CHASE CORPORATION The following discussion provides an analysis of the Company's financial
condition and results of operations and should be read in conjunction with the
Condensed Consolidated Financial Statements and notes thereto included in Item 1
of Part I of this Quarterly Report on Form 10-Q and with the Company's Annual
Report on Form 10-K filed for the fiscal year ended
Overview
We experienced a primarily volume-based revenue decline in the quarter ended
During the first quarter of fiscal 2020, the Company further progressed its
facility consolidation and rationalization initiative, nearly completing the
relocation of our pulling and detection product line production operations from
our
Net cash provided by operating activities exceeded the prior year first quarter and the Company's cash position continued the positive trend seen in the latter half of the prior fiscal year following the full payoff of our outstanding debt. We remain unleveraged, holding no outstanding balance on our revolving credit facility at the close of the current period. Our revolving credit facility allows for us to pay down debt when we have excess cash, while retaining access to immediate liquidity to fund future accretive activities, including mergers and acquisitions, as identified.
Revenue from the Adhesives, Sealants and Additives segment decreased as our electronic and industrial coatings product line sales volume continued to be affected by slower Asian markets, a trend which began in the second half of the prior year. Our specialty chemical intermediates product line sales increased on volume over the prior year, partially tempering the overall sales decline for the segment.
Our Industrial Tapes segment's sales decreased compared to the prior year, most notably related to both our cable materials and specialty products product lines. The reduction in our specialty products product line came largely on less low-margin transitional toll manufacturing services provided to the common purchaser of our structural composites rod and fiber optical cable components businesses as that arrangement neared completion. Our electronic materials product line, which sells into near exclusively Asian end markets, also had reduced sales volume as compared to the prior year. The segment's top-line results for the quarter were positively affected by our pulling and detection product line, which had strong sales into North American utility and telecommunication markets.
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Our Corrosion Protection and Waterproofing segment's revenue fell short of the
prior year for the quarter ended
The upcoming second fiscal quarter has historically generated lower quarterly
revenue for many of our product lines, especially within the Corrosion
Protection and Waterproofing segment due to the seasonal effects of winter
weather across much of
Our balance sheet remains strong at
We have three reportable operating segments as summarized below:
Segment Product Lines Manufacturing Focus and Products
Adhesives, Electronic and Protective coatings, including moisture
Sealants and Industrial Coatings protective coatings and customized
Additives Specialty Chemical sealant and adhesive systems for
Intermediates electronics; polyurethane dispersions,
polymeric microspheres and
superabsorbent polymers.
Industrial Cable Materials Protective tape and coating products and
Tapes Specialty Products services, including insulating and
Pulling and Detection conducting materials for wire and cable
Electronic Materials manufacturers; laminated durable papers,
packaging and industrial laminate
products and custom manufacturing
services; pulling and detection tapes
used in the installation, measurement
and location of fiber optic cables and
water and natural gas lines; cover tapes
essential to delivering semiconductor
components via tape-and-reel packaging.
Corrosion Coating and Lining Protective coatings and tape products,
Protection Systems including coating and lining systems for
and Pipeline Coatings use in liquid storage and containment
Waterproofing Building Envelope applications; protective coatings for
Bridge and Highway pipeline and general construction
applications; adhesives and sealants
used in architectural and building
envelope waterproofing applications;
high-performance polymeric asphalt
additives and expansion and control
joint systems for use in the
transportation and architectural
markets.
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Results of Operations
Revenue and Income before Income Taxes by Segment were as follows (dollars in
thousands):
% of % of
Three Months Ended Total Three Months Ended Total
November 30, 2019 Revenue November 30, 2018 Revenue
Revenue
Adhesives,
Sealants and
Additives $ 25,822 39 % $ 26,698 37 %
Industrial Tapes 30,124 45 % 33,462 46 %
Corrosion
Protection and
Waterproofing 10,856 16 % 12,343 17 %
Total $ 66,802 $ 72,503
% of % of
Three Months Ended Segment Three Months Ended Segment
November 30, 2019 Revenue November 30, 2018 Revenue
Income before
income taxes
Adhesives,
Sealants and
Additives $ 7,482 29 % $ 8,265 31 %
Industrial Tapes 6,637 (a) 22 % 6,538 (c) 20 %
Corrosion
Protection and
Waterproofing 3,964 37 % 4,466 36 %
Total for
reportable
segments 18,083 27 % 19,269 27 %
Corporate and
Common Costs (8,012) (b) (7,461) (d)
Total $ 10,071 15 % $ 11,808 16 %
--------------------------------------------------------------------------------
(a) Includes
detection business out of the
(b) Includes
potential future upgrades to our companywide ERP system
(c) Includes
location recognized in the first quarter of fiscal 2019
(d) Includes
lump-sum distributions
Total Revenue
Total revenue decreased
Revenue in our Adhesives, Sealants and Additives segment decreased
Revenue in our Industrial Tapes segment decreased
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Compared to the prior year first quarter, revenue from our Corrosion Protection
and Waterproofing segment decreased
Cost of Products and Services Sold
Cost of products and services sold decreased
The following table summarizes our cost of products and services sold as a percentage of revenue for each of our reportable operating segments:
Three Months Ended November 30,
Cost of products and services sold 2019 2018
Adhesives, Sealants and Additives 56 % 56 %
Industrial Tapes 71 74
Corrosion Protection and Waterproofing 55 56
Total Company 63 % 64 %
