July 8, 2016 - 12:10 PM EDT
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CHASE CORP - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

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 August 31, 2015.



Overview



The Company attained revenue growth in the first nine months of fiscal 2016 as
compared to the same period in the prior fiscal year, but on a quarterly basis,
it did not match the top-line results achieved in the third fiscal quarter of
the prior year. Despite the third quarter reduction in revenue, Chase realized
growth in both operating income and net income for both the quarter and
year-to-date periods as compared to the prior year. This growth in operating
income and net income can be attributed to both an overall favorable sales mix,
and the results of the Company's ongoing cost control and facility
rationalization initiatives, which are focused on streamlining processes and
reducing operating costs. Our pulling and detection, coating and lining systems,
bridge and highway, building envelope and specialty chemical intermediates
product lines all saw revenue growth for both the quarterly and year-to-date
periods. However, this growth was more than offset in the quarterly period and
partially offset in the year-to-date period by declines in our pipeline
coatings, wire and cable and fiber optic cable components product lines. Our
specialty chemical intermediates product line was acquired in the second quarter
of the prior year, and this represents the first quarter in which it is fully
included in both the current and comparative quarters. Net income attributable
to Chase Corporation further benefited in the nine month period ended May 31,
2016 from the sale of our RodPack wind energy business during the first quarter
of our fiscal year.



Third quarter revenue from our Industrial Materials segment was relatively
stable compared to the prior year period, decreasing less than one percent.
Year-to-date revenue exceeded the same period in the prior year, with both
current year periods seeing higher demand for our pulling and detection and
specialty chemical intermediates product offerings. Sales of our electronic
coatings products were up on a year-to-date basis, but down for the quarter as
compared to the prior year comparable periods. Reduced demand for wire and cable
and fiber optic cable components products fully offset gains for the quarter,
and partially offset revenue increases for the year-to-date period.



Revenue from our Construction Materials segment decreased for both the current
quarter and current year-to-date periods, as compared to the same periods in the
prior year. Both the segment's quarter-over-quarter and year-to-date net sales
decreases were driven by reduced demand for our pipeline coatings products.
Middle East water infrastructure project demand continued for the pipeline
coatings products produced at our Rye, UK facility, but as anticipated this
demand was at a lower volume than achieved in both the comparable prior year
periods. Our domestically-produced pipeline coatings products, which sell
predominantly into North American oil and gas markets, had a year-to-date
increase in sales volume, but was down for the current quarter as compared to
the third quarter of the prior year. Given the repair and maintenance focus of
many of our domestically-produced pipeline coatings products, the product line
as a whole has not been as heavily impacted by the dynamics in the oil and gas
markets into which it sells. Our coating and lining systems, bridge and highway
and building envelope product lines all saw sales volume growth in both the
quarter-over-quarter and year-over-year periods, partially offsetting the
results of our pipeline coatings products.



During the remainder of fiscal 2016, we will continue to focus on our core strategies: organic earnings growth via our core businesses; inorganic growth through the identification, pursuit and possible purchase of accretive and complementary acquisition targets; and cost control, by leveraging existing resources and streamlining processes.



Our balance sheet remains strong, with cash on hand of $62,347,000 and a current
ratio of 4.0.  Our $15,000,000 line of credit is fully available, while the
balance of our term debt is $45,500,000. The entire outstanding balance of our
term debt will become current in the fourth fiscal quarter of 2016, with final
payment due June 2017 (the fourth quarter of fiscal 2017).

