CHASE CORPORATION The following discussion provides an analysis of the Company's financial condition and results of operations for the second quarter and six-month period endingFebruary 28, 2023 . It 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 endedAugust 31, 2022 .
Executive Overview
Results of Operations
The Company's revenue grew in the second fiscal quarter and six months endedFebruary 28, 2023 , with the Adhesives, Sealants and Additives and Industrial Tapes operating segments surpassing sales achieved in the prior year quarter and year-to-date period. The revenue increase was primarily attributed to inorganic growth from our NuCera Solutions ("NuCera") business acquired in the first month of fiscal 2023 (included within our Adhesives, Sealants and Additives segment) and revenue generated from the cable materials product line within the Industrial Tapes operating segment. The Company's second quarter gross margin increased to 36.8% compared to 36.6% in the comparable prior fiscal quarter. Despite the Company's sales growth in both the current quarter and fiscal six-month period, and an increase in gross margin percentage in the current fiscal quarter, the Company continues to have a less favorable gross margin percentage of 35.8% in the fiscal year-to-date period compared to 36.8% in the prior comparable period. The decrease in the gross margin percentage is primarily due to purchase accounting expense related to our NuCera business which includes inventory step-up adjustment expensed in the first fiscal quarter. Additionally, the Company's gross margin was negatively impacted by customer destocking caused by customer inventory reduction initiatives seen in the first half of the fiscal year compared to both the prior second fiscal quarter and year-to-date periods. In addition, increased operating expenses seen in the second quarter and first half of the fiscal period include incremental monthly depreciation and amortization related to our NuCera business, lease impairment and write-off associated with theWoburn, MA facility relocation and closure, and first quarter purchase accounting adjustments including backlog fully amortized during the first fiscal quarter, all of which negatively impacted operating income over the first half of the fiscal period. As a result of measures implemented in fiscal 2022, the gross margin for our organic business has stabilized due to sales price increases fully realized in the current fiscal period and the Company's supply chain strategy to actively explore secondary sourcing initiatives to locate alternative suppliers for our critical raw materials. As the Company is halfway through our fiscal 2023 period, we do not anticipate inflationary pressures to have a significant impact on our profitability for the second fiscal quarter and year-to-date period.
Balance Sheet and Cash Flow
Chase Corporation's balance sheet remained strong as ofFebruary 28, 2023 , with cash on hand of$36,370,000 , and a current ratio of 4.8. The Company's cash position remained healthy including cash flow from operations. Purchase accounting adjustments related to the Company's NuCera business were made in the first half of the fiscal year and includes increases in inventory step-up, intangible assets, goodwill and other working capital. In addition, during the second fiscal quarterChase Corporation paid out an annual cash dividend of$9,500,000 onDecember 9, 2022 . The Company had a$145,000,000 outstanding balance on its$200,000,000 revolving credit facility as ofFebruary 28, 2023 , related to the funding of the NuCera acquisition as noted above. The revolving credit facility, which was amended and restated inJuly 2021 to increase its capacity from$150,000,000 to$200,000,000 , allows for the Company to pay down debt with excess cash, while retaining access to immediate liquidity to fund future accretive activities, including mergers and acquisitions, as they are identified. The facility also gives Chase the ability to request an increase in this amount by an additional$100,000,000 ($300,000,000 in total borrowing capacity) at the individual or collective option of any of the lenders. The facility matures inJuly 2026 .