Cost of products and services sold in our Adhesives, Sealants and Additives
segment was
As a percentage of revenue, cost of products and services sold stayed the same
for the Adhesives, Sealants and Additives segment, and was reduced for both the
Industrial Tapes and Corrosion Protection and Waterproofing segments for the
quarter as compared to the same period in the prior year. These relative gross
margin improvements were primarily due to: (a) production efficiencies
recognized in the quarter over the prior year, most acutely seen at our
With the composition of our finished goods and the markets we serve, the costs
of certain commodities (including petroleum-based solvents, films, yarns, polymers and nonwovens, aluminum and copper foils, specialty papers, and various resins, adhesives and inks) both directly and indirectly affect the purchase price of our raw materials and the market demand for our product offerings. The Company diligently monitors raw material and commodities pricing across all its product lines in its efforts to preserve margins.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased
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Operations Optimization Costs
During the first quarter of fiscal 2020, third-party-led studies regarding the
potential upgrading of the Company's current worldwide ERP system were
conducted. Chase is currently reviewing the data and recommendations provided by
the study and may further utilize third-party engineering, IT and other
professional services firms in the future for similar work, as well as work
around our facilities rationalization and consolidation initiative. The Company
recognized
During the third quarter of fiscal 2019, Chase began moving the pulling and
detection operations housed in its
On
Interest Expense
Interest expense decreased
In fiscal 2018, subsequent to the
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Other Income (Expense)
Other income (expense) was an expense of
Income Taxes
The effective tax rates for the three-month periods ended
The current and prior year effective tax rates were most prominently affected by
the passage of the Tax Cuts and Jobs Act (the "Tax Act") in
Net Income
Net income decreased
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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 also useful to investors. EBITDA is
useful in comparing the core operations of the business from period to period by
removing the impact of the Company's capital structure (through interest
expense), asset base (through depreciation and amortization) and tax rate, and
in evaluating operating performance relative to others in the industry. Adjusted
EBITDA allows for comparison to the Company's performance in prior periods
without the effect of items that, by their nature, tend to obscure the Company's
core operating results due to the potential variability across periods based on
their timing, frequency and magnitude. Free Cash Flow provides a means for
measuring the cash generated from operations that is available for mandatory
obligations, including interest payments and debt repayment, and discretionary
investment opportunities such as funding acquisitions, product and market
development and paying dividends. As a result, management believes these
metrics, which are commonly used by financial analysts and others in the
industries in which the Company operates, enhance the ability of investors to
analyze trends in the Company's business and evaluate the Company's performance
relative to peer companies and the past performance of the Company itself.
EBITDA, Adjusted EBITDA and Free Cash Flow are non-
We define EBITDA as net income 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, operations optimization costs, 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,
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The following table provides a reconciliation of net income, the most directly
comparable financial measure presented in accordance with
Three Months Ended November 30,
2019 2018
Net income $ 7,362 $ 8,823
Interest expense 55 204
Income taxes 2,709 2,985
Depreciation expense 1,053 1,238
Amortization expense 2,914 3,113
EBITDA $ 14,093 $ 16,363
Operations optimization costs (a) 649 260
Pension settlement costs (b) - 200
Adjusted EBITDA $ 14,742 $ 16,823 (a) Represents costs to relocate certain production operations from Granite
Falls, NC to Hickory, NC and to perform certain exploratory work into
upgrading our companywide ERP system, both incurred in the first quarter of
fiscal 2020, and Pawtucket, RI facility closure costs recognized in the first
quarter of fiscal 2019
(b) Represents pension-related settlement costs due to the timing of lump-sum
distributions
The following table provides a reconciliation of net cash provided by operating
activities, the most directly comparable financial measure presented in
accordance with
Three Months Ended November 30,
2019 2018
Net cash provided by operating activities
(699) (639)
Free Cash Flow $ 17,454 $ 10,938 Liquidity and Sources of Capital
Our overall cash and cash equivalents balance increased
Cash flow provided by operations was
The ratio of current assets to current liabilities was 4.6 as of
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Cash flow used in investing activities of
There was no cash flow related to financing activities for the first three months of fiscal 2020.
On
On
We have several ongoing capital projects, as well as our facility rationalization and consolidation initiative, which are important to our long-term strategic goals. Machinery and equipment may be added as needed to increase capacity or enhance operating efficiencies in our production facilities.
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 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 significant off-balance sheet arrangements.
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Contractual Obligations
Please refer to Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in our Annual Report on Form 10-K for the
fiscal year ended
Recent Accounting Standards
Please see Note 2 - "Recent Accounting Standards" to the Condensed Consolidated Financial Statements for a discussion of the effects of recently issued and recently adopted accounting pronouncements.
Critical Accounting Policies
Our financial statements are prepared in accordance with accounting principles
generally accepted in
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