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We have two reportable segments as summarized below:



Segment            Product Lines             Manufacturing Focus and Products
Industrial       ?Wire and Cable       Protective coatings and tape products,
Materials        ?Electronic           including insulating and conducting
                 Coatings              materials for wire and cable manufacturers;
                 ?Specialty            moisture protective coatings for
                 Products              electronics; laminated durable papers,
                 ?Pulling and          packaging and industrial laminate products;
                 Detection             pulling and detection tapes used in the
                 ?Electronic           installation, measurement and location of
                 Materials             fiber optic cables and water and natural gas
                 ?Structural           lines; cover tapes essential to delivering
                 Composites            semiconductor components via tape and reel
                 ?Fiber Optic Cable    packaging; composite materials elements;
                 Components (1)        glass-based strength elements designed to
                 ?Specialty            allow fiber optic cables to withstand
                 Chemical              mechanical and environmental strain and
                 Intermediates         stress; Dualite brand microspheres; and
                                       polyurethane dispersions.
Construction     ?Pipeline             Protective coatings and tape products,
Materials        ?Bridge and           including coating and lining systems for use
                 Highway               in liquid storage and containment
                 ?Coating and          applications; protective coatings for
                 Lining Systems        pipeline and general construction
                 ?Building Envelope    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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 (1)  50% owned joint venture until October 31, 2014, when we purchased the
      remaining 50% non-controlling interest.




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Results of Operations



Revenue and Operating Profit by Segment are as follows (dollars in thousands):




                                                   % of                                % of                                  % of                               % of
                         Three Months Ended        Total      Three Months Ended       Total        Nine Months Ended        Total      Nine Months Ended       Total
                            May 31, 2016          Revenue        May 31, 2015         Revenue         May 31, 2016          Revenue       May 31, 2015         Revenue

Revenue
Industrial Materials    $             47,185           73 %  $             47,288          73 %    $           134,253           76 %  $           130,013          75 %
Construction
Materials                             17,051           27 %                17,610          27 %                 42,385           24 %               43,122          25 %
Total                   $             64,236                 $             64,898                  $           176,638                 $           173,135

                                                   % of                                % of                                  % of                               % of
                         Three Months Ended       Segment     Three Months Ended      Segment       Nine Months Ended       Segment     Nine Months Ended      Segment
                            May 31, 2016          Revenue        May 31, 2015         Revenue         May 31, 2016          Revenue       May 31, 2015         Revenue
Income before income
taxes
Industrial Materials    $             14,191           30 %  $             13,129 (b)      28 %    $            40,391 (c)       30 %  $            35,957 (b)      28 %
Construction
Materials                              5,662           33 %                 5,586          32 %                 14,785           35 %               12,051          28 %
Total for reportable
segments                              19,853           31 %                18,715          29 %                 55,176           31 %               48,008          28 %
Corporate and Common
Costs                                (7,387) (a)                          (6,852)                             (20,321) (a)                        (19,120) (d)
Total                   $             12,466           19 %  $             11,863          18 %    $            34,855           20 %  $            28,888          17 %



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(a) Includes Randolph, MA facility exit and demolition costs of $662 and $871

incurred during the quarterly and year-to-date periods, respectively

(b) Includes $16 and $65 of expenses related to inventory step-up in fair value

related to the January 2015 acquisition of the specialty chemical

intermediates product line, incurred during the quarterly and year-to-date

periods, respectively

(c) Includes both a $1,031 gain on sale of our RodPack® wind energy business

contained within our structural composites product line and a $365 write-down

on certain other structural composites assets based on usage constraints

      following the sale, both recognized in November 2015


 (d)  Includes $584 in expenses related to the January 2015 acquisition of the
      specialty chemical intermediates product line


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Total Revenue



Total revenue decreased $662,000 or 1% to $64,236,000 for the quarter ended May
31, 2016, compared to $64,898,000 in the same quarter of the prior year. Total
revenue increased $3,503,000 or 2% to $176,638,000 in the fiscal year-to-date
period compared to $173,135,000 in the same period in fiscal 2015.