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Results of Operations
Revenue and Income before Income Taxes by Segment were as follows (dollars in
thousands):
Three Three Six Six
Months Ended % of Months Ended % of Months Ended % of Months Ended % of
February 28, Total February 28, Total February 28, Total February 28, Total
2023 Revenue 2022 Revenue 2023 Revenue 2022 Revenue
Revenue
Adhesives,
Sealants and
Additives $ 48,734 52 % $ 31,780 43 % $ 104,287 53 % $ 62,829 42 %
Industrial
Tapes 36,983 39 % 33,330 45 % 76,060 39 % 66,091 44 %
Corrosion
Protection and
Waterproofing 8,563 9 % 8,843 12 % 16,826 9 % 20,043 13 %
Total $ 94,280 $ 73,953 $ 197,173 $ 148,963
Three Three Six Six
Months Ended % of Months Ended % of Months Ended % of Months Ended % of
February 28, Segment February 28, Segment February 28, Segment February 28, Segment
2023 Revenue 2022 Revenue 2023 Revenue 2022 Revenue
Income before
income taxes
Adhesives,
Sealants and
Additives $ 5,621 (a) 12 % $ 7,802 (d) 25 % $ 9,745 (a), (b) 9 % $ 15,399 (d) 25 %
Industrial
Tapes 12,258 33 % 10,250 31 % 24,205 32 % 19,540 30 %
Corrosion
Protection and
Waterproofing 2,463 29 % 2,884 33 % 5,014 30 % 7,330 37 %
Total for
reportable
segments 20,342 22 % 20,936 28 % 38,964 20 % 42,269 28 %
Corporate and
Common Costs (9,350) (c) (8,569) (e) (19,372) (c) (16,785) (e)
Total $ 10,992 12 % $ 12,367 17 % $ 19,592 10 % $ 25,484 17 %
Note: Some percentage of total revenue amounts may not sum to 100% due to rounding.
(a)Includes a$128 loss in the second quarter and a$434 year-to-date loss on the upward adjustment of the performance-based earn out contingent consideration associated with theSeptember 2020 acquisition of ABchimie,$321 and$434 in operations optimization costs related to the move fromWoburn, MA toO'Hara Township, PA and facility closure related toWoburn, MA facility in the second quarter and year-to-date period, respectively, and$314 and$862 loss on right-of-use lease impairment/write-off related to theWoburn, MA facility in the second quarter and year-to-date period, respectively (b)Includes$2,200 of purchase accounting inventory adjustment related to the Company's NuCera business and$2,820 of backlog amortization fully amortized related to the Company's NuCera business both incurred during the first quarter of the fiscal year
(c)Includes $317 of operations optimization costs in the second quarter and
(d)For 2022, includes a$200 gain in the second quarter and a$275 year-to-date loss on the adjustment of the performance-based earn out contingent consideration associated with theSeptember 2020 acquisition of ABchimie,$301 in operation optimization costs in the second quarter and year-to-date period related to the move fromWoburn, MA toO'Hara Township, PA and$147 of operations optimization costs in the second quarter and year-to-date period related to the move fromNewark, CA toHickory, NC (e)For 2022, includes$141 of operations optimization costs in the second quarter and$200 year-to-date related to the Company's move to the new Corporate Headquarters withinWestwood, MA substantially completed in the second quarter of the fiscal year 33 Table of Contents Total Revenue Revenue by SegmentChase Corporation has 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 cleaning Additives Functional Additives chemistries, and customized sealant and adhesive systems for electronics; polyurethane dispersions, polymeric microspheres and superabsorbent polymers; highly differentiated specialty waxes and 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.
