased sales volume from the automotive and appliance manufacturing industries, along with an increased royalty received from our licensed manufacturer in Asia;  (b) sales volume increase of $2,674,000 for our specialty products, which, subsequent to the sale of our fiber optic cable components business on April 3, 2017, includes revenue from the manufacturing services provided by the Company to the purchaser of the fiber optic cable components product line (totaling $740,000 for fiscal 2017); (c) sales volume increase of $2,072,000 from our structural composite products, on sales into the wind energy market; (d) sales volume increase of $1,056,000 from our pulling and detection products, as we continue to meet the utility and telecommunication industries’ high demand for our products; (e) a sales volume increase of $450,000 for our electronic materials; (f) sales growth of $321,000 for our cable materials products on strong demand from manufacturers of communication and server cables in the third and fourth quarters of fiscal 2017; and (g) our specialty chemical intermediates product line, which had $24,000 in increased sales volume.  These increases were partially offset by decreased sales of $5,477,000 from our fiber optic cable components product line, which the Company sold in April. No revenue was recorded within the fiber optic cable components product line following its divestiture early in the third quarter.

 

Revenue from our Construction Materials segment decreased $6,762,000 or 12% to $49,604,000 for the year ended August 31, 2017 compared to $56,366,000 for fiscal 2016.  The decreased sales from our Construction Materials segment in fiscal 2017 was primarily due to a net decrease in sales volume of $7,409,000 in pipeline coatings products. Delayed project work and general weakness in the region has continued to affect Middle East water infrastructure project demand for pipeline coatings products produced at our Rye, U.K. facility. Conversely, sales for our domestically produced pipeline products, which sell predominantly into the North American oil and gas markets, increased compared to the prior year. Our building envelope products saw a year-over-year sales volume decrease of $382,000. Partially offsetting the overall decrease in sales for the  segment, were: (a) a $974,00 increase in our bridge and highway products sales volume, resulting from increased bridge work in the New York metro region; and (b) coating and lining systems products, whose sales volume increased by $55,000 over the prior year.

 

Royalties and commissions in the Industrial Materials segment were $4,683,000, $3,644,000 and $3,156,000 for the years ended August 31, 2017, 2016 and 2015, respectively.  The increase in royalties and commissions in fiscal 2017 over both fiscal 2016 and 2015 was primarily due to increased sales of electronic and industrial coatings products by our licensed manufacturer in Asia.

 

Export sales from domestic operations to unaffiliated third parties were $36,719,000, $28,826,000 and $27,955,000 for the years ended August 31, 2017, 2016 and 2015, respectively.  The increase in export sales in fiscal 2017 against both fiscal 2016 and 2015 resulted from increased export sales into China, and certain European countries.

 

In fiscal 2016, total revenue 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 and industrial 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 cable materials 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.

 

Cost of Products and Services Sold

 

Cost of products and services sold increased $1,598,000 or 1% to $146,036,000 for the fiscal year ended August 31, 2017 compared to $144,438,000 in fiscal 2016.  As a percentage of revenue, cost of products and services sold decreased to 58% in fiscal 2017 compared to 61% for fiscal 2016. 

 

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 $119,109,000 for the fiscal year ended August 31, 2017 compared to $111,424,000 in fiscal 2016.  As a percentage of revenue, cost of products and services sold in this segment decreased to 59% for fiscal 2017 compared to 61% in fiscal 2016. Cost of products and services sold in our Construction Materials segment was $26,927,000 for the fiscal year ended August 31, 2017 compared to $33,014,000 in fiscal 2016.  As a percentage of revenue, cost of products and services sold in this segment decreased to 54% in fiscal 2017 compared to 59% for fiscal 2016.   As a percentage of revenue, cost of products and services sold in both segments decreased primarily due to product mix, as our lower margin products constituted a comparatively lower portion of total sales in the current year. We purchase a wide variety of commodity items, including petroleum-based solvents, films, yarns, and nonwovens, along with base metals (aluminum and copper), as well as many other substrates. To facilitate continued improvement in margins, we closely monitor the pricing of our commodities-based raw materials across all product lines, as their price volatility can have short and long-term effects on both our customers’ demand for our products and the margins at which we are able to sell them.