Revenue in our Industrial Materials segment decreased $103,000 or less than one
percent for the current fiscal quarter and increased $4,240,000 or 3% in the
current year-to-date period. The changes in this segment compared to the prior
year periods were primarily due to the following for the current quarter and
year-to-date periods, respectively: (a) our specialty chemical intermediates
product line, which was acquired in the second quarter of the prior year, had
increases in sales volume of $76,000 and $8,292,000; and (b) our pulling and
detection products, which continued to garner high demand from the utility and
telecommunication industries, and had sales volume increases of $1,055,000 and
$2,705,000. These increases were fully offset for the quarter, and partially
offset for the year-to-date period, by: (a) our wire and cable products, which
continued the trend of reduced product demand from the energy and mining-related
markets and saw decreases of $712,000 and $4,438,000 for the quarter and
year-to-date periods, respectively; and (b) quarter-over-quarter and
year-to-date reductions of $98,000 and $1,303,000, respectively, in sales of our
fiber optic cable component products. In addition, while quarter-over-quarter
revenue for our electronic coatings products was down $531,000, total
year-to-date revenue for the product line was $25,000 over the prior year
comparable period, driven by demand from the automotive and appliance
industries.



Revenue from our Construction Materials segment decreased $559,000 or 3% and
$737,000 or 2% in the current quarter and year-to-date periods,
respectively. The decrease in our Construction Materials segment compared to
both prior year periods was primarily due to the anticipated net decreases in
our pipeline coatings products sales, which totaled $2,405,000 and $4,457,000
for the quarter-over-quarter and year-to-date periods, respectively. While
year-to-date sales of our domestically-produced pipeline products continued to
exceed prior year-to-date results, their sales volume for the quarter decreased
compared to the third quarter of the prior year. For both the current quarter
and current year-to-date periods, Middle East water infrastructure project
demand remained a significant sales driver for the pipeline coatings products
produced at our Rye, UK facility. However, this demand continued at a lower
volume in the current periods, as compared to those obtained in the respective
prior year periods. These decreases were partially offset by: (a) our coating
and lining systems products, which exceeded prior year quarter and year-to-date
results by $1,013,000 and $2,576,000, respectively, with sales volume increases
driven by both non-repeating project work and an overall increasing acceptance
of the product offerings in architectural and general waterproofing
applications; (b) our bridge and highway products, with quarter-over-quarter and
year-to-date sales volume increases of $516,000 and $1,074,000, respectively;
and (c) our building envelope products, which obtained quarterly and
year-to-date sales volume increases of $318,000 and $62,000, respectively.



Cost of Products and Services Sold



Cost of products and services sold decreased $1,602,000 or 4% to $38,542,000 for
the quarter ended May 31, 2016, compared to $40,144,000 in the prior year
quarter. Cost of products and services sold decreased $705,000 or 1% to
$108,154,000 in the fiscal year-to-date period compared to $108,859,000 in the
same period in fiscal 2015.


The following table summarizes our cost of products and services sold as a percentage of revenue for each of our reporting segments:



                                                 Three Months Ended May 31,       Nine Months Ended May 31,
Cost of products and services sold              2016            2015               2016               2015
Industrial Materials                                 62 %            62 %                62 %               63 %
Construction Materials                               55 %            62 %                59 %               64 %
Total                                                60 %            62 %                61 %               63 %




Cost of products and services sold in our Industrial Materials segment were
$29,095,000 and $83,300,000 in the current quarter and year-to-date periods
compared to $29,263,000 and $81,391,000 in the comparable periods in the prior
year. Cost of products and services sold in our Construction Materials segment
were $9,447,000 and $24,854,000 for the quarter and year-to-date periods ended
May 31, 2016, compared to $10,881,000 and $27,468,000 in the same periods of

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the prior year. As a percentage of revenue, cost of products and services sold
remained consistent for Industrial Materials for the quarter-over-quarter period
and decreased for the year-to-date period. For Construction Materials, cost of
products and services sold as a percentage of revenue decreased for both the
quarter and year-to-date periods. These decreases were primarily due to product
mix, as we had decreased sales volume from our lower margin products.  Given the
composition of our finished goods and the markets we serve, the pricing of
certain commodities can both directly and indirectly affect the purchase price
of our raw materials and the demand and sales price for our product offerings.
As such, Chase closely monitors raw material and commodities pricing across all
its product lines to preserve margins.