Total revenue increased$20,327,000 , or 27% to$94,280,000 for the quarter endedFebruary 28, 2023 , compared to$73,953,000 in the same quarter of the prior year. Out of the$20,327,000 increase in quarterly revenue, 85% relates to inorganic revenue from our NuCera Business and the remaining increase in revenue is primarily attributed to sales price increases fully realized in fiscal 2023. Total revenue increased$48,210,000 , or 32% to$197,173,000 , in the fiscal year-to-date period compared to$148,963,000 in the same period in fiscal 2022. Out of the$48,210,000 increase in in fiscal year-to-date revenue, 78% relates to inorganic revenue from our NuCera Business. The remaining increase in revenue is primarily attributed to sales prices increases fully realized in fiscal 2023. Revenue for our Adhesives, Sealants and Additives segment increased in the second quarter and year-to-date periods against the comparable prior year periods. The segment revenue increased$16,954,000 , or 53% and$41,458,000 , or 66% in the current quarter and year-to-date period, respectively. The second quarter and year-to-date revenue increase was predominately due to the inorganic growth from our NuCera business acquired on the first day of fiscal 2023, totaling$17,348,000 and$37,698,000 in the second quarter and year-to-date period, respectively. The remaining revenue increase for the second fiscal quarter and first six-months of the fiscal period was primarily attributed to sales price increases realized over the comparable prior periods and increased demand for our world-wide focused electronic and industrial coatings product line, totaling$1,529,000 and$3,368,000 in the second quarter and first half of fiscal 2023. Partially offsetting this increase in revenue in the second fiscal quarter was a reduction in revenue in our organic functional additives product line due to decreased customer demand inNorth America over the comparable prior fiscal quarter, totaling$1,923,000 . However, our organic functional additives product line continues to experience a year-to-date increase in sales over the prior comparable period, totaling$392,000 . 34
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Revenue for our Industrial Tapes segment surpassed the prior year quarter and year-to-date periods against the comparable prior year periods. The segment revenue increased$3,653,000 , or 11% and$9,969,000 , or 15% in the current quarter and year-to-date period, respectively. Sales price increases realized over the prior year periods and increased demand for our North American-focused cable materials and specialty products line positively impacted sales for the second quarter and year-to-date period, totaling$4,473,000 and$10,743,000 , respectively. Partially offsetting the overall increase in the second quarter revenue was a reduction in sales volume in our North American-focused pulling and detection product line, totaling$427,000 . However, our pulling and detection product line continues to experience a year-to-date increase in sales over the prior comparable period, totaling$60,000 . Tempering the overall increase in revenue for the segment was second quarter and year-to-date reduction in sales volume from ourAsia -focused electronic materials product line, totaling$393,000 and$834,000 in the current quarter and year-to-date period, respectively. Revenue in the Company's Corrosion Protection and Waterproofing segment decreased in the current quarter and year-to-date period against the comparable prior year periods. The segment revenue decreased$280,000 , or 3% and$3,217,000 , or 16% in the current quarter and year-to-date period, respectively. Negatively impacting sales for the segment was a reduction in sales volume for our building envelope product lines over the comparable prior year periods attributed to customer destocking over the comparable period, totaling$1,278,000 and$2,587,312 in the current quarter and year-to-date period, respectively. Tempering the overall decrease in revenue for the second quarter and year-to-date period was the commencement of delayed projects in theMiddle East market coupled with a demand increase that drove sales gains in North American oil and gas markets, totaling$448,000 and$83,000 in the second quarter and year-to-date period, respectively. Tempering the overall decrease in revenue for the second quarter was an increase in sales volume in our coatings and lining systems, totaling$474,000 in the second fiscal quarter. However, our coatings and lining systems product line continues to experience a year-to-date decrease in sales over the prior year comparable period due to prior year excess demand in the prior first quarter from customer inventory increase initiatives due to reactions of supply chain shortages, totaling$972,000 in the year-to-date fiscal period. Tempering the overall decrease in the second quarter and year-to-date segment revenue was an increase in quarter-to-quarter and year-to-date sales in our bridge and highway projects inNorth America .
Cost of Products and Services Sold
Cost of products and services sold increased$12,710,000 , or 27% to$59,621,000 for the quarter endedFebruary 28, 2023 , compared to$46,911,000 in the prior year quarter. Cost of products and services increased$32,429,000 , or 34% to$126,621,000 in the first six months of fiscal 2023, compared to$94,192,000 in the comparative year-to-date period.