 

In fiscal 2016, cost of products and services sold in our Industrial Materials segment was $111,424,000 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.

 

Selling, General and Administrative Expenses

 

Selling, general and administrative expenses increased $3,162,000 or 7% to $47,736,000 during fiscal 2017 compared to $44,574,000 in fiscal 2016.  As a percentage of revenue, selling, general and administrative expenses were consistent at 19% of total revenue in both fiscal 2017 and fiscal 2016.  The year-over-year increase in expenses is primarily attributable to: (a) increased amortization expense of $1,291,000, primarily related to intangible assets acquired in our September 30, 2016 acquisition of certain assets of Resin Designs; (b) increased research and development expense of $904,000, principally related to the current year addition of the established research and development department of Resin Designs; (c) increase of $879,000 in stock-based compensation expenses; and (d) the prior year $877,000 gain on the write-down of an annuity previously owed to a related party which did not recur in fiscal 2017.  Partially offsetting these increases was a $1,200,000 reduction in cash incentive compensation expense, predominantly based on the current year change in our Executive Chairman’s compensation plan; our Executive Chairman continued in his role as a director and the Chairman of the Board of Directors in fiscal 2017. The Company continues to closely monitor spend with an emphasis on controlling costs, and leveraging existing resources.

 

During fiscal 2016, selling, general and administrative expenses decreased $1,411,000 or 3% to $44,574,000 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.

 

Exit Costs Related to Idle Facility

 

In fiscal 2017 and 2016, the Company recognized $70,000 and $935,000, respectively, in expenses to raze its Randolph, MA facility, which has been idle regarding production for several years. The Company began marketing the site for sale and reclassified the net book value of the facility to assets held for sale during the second quarter of fiscal 2016. These actions were taken as part of the Company’s on-going facility consolidation and rationalization initiative. The Company substantially completed the demolition of the structure in the fourth fiscal quarter of 2016, and completed other environmental aspects of the project during fiscal 2017. The sale of the property is anticipated to follow in a subsequent period, and any future expenses related to the project are not anticipated to be material.

 

Acquisition-Related Costs

 

In fiscal 2017, the Company incurred $584,000 of costs related to our acquisition of certain assets of Resin Designs.   This acquisition was accounted for as a business combination in accordance with applicable accounting standards, and all related professional service fees (including banking, legal, accounting, and actuarial fees) were expensed as incurred during the year ended August 31, 2017.   

 

In fiscal 2015, the Company incurred $584,000 of 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 (including banking, legal, accounting, and actuarial fees) were expensed as incurred during the year ended August 31, 2015. 

 

Write-down of Certain Assets Under Construction

 

In fiscal 2016, the Company recorded a $365,000 charge related to the full write-down of certain structural composites tangible assets (construction in progress) located in its Granite Falls, NC facility. The fiscal 2016 sale of our RodPack wind energy business (and related intangible assets), contained within the structural composites product line, placed a limitation on the Company’s ability to sell certain other goods produced for the same product line, resulting in our determination to fully write-down certain assets under construction during the year.

 

Interest Expense

 

Interest expense decreased $215,000 or 20% to $839,000 in fiscal 2017 compared to $1,054,000 in fiscal 2016.  Interest expense decreased $9,000 or 1% to $1,054,000 in fiscal 2016 compared to $1,063,000 in fiscal 2015.  The continued decrease in interest expense is a result of the reduction in our overall average debt balance through principal payments prior to the Company’s refinancing in December 2016, and elective payments following the refinancing, made from cash provided by operations. As of August 31, 2017, there was no outstanding balance of the Company’s $150,000,000 revolving debt facility.