Selling, General and Administrative Expenses



Selling, general and administrative expenses decreased $355,000 or 3% to
$11,770,000 for the quarter ended May 31, 2016 compared to $12,125,000 in the
prior year quarter. As a percentage of revenue, selling, general and
administrative expenses decreased to 18% in the current fiscal quarter compared
to 19% in the prior year period. Selling, general and administrative expenses
decreased $754,000 or 2% to $33,506,000 in the fiscal year-to-date period
compared to $34,260,000 in the same period in fiscal 2015. As a percentage of
revenue, selling, general and administrative expenses decreased to 19% in the
current fiscal year-to-date period compared to 20% in the prior year period. The
percentage decrease for both the current fiscal quarter and year-to-date period
compared to the prior year periods, respectively, was primarily attributable to:
(a) decreases in international sales commissions of $256,000 and $907,000 due to
a commission structure change which affected sales in certain geographic regions
in the current year; (b) decreases of $188,000 and $216,000 in pension costs,
principally related to the $177,000 lump sum pension settlement cost recognized
in the prior year period third quarter; (c) net decreases of $168,000 and
$116,000 in selling expenses; and (d) transitional administrative costs of
$100,000 incurred following our purchase of the specialty chemical intermediates
product line (separate from acquisition-related costs) recognized in the third
quarter of the prior year, which did not recur in the current year. Selling,
general and administrative expenses were further affected by period-over-period
changes in amortization expense; these changes predominantly related to our
January 30, 2015 acquisition of the specialty chemical intermediates product
line. Amortization expense recorded to selling, general and administrative
expense decreased $118,000 and increased $834,000 for the quarter-over-quarter
and year-to-date periods, respectively. A focus on cost control continues to be
one of our core operating strategies, and this focus will continue throughout
the remainder of fiscal 2016 and in future periods.



Exit Costs Related to Idle Facility



In the quarter and year-to-date period ended May 31, 2016, the Company
recognized $662,000 and $871,000, respectively, in demolition costs associated
with its site in Randolph, MA, which has been idle with regard to production for
several years. The Company began marketing the site for sale during the second
fiscal quarter of 2016. The decision to raze the site and market the property
comes as part of the Company's facility consolidation and rationalization
initiative, and was done in part to make the property more attractive to a
potential buyer. Prior to the current fiscal year, production previously housed
in Randolph, MA had been relocated to the Company's Oxford, MA and Blawnox, PA
locations. The Company has updated its initial estimate and currently
anticipates an additional $100,000 in expenses associated with completing the
project, and expects work to be completed during the fourth fiscal quarter, with
the sale of the property to follow.

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Write-down of Certain Assets Under Construction




In the first quarter of 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 first
quarter 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 by the
same product line, resulting in our determination to fully write-down certain
assets under construction during the quarter.



Acquisition-Related Costs



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



Interest Expense



Interest expense increased $18,000 or 7% to $284,000 for the quarter ended May
31, 2016 compared to $266,000 in the prior year third quarter, primarily due to
a floating interest rate increase. Interest expense decreased $16,000 or 2% to
$794,000 for the fiscal year-to-date period compared to $810,000 in the same
period in fiscal 2015. The decrease in interest expense from the prior
year-to-date period is a result of a reduction in our overall average debt
balance through principal payments made from operating cash flow over the past
year.



