Table ofContents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended May 31, 2010**

 

**Commission File Number: 1-9852**

 

**CHASE CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **Massachusetts**                                               | ** ** | **11-1797126**                       |
|-----------------------------------------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of incorporation  of organization) |       | (I.R.S. Employer Identification No.) |

 

**26 Summer Street, Bridgewater, Massachusetts 02324**

(Address of Principal Executive Offices, Including Zip Code)

 

**(508) 279-1789**

(Registrant’s Telephone Number, Including Area Code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months, and (2) has been subject to suchfiling requirements for the past 90 days. YES x NO o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files). YES o NO o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reportingcompany.  See the definitions of “largeaccelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated filer o                                              |   | Accelerated filer x         |
|------------------------------------------------------------------------|--------|-----------------------------|
|                                                                   |   |                        |
| Non-accelerated filer o  (Do not check if a smaller reporting company) |   | Smaller reporting company o |

 

Indicateby checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). YES o NO x

 

Thenumber of shares of Common Stock outstanding as of June 30, 2010 was8,825,147.

 

 

 

----

Table ofContents

 

**CHASE CORPORATION**

**INDEX TO FORM 10-Q**

 

**For the Quarter Ended May 31, 2010**

** **
| **Part I — FINANCIAL INFORMATION**                                                              | ** **                                                                                            |
|-----------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------|
| ** **                                                                                                | ** **                                                                                            |
| Item 1 — Unaudited Financial Statements                                                              | ** **                                                                                            |
| ** **                                                                                                | ** **                                                                                            |
|                                                                                                      | Consolidated Balance Sheets as of May 31, 2010  and August 31, 2009                         | 3 |
|                                                                                                      |                                                                                                  |   |
|                                                                                                      | Consolidated Statements of Operations for the three  and nine months ended May 31, 2010 and 2009 | 4 |
|                                                                                                      |                                                                                                  |   |
|                                                                                                      | Consolidated Statement of Stockholders’ Equity for the  nine months ended May 31, 2010      | 5 |
|                                                                                                      |                                                                                                  |   |
|                                                                                                      | Consolidated Statements of Cash Flows for the nine  months ended May 31, 2010 and 2009           | 6 |
|                                                                                                      |                                                                                                  |   |
|                                                                                                      | Notes to Consolidated Financial Statements                                                            | 7 |
|                                                                                                      |                                                                                                  |
| Item 2 — Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 19                                                                                                    |
|                                                                                                      |                                                                                                  |
| Item 3 — Quantitative and Qualitative Disclosures  About Market Risk                                 | 27                                                                                                    |
|                                                                                                      |                                                                                                  |
| Item 4 — Controls and Procedures                                                                     | 27                                                                                                    |
|                                                                                                      |                                                                                                  |
| **Part II — OTHER INFORMATION**                                                                 |                                                                                                  |
|                                                                                                      |                                                                                                  |
| Item  1 — Legal Proceedings                                                                          | 28                                                                                                    |
|                                                                                                      |                                                                                                  |
| Item  1A — Risk Factors                                                                              | 28                                                                                                    |
|                                                                                                      |                                                                                                  |
| Item  5 — Other Information                                                                          | 28                                                                                                    |
|                                                                                                      |                                                                                                  |
| Item 6 — Exhibits                                                                                    | 28                                                                                                    |
|                                                                                                      |                                                                                                  |
| **SIGNATURES**                                                                                            | 29                                                                                                    |

 

2

----

Tableof Contents

 

**Part 1— FINANCIAL INFORMATION**

 

**Item 1 —Unaudited Financial Statements**

 

**CHASE CORPORATION**

**CONSOLIDATED BALANCESHEETS**

(UNAUDITED)

 