Gain on Sale of Real Estate

In November 2016, the Company finalized the sale of its Paterson, NJ property for proceeds of $1,382,000. This transaction resulted in a gain of $792,000 which was recorded during the year ended August 31, 2017. The Company had previously reclassified the related long-lived assets to assets held for sale after committing to a plan in February 2016 to actively market the property. The assets held for sale had previously been reported within Corporate and Common assets.

In October 2016, Chase entered an agreement to sell its former corporate headquarters and executive offices in Bridgewater, MA. In December 2016, the sale was finalized for gross proceeds of $740,000, resulting in a gain on sale of $68,000 recognized during the year ended August 31, 2017.

 

Gain on Sale of Businesses

 

On April 3, 2017, Chase executed an agreement with an unrelated party to sell all inventory, machinery and equipment and intangible assets of its fiber optic cable components product line for proceeds of $3,858,000, net of transaction costs and following certain working capital adjustments. The fiber optic cable components product line had been a part of our Industrial Materials segment. Given its low-growth and low-margin prospects, and a customer, supplier and equipment base separate from our other businesses, the product line was determined to not be part of Chase’s long-term strategy. The resulting pre-tax gain on sale of $2,013,000 was recognized during the year ended August 31, 2017. Further, the purchaser entered a multiyear lease for a portion of the manufacturing space at the Company’s Granite Falls, NC facility. Chase will provide ongoing manufacturing and administrative support to the purchaser for which the Company will receive additional consideration upon the performance of services.

 

In the first quarter of fiscal 2016, the Company sold the RodPack wind energy business formerly contained within its structural composites product line, part of the Industrial Materials segment. 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.

 

Other Income (Expense)

 

Other income was $724,000 in fiscal 2017 compared to other income of $2,351,000 in fiscal 2016, a decrease of $1,627,000.  Other income (expense) primarily includes interest income, rental income, foreign exchange gains (losses) caused by changes in exchange rates on transactions or balances denominated in currencies other than the functional currency of our subsidiaries and other non-trade/non-royalty- and non-commission-related receipts.  Other income (expense) in the current year was largely net foreign exchange gains resulting from sales made from our U.K.-based operations and denominated in U.S. dollars and euros. British Pound Sterling exchange volatility was lower in the current year than that observed in the prior year, ultimately resulting in lower net foreign exchange gains recognized. Also included in fiscal 2017 was a $300,000 gain on the settlement of a claim and the release of an escrow related to a prior acquisition.

 

Other income was $2,351,000 in fiscal 2016 compared to other income of $44,000 in fiscal 2015, an increase of $2,307,000.  Other income in 2016 was primarily the result of sales made from our U.K.-based operations but denominated in either U.S. dollars or euros. This income was most predominantly observed in our fourth fiscal quarter of 2016, 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 U.S. dollar and euro.

 

Income Taxes

 

Our effective tax rate for fiscal 2017 was 31.0% as compared to 34.5% and 35.9% in fiscal 2016 and 2015, respectively.  The current year effective tax rate was affected by the Company’s fiscal 2017 adoption of ASU No. 2016-09, “Compensation – Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting.” During fiscal 2017, the Company recognized an excess tax benefit from stock-based compensation of $1,917,000, within income tax expense on the consolidated statements of operations (adopted prospectively). The Company anticipates the potential for increased periodic volatility in future effective tax rates based on the continued application of ASU No. 2016-09. Additionally, in all three years we have received the benefit of the domestic production deduction. 

 

Noncontrolling Interest

 

The income 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 2017 increased $9,207,000 or 28% to $42,014,000 compared to $32,807,000 in fiscal 2016.  The increase in net income in 2017 was primarily due to: (a) an increased sales volume, including increases in revenue and earnings provided by the acquired operations of Resin Designs; (b) gains on the sales of our fiber optic cable components product line and our Paterson, NJ and Bridgewater, MA real estate; and (c) the recognition of excess tax benefit related to our early adoption of ASU No. 2016-09. These gains were partially offset by increased amortization expense recognized related to our September 30, 2016 acquisition of certain assets of Resin Designs.