The following table summarizes the cost of products and services sold as a
percentage of revenue for each of
Three Months Ended February 28, Six Months Ended February 28,
Cost of products and services sold 2023 2022 2023 2022
Adhesives, Sealants and Additives 63 % 62 % 64 % 62 %
Industrial Tapes 63 65 65 67
Corrosion Protection and Waterproofing 63 60
62 57
Total Company 63 % 63 % 64 % 63 %
Cost of products and services sold in the Adhesives, Sealants, and Additives
segment was $30,769,000 and $67,001,000 in the current quarter and year-to-date
period compared to $19,838,000 and $38,755,000 in the comparable periods in the
prior year. Cost of products and services sold in the Industrial Tapes segment
was $23,477,000 and $49,196,000 in the current quarter and year-to-date period
compared to $21,790,000 and $44,009,000 in the comparable periods in the prior
year. Cost of products and services sold in the Corrosion Protection and
Waterproofing segment was $5,375,000 and $10,424,000 in the current quarter and
year-to-date period compared to $5,283,000 and $11,428,000 in the comparable
prior year period.
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As a percentage of revenue, cost of products and services increased for both the
Adhesives, Sealants and Additives and Corrosion Protection and Waterproofing
segment as compared to the prior year second quarter and year-to-date period. As
a percentage of revenue, cost of products and services sold decreased for the
Industrial Tapes segment for the second quarter and year-to-date period. The
decrease in the relative gross margin for the Adhesives, Sealants and Additives
and Corrosion Protection and Waterproofing segments was primarily attributed to
decreased production volume effecting overhead variances. The decrease in
relative gross margin for the Adhesives, Sealants and Additives segment was also
impacted by purchase accounting inventory step-up expense related to our NuCera
business recorded in the prior fiscal quarter.
With the composition of the Company's finished goods and the markets it serves,
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) directly and indirectly affect both the
purchase price of the raw materials and the market demand for its product
offerings. In an effort to preserve margins, the Company diligently monitors raw
materials and commodities pricing across all its product lines.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased$5,311,000 , or 40% to$18,436,000 for the quarter endedFebruary 28, 2023 compared to$13,125,000 in the prior year quarter. Selling, general and administrative expenses increased$13,543,000 or 51% to$40,043,000 in the fiscal year-to-date period compared to$26,500,000 in the same period in fiscal 2022. The quarter-to-quarter increase in expense is predominately due to the inclusion of expenses from our NuCera business (including additional amortization expected to recur in future periods and backlog intangible fully amortized during the first fiscal quarter) which was acquired on the first day of fiscal 2023. As a percentage of revenue, selling, general and administrative expenses represented 20% for both the current quarter and fiscal year-to-date periods endedFebruary 28, 2023 and 18% for both the prior current quarter and fiscal year-to-date period for fiscal 2022.
Research and Product Development Costs
Research and product development costs increased$368,000 or 34% to$1,463,000 during the second quarter of fiscal 2023, compared to$1,095,000 in fiscal 2022. Research and product development costs increased$866,000 or 41% to$2,954,000 during the first six months of fiscal 2023, compared to$2,088,000 in the same period of fiscal 2022. The increase in research and product development costs in the current quarter and year-to-date fiscal period is primarily related to our NuCera business, which was acquired in the first month of fiscal 2023.
Operations Optimization Costs
ERP System Upgrade
During the first quarter of fiscal 2023, the Company began the process of upgrading our current Oracle Legacy ERP System to the Oracle Fusion Cloud Platform. This upgrade will position us with a more advanced system to support business expansion, access to upgrades in functionality and a more modern system for operations - all within the Oracle Ecosystem. Additionally, the upgrade will be a multi-year, phased-in approach designed to mitigate any disruptions to our business. The Company recognized$317,000 and$857,000 in operations optimization expense related to the ERP system upgrade in the second quarter and first half of fiscal 2023, respectively.