Gain on Sale of Business



In the first quarter of fiscal 2016, the Company sold the RodPack wind energy
business formerly contained within its structural composites product line. This
transaction resulted in a pre-tax book gain of $1,031,000, which was recorded in
the nine month period ended May 31, 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 (expense) was an expense of $512,000 in the quarter ended May 31,
2016 compared to an expense of $500,000 in the same period in the prior year, an
increase of $12,000. Other income (expense) was an income of $876,000 for the
fiscal year-to-date period compared to an income of $266,000 in the same period
in the prior year, an increase of $610,000. Other income (expense) primarily
includes interest income and 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. Expense in the current quarter
was primarily the result of sales made from our UK-based operations and
denominated in US dollars, while income in the current year-to-date period was
primarily the result of sales made from our UK-based operations and denominated
in both US dollars and euros.



Income Taxes



The effective tax rates for the third quarter and nine month period ended May
31, 2016 were 39.6% and 37.0%, respectively, and were 39.6% and 36.9%, for the
quarter and year-to-date period ended May 31, 2015, respectively. The current
year third quarter and year-to-date tax rates were affected by an adjustment in
our uncertain tax positions. The prior year third quarter and year-to-date tax
rates were affected by a domestic production deduction return to provision
true-up item related to the sale of our Insulfab product line, which did not
repeat in the current year.



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Non-Controlling Interest



The income (loss) attributable to non-controlling interest relates to a joint
venture we had, prior to our October 2014 acquisition of the 50% outstanding
non-controlling membership interest. 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. The $95,000 recorded in the
condensed consolidated statement of operations as net income attributable to
non-controlling interest for the nine month period ended May 31, 2015,
represents the now-former joint venture partner's share of the results of
operations of the JV for the period from September 1, 2014 through October 31,
2014.



Net Income Attributable to Chase Corporation

Net income attributable to Chase Corporation increased $365,000 or 5% to $7,531,000 in the quarter ended May 31, 2016 compared to $7,166,000 in the prior year third quarter. The increase in net income in the current quarter is primarily due to a more favorable sales mix during the quarter, and reduced selling, general and administrative expense for the period.




Net income attributable to Chase Corporation increased $3,815,000 or 21% to
$21,952,000 in the nine months ended May 31, 2016 compared to $18,137,000 in the
same period in the prior year. The increase in net income in the current nine
month period is primarily due to: (a) increased sales volume and an improved
sales mix, including increases in revenue and earnings provided by the recently
acquired specialty chemical intermediates product line; (b) a gain on the sale
of our RodPack wind energy business in November 2015; (c) a period-over-period
reduction in selling, general and administrative expense; and (d) year-to-date
foreign exchange gains recognized in other income (expense).



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Other Important Performance Measures




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



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



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



The following table provides a reconciliation of net income attributable to
Chase Corporation, the most directly comparable financial measure presented in
accordance with US GAAP, to EBITDA and Adjusted EBITDA for the periods presented
(dollars in thousands):




                                  Three Months Ended May 31,             Nine Months Ended May 31,
                                    2016                2015               2016               2015
Net income attributable to
Chase Corporation              $        7,531      $        7,166     $       21,952      $      18,137
Interest expense                          284                 266                794                810
Income taxes                            4,935               4,697             12,903             10,656
Depreciation expense                    1,418               1,426              4,282              4,238
Amortization expense                    1,938               2,056              5,774              4,940
EBITDA                         $       16,106      $       15,611     $       45,705      $      38,781
Exit costs related to idle
facility (a)                              662                   -                871                  -
Gain on sale of business
(b)                                         -                   -            (1,031)                  -
Write-down of certain
assets under construction
(c)                                         -                   -                365                  -
Acquisition-related costs
(d)                                         -                   -                  -                584
Cost of sale of inventory
step-up (e)                                 -                  16                  -                 65
Pension settlement costs
(f)                                         -                 177                  -                177
Adjusted EBITDA                $       16,768      $       15,804     $       45,910      $      39,607




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(a) Represents Randolph, MA facility exit and demolition costs incurred

(b) Represents gain on sale of the RodPack wind energy business contained within

      the structural composites product line that was completed in November 2015


 (c)  Represents a write-down of certain structural composites assets under

construction based on usage constraints recognized following the sale of the

RodPack wind energy business in November 2015

(d) Represents costs related to the January 2015 acquisition of the specialty

chemical intermediates product line

(e) Represents expenses related to inventory step-up in fair value related to the