 

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.

 

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, U.S. GAAP measures such as net income attributable to Chase Corporation 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 U.S. GAAP, to EBITDA and Adjusted EBITDA for the periods presented (dollars in thousands):

 

 

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

 

 

The following table provides a summary of net cash used in investing activities and financing activities, presented in accordance with U.S. GAAP, for the periods presented (dollars in thousands):

 

 

Liquidity and Sources of Capital 

 

Our cash balance decreased $26,057,000 to $47,354,000 at August 31, 2017 from $73,411,000 at August 31, 2016. The decreased cash balance is primarily attributable to: (a) the repayment of $43,400,000 of debt principal, (b) the $30,270,000 in net cash paid for the September 2016 acquisition of certain assets of Resin Designs, LLC; and (c) the payment of our annual dividend totaling $6,532,000. The overall decrease was positively impacted by: (a) cash from operations of $51,932,000; (b) cash proceeds from the sale of our fiber optic cable components product line of $3,458,000; (c) cash proceeds from the sale of our Paterson, NJ and Bridgewater, MA real estate totaling $2,122,000; and (d) cash reimbursement related to the release of claims to a life insurance policy of $1,504,000.  Of the above noted amounts, $31,756,000 and $27,550,000 were held outside the U.S. by Chase Corporation and our foreign subsidiaries as of August 31, 2017 and 2016, 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, less any tax credit offsets, to satisfy all previously recorded tax liabilities.

 

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 was 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 (renamed HumiSeal India Private Limited in December 2016).

 

Cash provided by operations was $51,932,000 for the year ended August 31, 2017 compared to $48,833,000 in fiscal 2016.  Cash provided by operations during fiscal 2017 was primarily due to operating income and increased accounts payable. Increased accounts payable resulted from the timing of payments. Partially offsetting the overall amount of cash provided by operations were increased accounts receivable (based on increased fourth quarter sales) and decreased accrued compensation and other expenses (based on certain payouts from the Company’s non-qualified deferred savings plan in fiscal 2017 totaling $1,131,000).

 

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 international sales in the fourth quarter of fiscal 2016, which customarily have longer collection terms, while decreased inventory was a result of the enhanced inventory management control the Company is exercising through the use of its companywide ERP system, whose rollout was substantially completed in fiscal 2015. 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.

 

The ratio of current assets to current liabilities was 4.2 as of August 31, 2017 compared to 2.0 as of August 31, 2016.  The increase in our current ratio in fiscal 2017 was primarily attributable to the classification of our debt as current at August 31, 2016 (total balance of $43,400,000) prior to our entry into the New Credit Agreement (defined below) in December 2016,  which we eventually paid down during fiscal 2017. This was partially offset by the $26,057,000 decrease in cash and cash equivalents during fiscal 2017.

 

Cash used in investing activities was $25,102,000 for the year ended August 31, 2017 compared to $612,000 in fiscal 2016.  During fiscal 2017, cash used in investing activities was primarily due to our acquisition of certain assets of Resin Designs, LLC in September 2016, in addition to cash paid for purchases of machinery and equipment at our manufacturing locations. These uses were partially offset by cash received from the sale of our fiber optic cable components business and both our Paterson, NJ location and our former corporate headquarters in Bridgewater, MA, as well as in relation to a life insurance policy. 

 

During fiscal 2016, cash used in investing activities was $612,000 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 (renamed HumiSeal India Private Limited in December 2016), 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.

 

Cash used in financing activities was $52,796,000 for the year ended August 31, 2017 compared to $15,299,000 in fiscal 2016 and $13,498,000 in fiscal 2015.  During fiscal 2017, 2016 and 2015, cash used in financing activities was primarily due to our annual dividend payment, payments made on the term debt used to finance our fiscal 2012 acquisition of NEPTCO,  described in more detail below, and, after December 15, 2016, payments made on the Company’s new revolving credit facility, described in more detail below

 

On October 30, 2017, we announced a cash dividend of $0.80 per share (totaling approximately $7,490,000) to shareholders of record on November 9, 2017 and payable on December 6, 2017. 