Relocation of Adhesives Systems Manufacturing to
During the third quarter of fiscal 2021, Chase announced to the employees at itsWoburn, MA location that its adhesives systems operations, part of the Adhesives, Sealants and Additives segment's electronic and industrial coatings product line, would be consolidating into the Company's existingO'Hara Township, PA location.Chase Corporation obtained the adhesives systems operations as part of its fiscal 2017 acquisition of the operations of Resin Designs. The Company recognized$321,000 and$434,000 in operations optimization expense related to the consolidation of theWoburn, MA location during the second quarter and first half of fiscal 2023, respectively. 36
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Loss on Impairment/write-off of right-of-use Lease Asset
The Company signed a termination agreement with the landlord for theWoburn, MA facility on the last day of the fiscal second quarter and wrote off the right-of-use asset and liability of theWoburn, MA lease, expensing$314,000 in the second fiscal quarter of 2023. Additionally, the Company expensed$548,000 as a lease impairment related to theWoburn, MA facility relocation, as part of the relocation of the Company's Adhesives, Sealants and Additives segment's electronic and industrial coatings product line to the Company's existingO'Hara Township, PA location in the first quarter of fiscal 2023. The total combined year-to-date expense of$862,000 is included in the Loss on impairment/write-off of right-of-use lease asset in the Condensed Consolidated Statement of Operations. The project is now substantially complete and any future costs related to this move are not anticipated to be significant to the condensed consolidated financial statements.
Loss (Gain) on Contingent Consideration
As a component of theSeptember 1, 2020 (fiscal 2021) acquisition of ABchimie, the Company incurred a performance-based earn out liability potentially worth an additional €7,000,000 (approximately$8,330,000 at the time of the transaction) in consideration. Following its initial recording of an accrual for$928,000 at the acquisition date,$1,664,000 and$432,000 in expense related to adjustments to the performance-based earn out accrual were recorded during the fiscal years endedAugust 31, 2021 and 2022, respectively. The Company recognized an expense of$128,000 and$434,000 in the second quarter and year-to-date period of fiscal 2023, respectively, and recognized a gain of$200,000 and loss of$275,000 in the prior period second quarter and year-to-date period, respectively, related to the performance-based contingent consideration.
Interest Expense
The Company recognized interest expense of$2,387,000 and$4,525,000 for the second quarter and year-to-date fiscal period endedFebruary 28, 2023 , respectively, compared to$86,000 and$173,000 for the prior comparable second quarter and year-to-date fiscal period, respectively. The increase in interest expense relates to our outstanding long-term debt which was used to fund our NuCera business acquisition at the beginning of fiscal 2023.
Other Income (Expense)
Other income (expense) was an expense of ($301,000 ) in the quarter endedFebruary 28, 2023 , compared to income of$20,000 in the same period in the prior year, a difference of$321,000 . Other income (expense) was an expense of ($822,000 ) in the first six months of the fiscal year compared to income of$397,000 in the comparable period, a difference of$1,219,000 . Other income (expense) primarily includes 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, non-service cost components of periodic pension expense (including pension-related settlement costs due to the timing of lump-sum distributions), interest income, rental income and other non-trade/non-royalty/non-commission receipts. The change in total other income (expense) in fiscal 2023 compared to fiscal 2022 for both the quarter-to-date and year-to-date periods was largely due to the recognition of a foreign exchange loss in fiscal 2023 as compared to a foreign exchange gain in fiscal 2022. Income Taxes For the three and six months endedFebruary 28, 2023 , the Company's recognized effective tax rate was 22.6% and 22.3%, respectively. For the three and six months endedFebruary 28, 2022 , the Company's recognized effective tax rate was 26.2% and 26.0%, respectively.
For fiscal 2023 and 2022, the Company is utilizing the 21% Federal tax rate
enacted by the Tax Cuts and Jobs Act (the "Tax Act") passed in
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Net Income
Net income decreased $623,000 or 7% to $8,503,000 in the quarter ended February
28, 2023 compared to $9,126,000 in the comparable prior second quarter. Net
income decreased $3,626,000 or 19% in the six month year-to-date period ended
February 28, 2023 compared to $18,853,000 in the comparable six month
year-to-date period. The decrease in net income is predominately caused by an
increase in operating expenses and interest expense in the second quarter and
first half of the fiscal period. This includes incremental depreciation and
amortization related to our NuCera business, lease impairment/write-off
associated with the Woburn, MA facility location, and first quarter purchase
accounting adjustments related to the NuCera acquisition, which include backlog
fully amortized during the first fiscal quarter - all of which negatively
impacted net income over the comparable prior year quarter.