January 2015 acquisition of the specialty chemical intermediates product line

 (f)  Represents pension-related settlement costs due to the timing of lump sum
      distributions


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Liquidity and Sources of Capital



Our overall cash and cash equivalents balance increased $18,528,000 to
$62,347,000 at May 31, 2016, from $43,819,000 at August 31, 2015. The increased
cash balance is primarily attributable to cash from operations and the sale of
the RodPack wind energy business formerly contained within our structural
composites product line. Of the above noted amounts, $25,004,000 and $18,659,000
were held outside the US by our foreign subsidiaries as of May 31, 2016 and
August 31, 2015, respectively. Given our cash position and borrowing capability
in the US and the potential for increased investment and acquisitions in foreign
jurisdictions, we do not have a history of repatriating a significant portion of
our foreign cash. However, we do not currently take the position that
undistributed foreign subsidiaries' earnings are considered to be permanently
reinvested. Accordingly, we recognize a deferred tax liability for the estimated
future tax effects attributable to temporary differences due to these unremitted
earnings. In the event that circumstances should change in the future and we
decide to repatriate these foreign amounts to fund US operations, we would pay
the applicable US taxes on these repatriated foreign amounts, less any tax
credit offsets, to satisfy all previously recorded tax liabilities.



Cash flow provided by operations was $31,842,000 in the first nine months of
fiscal year 2016 compared to $23,866,000 in the same period in the prior year.
Cash provided by operations during the first nine months of fiscal 2016 was
primarily related to operating income and a reduction in our overall inventory
balance (a result of the enhanced inventory-management control the Company is
exercising through the use of its companywide ERP system, whose roll-out was
substantially completed in the prior year). These were offset by a decrease in
accounts payable (in part driven by lower purchases on inventory, based on
enhanced inventory-management control) and a decrease in accrued compensation
and other expenses (related primarily to the payment of the Company's annual
employee incentive plan in November 2015).



The ratio of current assets to current liabilities was 4.0 as of May 31, 2016
compared to 3.2 as of August 31, 2015. The increase in our current ratio at May
31, 2016 was primarily attributable to an increase in cash and cash equivalents
and decreases in accounts payable and accrued payroll and other compensation,
due to the payment of our annual incentive plan in November 2015.



Cash flow provided by investing activities of $119,000 was primarily due to the
sale of the RodPack wind energy business in November 2015, largely offset by
cash paid for purchases of machinery and equipment at our manufacturing
locations during the first nine months of fiscal 2016.



Cash flow used in financing activities of $12,539,000 was primarily due to scheduled payments made on the bank loans used to finance our June 2012 acquisition of NEPTCO, as well as payment of our annual dividend in December 2015, both of which are described in more detail below.



On October 28, 2015, we announced a cash dividend of $0.65 per share (totaling
$5,999,000). The dividend was paid on December 4, 2015 to shareholders of record
on November 9, 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
"Credit Facility"). The applicable interest rate is based on the effective LIBOR
plus a range of 1.75% to 2.25%, depending on our consolidated leverage ratio. At
May 31, 2016, the applicable interest rate was 2.20% per annum and the
outstanding principal amount was $45,500,000. We are required to repay the
principal amount of the term loan in quarterly installments. Installment
payments of $1,400,000 began in September 2012 and continued through June 2014,
increased to $1,750,000 per quarter thereafter through June 2015, and increased
to $2,100,000 per quarter thereafter through March 2017. The Credit Facility
matures in June 2017, at which time the remaining principal balance will be due.
Prepayment of the Credit Facility is allowed at any time.



We have a revolving line of credit with Bank of America (the "Revolver")
totaling $15,000,000, which bears interest at LIBOR plus a range of 1.75% to
2.25%, depending on our consolidated leverage ratio, or, at our option, at the
bank's base lending rate. As of both May 31, 2016, and June 30, 2016, the entire
amount of $15,000,000 was available for use.