On November 1, 2016, we announced a cash dividend of $0.70 per share (resulting in payment of $6,532,000) 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.

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 “2012 Credit Facility”). The applicable interest rate was based on the effective LIBOR plus an additional amount in the range of 1.75% to 2.25%, depending on our consolidated leverage ratio. The 2012 Credit Facility required repayment of 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, and were scheduled to continue at this amount through March 2017.  The 2012 Credit Facility had a scheduled maturity date of June 27, 2017, prior to the refinancing described below.

 

Under the 2012 Credit Facility, Chase also had a revolving line of credit with Bank of America (the “2012 Revolver”) totaling $15,000,000, which bore interest at LIBOR plus an additional amount in the 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 December 15, 2016 (the date on which the New Credit Agreement was entered into), the entire amount of $15,000,000 was available for use.  The 2012 Revolver had a scheduled maturity date of June 27, 2017 prior to its refinancing.

 

The 2012 Credit Facility with Bank of America contained customary affirmative and negative covenants that, among other things, restricted our ability to incur additional indebtedness.  It also required us to maintain a ratio of consolidated indebtedness to consolidated EBITDA (each as defined in the facility) of no more than 3.00 to 1.00, and to maintain a consolidated fixed charge coverage ratio (as calculated in the facility) of at least 1.25 to 1.00.  We were in compliance with our debt covenants of the 2012 Credit Facility as of November 30, 2016 (the last measurement date for the 2012 Credit Facility).

 

On December 15, 2016, we entered an Amended and Restated Credit Agreement (the “New Credit Agreement”) with Bank of America, acting as administrative agent, and with participation from Citizens Bank and JPMorgan Chase Bank (collectively with Bank of America, the “Lenders”). The New Credit Agreement is initially an all-revolving credit

facility with a borrowing capacity of $150,000,000, which can be increased by an additional $50,000,000 at the request of the Company and the individual or collective option of any of the Lenders. The New Credit Agreement contains customary affirmative and negative covenants that, among other things, restrict our ability to incur additional indebtedness and require certain lender approval for acquisitions by us and our subsidiaries over a certain size.  It also requires us to maintain certain financial ratios on a consolidated basis, including a consolidated net leverage ratio (as defined in the facility) of no more than 3.25 to 1.00, and a consolidated fixed charge coverage ratio (as defined in the facility) of at least 1.25 to 1.00. We were in compliance with our debt covenants as of August 31, 2017. The applicable interest rate for the New Credit Agreement is based on the effective LIBOR plus an additional amount in the range of 1.00% to 1.75%, depending on our consolidated net leverage ratio or, at our option, at the bank’s base lending rate.  At August 31, 2017, there was no outstanding principal balance, and as such no applicable interest rate. The New Credit Agreement was used to refinance our previously existing term loan and revolving line of credit, and also provides for additional liquidity to finance potential acquisitions, working capital, capital expenditures, and other general corporate purposes.

 

We have several on-going capital projects, as well as our facility rationalization and consolidation 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 2017, we finalized the sale of both our Paterson, NJ and Bridgewater, MA real estate and entered the final stages of razing our location in Randolph, MA, in preparation for its eventual sale. All these actions were done as part of our continued facility rationalization and consolidation plan.

 

We may acquire companies or other assets in future periods which are complementary to our business.  We believe that our existing resources, including cash on hand and the New Credit Agreement, 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 assurance that additional financing, if needed, will be available on favorable terms, if at all.

 

To the extent that interest rates increase in future periods, we will assess the impact of these higher interest rates on the financial and cash flow projections of our potential acquisitions. 

 

We have no material off-balance sheet arrangements.

 

Contractual Obligations

 

The following table summarizes our contractual cash obligations at August 31, 2017 and the effect such obligations are expected to have on our liquidity and cash flow in future periods (dollars in thousands):