Liquidity and Sources of Capital
The Company's overall cash and cash equivalents balance decreased by$279,125,000 to$36,370,000 atFebruary 28, 2023 , from$315,495,000 atAugust 31, 2022 . The lower cash balance atFebruary 28, 2023 was attributed to the$180,000,000 of cash drawn from the revolving credit facility prior to the end of fiscal 2022, the proceeds of which were used, together with$70,000,000 in cash on hand, to fund the acquisition of NuCera which closed onSeptember 1, 2022 (the first day of fiscal 2023). The decrease in cash balance atFebruary 28, 2023 is offset by cash provided by operations of$19,191,000 . Of the above-noted balances,$19,827,000 and$28,951,000 were held outsidethe United States byChase Corporation and its foreign subsidiaries as ofFebruary 28, 2023 andAugust 31, 2022 , respectively. Given the Company's cash position and borrowing capability inthe United States and the potential for increased investment and acquisitions in foreign jurisdictions, prior to the second quarter of fiscal 2018 the Company did not have a history of repatriating a significant portion of its foreign cash. With the passage of the Tax Cuts and Jobs Act (the "Tax Act") in the second quarter of fiscal 2018, significant changes in the Internal Revenue Code were enacted, changing theU.S. taxable nature of previously unrepatriated foreign earnings. Following the passage of the Tax Act, the Company repatriated$10,499,000 inU.K. foreign earnings in fiscal 2018 and$17,230,000 in fiscal 2019. No additional amounts were repatriated in fiscal year 2020, 2021, or 2022. The Company repatriated$0 and$11,458,000 inU.K. foreign earnings in second quarter and year-to-date period of fiscal 2023. Please see Note 14 - "Income Taxes" to the Condensed Consolidated Financial Statements for further discussion of the effects of the Tax Act. Cash flow provided by operations was$19,191,000 in the first six months of fiscal year 2023 compared to$8,757,000 in the same period of the comparable year. The increase in cash provided by operations during the current period compared to the prior year was primarily related to increase in revenue, mainly driven by our NuCera business and reduction on inventory spend. The ratio of current assets to current liabilities was 4.8 as ofFebruary 28, 2023 compared to 12.4 (or 7.3 excluding the$180,000,000 cash drawn from our revolving credit facility to fund the NuCera acquisition) as ofAugust 31, 2022 . The decrease in the ratio of current assets to current liabilities is primarily due to the cash outflow of$250,000,000 to fund the acquisition of NuCera mentioned above.
Cash flow used in investing activities of
Cash flows used in financing activities of$44,749,000 was due to principal payments (totaling$35,000,000 ) on our long-term debt related to the funding of the NuCera acquisition mentioned above. Additionally, the cash flows used in financing activities was due to a cash dividend of$1.00 per share (totaling$9,500,000 ) to shareholders of record onNovember 30, 2022 and paid onDecember 9, 2022 , the second quarter of fiscal 2023. OnJuly 27, 2021 (the fourth quarter of fiscal 2021), the Company entered into the Second Amended and Restated Credit Agreement (the "Credit Agreement") by and among the Company andNEPTCO Incorporated ("NEPTCO"), each as borrowers, the guarantor subsidiaries party thereto, the financial institutions party thereto as Lenders, andBank of America, N.A ., as administrative agent, with participation fromWells Fargo Bank, N.A. ,PNC Bank, N.A. and 38
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JPMorgan Chase Bank, N.A . The Credit Agreement is used to provide for additional liquidity to finance acquisitions, working capital and capital expenditures, and for other general corporate purposes. The Credit Agreement includes a revolving credit loan (the "Revolving Facility"), with borrowing capabilities not to exceed$200,000,000 at any time, with the ability to request an increase in this amount by an additional$100,000,000 at the individual or collective option of any of the Lenders. EffectiveFebruary 1, 2023 , the Credit Agreement transitioned to a secured overnight financing rate (SOFR) in substitution for the London Interbank Offered Rate (LIBOR) and will commence at the next interest rate renewal period. The applicable interest rate for the Revolving Facility and Term Loan (defined below) is based on the effective SOFR base rate plus a SOFR adjustment based on the term of the interest rate period plus a spread ranging from 1.00% to 1.75%, depending on the consolidated net leverage ratio of Chase and its subsidiaries. The SOFR adjustment is based