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The Revolver is scheduled to mature in June 2017. This Revolver allows for increased flexibility for working capital requirements going forward, and we plan to use this availability to help finance our cash needs, including potential acquisitions, in future periods.



The Credit Facility with Bank of America contains customary affirmative and
negative covenants that, among other things, restrict our ability to incur
additional indebtedness. It also requires us to maintain a ratio of consolidated
indebtedness to consolidated EBITDA (each as defined in the 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 as of May 31, 2016.



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



During fiscal 2016, we have taken action to market for sale two non-production
properties owned by the Company. Included in this was the razing of our idle
facility in Randolph, MA, which is being done in part to make the location more
attractive to a potential buyer. The demolition work is anticipated to be
completed in the fourth fiscal quarter, with the sale of the property to
follow.  Our Paterson, NJ site was reclassified to assets held for sale during
the second fiscal quarter, and we are currently working to execute a sales
agreement with terms we deem beneficial to the Company.



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 our Revolver, together with cash generated from
operations and additional bank borrowings, will be sufficient to fund our cash
flow requirements through at least the next twelve months.  However, there can
be no assurances that additional financing will be available on favorable terms,
if at all.



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




We have no significant off-balance sheet arrangements.



The June 23, 2016 referendum by British voters to exit the European Union
("Brexit") adversely impacted global markets, including currencies, and resulted
in a decline in the value of the British pound, as compared to the US dollar and
other currencies, subsequent to our third fiscal quarter. Volatility in exchange
rates could be expected to continue in the short term as the United Kingdom
negotiates its exit from the European Union. A weaker British pound compared to
the US dollar during a reporting period would cause local currency results of
our United Kingdom operations to be translated into fewer US dollars. For the
nine month period ended May 31, 2016 revenue of our United Kingdom operations
constituted 10% of our consolidated revenue, with sales denominated in a variety
of trading currencies in addition to the British pound. In the longer term, any
impact from Brexit on our United Kingdom operations will depend, in part, on the
outcome of tariff, trade, regulatory, and other negotiations.



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 August 31, 2015 for a complete discussion of our contractual
obligations.



Recent Accounting Standards



In May 2014, the FASB issued Accounting Standards Update ("ASU") No. 2014-09,
"Revenue from Contracts with Customers," which will replace most of the existing
revenue recognition guidance under US Generally Accepted Accounting Principles
("GAAP"). The core principle of the ASU is that an entity should recognize
revenue for the transfer of goods or services equal to the amount that it
expects to be entitled to receive for those goods or services. The ASU requires
additional disclosure about the nature, amount, timing and uncertainty of
revenue and cash flows arising from customer contracts, including significant
judgments and changes in judgments. In March and April 2016, the FASB

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issued ASU 2016-08 "Principal versus Agent Considerations (Reporting Revenue
Gross versus Net)" and ASU 2016-10 "Identifying Performance Obligations and
Licensing," both of which provide further clarification to be considered when
implementing ASU 2014-09. The ASU will be effective for the Company beginning
September 1, 2018 (fiscal 2019), including interim periods in its fiscal year
2019, and allows for either retrospective or modified retrospective methods of
adoption. The Company is in the process of determining the method of adoption
and assessing the impact of this ASU on the Company's consolidated financial
position, results of operations and cash flows.



In April 2015, the FASB issued ASU 2015-03, "Simplifying the Presentation of
Debt Issuance Costs," which requires that debt issue costs related to a
recognized debt liability be presented on the balance sheet as a direct
deduction from the amount of the debt liability, consistent with debt discounts
and premiums. Amortization of such costs is still reported as interest expense.
ASU 2015-03 is effective for fiscal years, and interim periods therein,
beginning after December 15, 2015 (fiscal year 2017 for the Company), but early
adoption is allowed. In August 2015, the FASB issued ASU 2015-15, "Presentation
and Subsequent Measurement of Debt Issue Costs Associated with Line-of-Credit
Arrangements." ASU 2015-15 supplements the requirements of ASU 2015-03 by
allowing an entity to defer and present debt issue costs related to a line of
credit arrangement as an asset and subsequently amortize the deferred costs
ratably over the term of the line of credit arrangement. The Company is
currently evaluating the impact of the adoption of this accounting standard
update on our consolidated financial position, results of operations and cash
flows.



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



In November 2015, the FASB issued ASU No. 2015-17, "Income Taxes - Balance Sheet
Classification of Deferred Taxes." The purpose of the standard is to simplify
the presentation of deferred taxes on a classified balance sheet. Under current
GAAP, deferred income tax assets and liabilities are separated into current and
noncurrent amounts in the balance sheet. The amendments in ASU 2015-17 require
that all deferred tax assets and liabilities be classified as noncurrent in the
balance sheet. The ASU will be effective for the Company beginning September 1,
2017 (fiscal 2018), including interim periods in its fiscal year 2018, but with
early adoption permitted. The Company does not expect the adoption of ASU
2015-17 to have a material impact on its financial statements or presentation.



In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)." Under
the new guidance, lessees will be required to recognize the following for all
leases (with the exception of short-term leases) at the commencement date: (a) a
lease liability, which is a lessee's obligation to make lease payments arising
from a lease, measured on a discounted basis; and (b) a right-of-use asset,
which is an asset that represents the lessee's right to use, or control the use
of, a specified asset for the lease term. Changes were made to align lessor
accounting with the lessee accounting model and ASU No. 2014-09, "Revenue from
Contracts with Customers." The new lease guidance simplifies the accounting for
sale and leaseback transactions primarily because lessees must recognize lease
assets and lease liabilities. The ASU will be effective for the Company
beginning September 1, 2019 (fiscal 2020). Early application is permitted for
all public business entities upon issuance. Lessees must apply a modified
retrospective transition approach for leases existing at, or entered into after,
the beginning of the earliest comparative period presented in the financial
statements. The modified retrospective approach would not require any transition
accounting for leases that expired before the earliest comparative period
presented. Lessees may not apply a full retrospective transition approach. We
are currently evaluating the impact of the application of this accounting
standard update on our consolidated financial position, results of operations
and cash flows.



In March 2016, the FASB issued ASU No. 2016-09, "Compensation - Stock
Compensation (Topic 718), Improvements to Employee Share-Based Payment
Accounting." This ASU provides simplification in the accounting for share-based
payment transactions including the accounting for income taxes, forfeitures,
statutory tax withholding requirements and classification in the statement of
cash flows. The effective date for adoption of this guidance would be our fiscal
year

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beginning September 1, 2017 (fiscal 2018), but with early adoption allowed. We are currently evaluating the effect that this guidance will have on our consolidated financial statements.


Critical Accounting Policies



Our financial statements are prepared in accordance with accounting principles
generally accepted in the United States.  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 nine months ended May 31, 2016 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 ended August 31, 2015.

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Forward Looking Information



The part of this Quarterly Report on Form 10-Q captioned "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
contains certain forward-looking statements, which involve risks and
uncertainties.  Forward-looking statements include, without limitation,
statements as to our future operating results, seasonality expectations, plans
for manufacturing facilities, future economic conditions and expectations or
plans relating to the implementation or realization of our strategic goals and
future growth.  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.  Readers should refer to the discussions under
"Forward Looking Information" and "Risk Factors" contained in our Annual Report
on Form 10-K for the fiscal year ended August 31, 2015 concerning certain
factors that could cause our actual results to differ materially from the
results anticipated in such forward-looking statements. These discussions and
Risk Factors are hereby incorporated by reference into this Quarterly Report.

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Source: Equities.com News (July 8, 2016 - 12:10 PM EDT)

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