on interest rate periods of 1-month at .1%, 3-month at .15%, and 6-months at .25%. Prior to the transition to SOFR, the applicable interest rate for the Revolving Facility and Term Loan (defined below) is based on the effective LIBOR plus a spread ranging from 1.00% to 1.75%, depending on the consolidated net leverage ratio of Chase and its subsidiaries. As ofFebruary 28, 2023 , the Company had$145,000,000 in long-term debt attributed to the acquisition of NuCera Solutions that closed onSeptember 1, 2022 . The long-term debt has a weighted average interest rate of 6.5%. The Credit Agreement has a five-year term with interest payments due at the end of the applicable LIBOR or SOFR period (but in no event less frequently than the three-month anniversary of the commencement of such LIBOR or SOFR period) and principal payment due at the expiration of the agreement,July 27, 2026 . The Credit Agreement contains provisions that may replace LIBOR as the benchmark index under certain circumstances. In addition, the Company may elect a base rate option for all or a portion of the Revolving Facility, in which case interest payments shall be due with respect to such portion of the Revolving Facility on the last business day of each quarter. Subject to certain conditions set forth in the Credit Agreement, the Company may elect to convert all or a portion of the outstanding Revolving Facility into a new term loan twice during the term of the Revolving Facility (each, a "Term Loan", and collectively with the Revolving Facility, the "Credit Facility"), which Term Loan shall be payable quarterly in equal installments sufficient to amortize the original principal amount of such Term Loan on a ten year amortization schedule. The outstanding balance on the Credit Facility is guaranteed by all of Chase's direct and indirect domestic subsidiaries, which collectively had a carrying value of approximately$317,889,000 atFebruary 28, 2023 . The Credit Facility is subject to restrictive covenants under the Credit Agreement, and financial covenants that require Chase and its subsidiaries to maintain certain financial ratios on a consolidated basis, including a consolidated net leverage ratio of 3.25 to 1.00 and a consolidated interest coverage ratio of 3.50 to 1.00 (both defined in the Credit Agreement).Chase Corporation was in compliance with the debt covenants as ofFebruary 28, 2023 . The Credit Agreement requires lender approval for acquisitions over a certain size and allows for a temporary step-up in the allowed consolidated leverage ratio for the four fiscal quarters ending after certain designated acquisitions. Prepayment is allowed by the Credit Agreement at any time during the term of the agreement, subject to customary notice requirements and the payment of customary LIBOR or SOFR breakage fees. The Company has several ongoing capital projects, including upgrading the Company's ERP system, as well as its facility rationalization and consolidation initiative, which are important to its long-term strategic goals. Machinery and equipment may be added as needed to increase capacity or enhance operating efficiencies in the Company's production facilities. We may acquire companies or other assets in future periods which are complementary to our business. The Company believes that its 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 its 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.
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Contractual Obligations
Please refer to Item 7 "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Company's 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 withU.S. GAAP. To apply these principles, we must make estimates and judgments that affect our reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. In many instances, we reasonably could have used different accounting estimates and, in other instances, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from our estimates. To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected. We base our estimates and judgments on historical experience and other assumptions that we believe to be reasonable at the time and under the circumstances, and we evaluate these estimates and judgments on an ongoing basis. We refer to accounting estimates and judgments of this type as critical accounting policies, judgments, and estimates. Management believes there have been no material changes during the six months endedFebruary 28, 2023 to the critical accounting policies reported in 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 endedAugust 31, 2022 . 40
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