*In thousands, except share andper share amounts*

 
| ** **                                                                                                                                                              | ** ** | **May 31,** | ** ** | **August 31,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|---------------------|------------|
| ** **                                                                                                                                                              | ** ** | **2010**         | ** ** | **2009**            | ** ** |
| **ASSETS**                                                                                                                                                              | ** ** | ** **       | ** ** | ** **          | ** ** |
| Current Assets:                                                                                                                                                         |       |             |       |                |       |
| Cash                                                                                                                                                                    |       | $                | 4,321      |                | $          | 11,643 |   |
| Accounts receivable, less allowance for doubtful  accounts of $474 and $350                                                                                             |       | 21,805           |       | 14,536              |       |
| Inventories                                                                                                                                                             |       | 18,476           |       | 13,941              |       |
| Prepaid expenses and other current assets                                                                                                                               |       | 1,002            |       | 607                 |       |
| Deferred income taxes                                                                                                                                                   |       | 368              |       | 471                 |       |
| Total current assets                                                                                                                                                    |       | 45,972           |       | 41,198              |       |
|                                                                                                                                                                    |       |             |       |                |       |
| Property, plant and equipment, net                                                                                                                                      |       | 28,082           |       | 23,219              |       |
|                                                                                                                                                                    |       |             |       |                |       |
| Other Assets:                                                                                                                                                           |       |             |       |                |       |
| Goodwill                                                                                                                                                                |       | 22,973           |       | 14,606              |       |
| Intangible assets, less accumulated amortization  of $6,637 and $4,869                                                                                                  |       | 18,145           |       | 4,497               |       |
| Cash surrender value of life insurance                                                                                                                                  |       | 5,827            |       | 5,684               |       |
| Restricted investments                                                                                                                                                  |       | 635              |       | 573                 |       |
| Deferred income taxes                                                                                                                                                   |       | —           |       | 1,264               |       |
| Other assets                                                                                                                                                            |       | 85               |       | 25                  |       |
|                                                                                                                                                                    |       | $                | 121,719    |                | $          | 91,066 |   |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                                                                          |       |             |       |                |       |
| Current Liabilities:                                                                                                                                                    |       |             |       |                |       |
| Accounts payable                                                                                                                                                        |       | $                | 8,175      |                | $          | 6,319 |   |
| Accrued payroll and other compensation                                                                                                                                  |       | 2,479            |       | 2,561               |       |
| Accrued stock based and deferred compensation                                                                                                                           |       | 150              |       | 302                 |       |
| Accrued expenses                                                                                                                                                        |       | 3,427            |       | 2,555               |       |
| Accrued income taxes                                                                                                                                                    |       | 1,952            |       | 1,346               |       |
| Current portion of long-term debt                                                                                                                                       |       | 4,400            |       | —              |       |
| Total current liabilities                                                                                                                                               |       | 20,583           |       | 13,083              |       |
|                                                                                                                                                                    |       |             |       |                |       |
| Long-term debt, less current portion                                                                                                                                    |       | 13,683           |       | —              |       |
| Deferred compensation                                                                                                                                                   |       | 1,549            |       | 1,525               |       |
| Accumulated pension obligation                                                                                                                                          |       | 6,162            |       | 5,690               |       |
| Other liabilities                                                                                                                                                       |       | 580              |       | 555                 |       |
| Deferred income taxes                                                                                                                                                   |       | 2,167            |       | —              |       |
|                                                                                                                                                                    |       |             |       |                |       |
| Commitments and Contingencies (Note 9)                                                                                                                                  |       |             |       |                |       |
|                                                                                                                                                                    |       |             |       |                |       |
| Stockholders’ Equity:                                                                                                                                              |       |             |       |                |       |
| First Serial Preferred Stock, $1.00 par value:  Authorized 100,000 shares; none issued                                                                                  |       |             |       |                |       |
| Common stock, $.10 par value: Authorized  20,000,000 shares; 8,827,279 shares at May 31, 2010 and 8,714,431 shares  at August 31, 2009 issued and outstanding |       | 883              |       | 871                 |       |
| Additional paid-in capital                                                                                                                                              |       | 9,478            |       | 7,489               |       |
| Accumulated other comprehensive loss                                                                                                                                    |       | (5,171           | )          | (3,563              | )          |
| Retained earnings                                                                                                                                                       |       | 71,805           |       | 65,416              |       |
| Total stockholders’ equity                                                                                                                                         |       | 76,995           |       | 70,213              |       |
| Total liabilities and stockholders’ equity                                                                                                                         |       | $                | 121,719    |                | $          | 91,066 |   |

 

See accompanying notes to the consolidated financial statements

 

3

----

Table ofContents

 

**CHASE CORPORATION**

**CONSOLIDATED STATEMENTS OFOPERATIONS**

(UNAUDITED)

 

*In thousands, except share and per share amounts*

 
| ** **                                                                           | ** ** | **Three Months Ended May 31,** | ** ** | **Nine Months Ended May 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                                                           | ** ** | **2010**                            | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                                                                           | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                             |       |                                |       |                               |       |   |   |   |   |
| Sales                                                                                |       | $                                   | 39,199     |                               | $          | 25,012 |   | $ | 98,570 |   | $ | 78,370 |   |
| Royalties and commissions                                                            |       | 427                                 |       | 77                                 |       | 1,176 |   | 792 |   |
|                                                                                 |       | 39,626                              |       | 25,089                             |       | 99,746 |   | 79,162 |   |
| Costs and Expenses                                                                   |       |                                |       |                               |       |   |   |   |   |
| Cost of products and services sold                                                   |       | 25,132                              |       | 17,637                             |       | 65,536 |   | 56,836 |   |
| Selling, general and administrative expenses                                         |       | 7,672                               |       | 5,582                              |       | 21,253 |   | 16,463 |   |
| Loss on impairment of fixed assets                                                   |       | —                              |       | 262                                |       | — |   | 262 |   |
| Loss on impairment of goodwill                                                       |       | —                              |       | 237                                |       | — |   | 237 |   |
|                                                                                 |       |                                |       |                               |       |   |   |   |   |
| Operating income                                                                     |       | 6,822                               |       | 1,371                              |       | 12,957 |   | 5,364 |   |
|                                                                                 |       |                                |       |                               |       |   |   |   |   |
| Interest expense                                                                     |       | (100                                | )          | (3                                 | )          | (259 | ) | (13 | ) |
| Other income (expense)                                                               |       | 99                                  |       | 1                                  |       | 74 |   | 326 |   |
|                                                                                 |       |                                |       |                               |       |   |   |   |   |
| Income before income taxes                                                           |       | 6,821                               |       | 1,369                              |       | 12,772 |   | 5,677 |   |
|                                                                                 |       |                                |       |                               |       |   |   |   |   |
| Income taxes                                                                         |       | 2,421                               |       | 507                                |       | 4,624 |   | 2,100 |   |
|                                                                                 |       |                                |       |                               |       |   |   |   |   |
| Net income                                                                           |       | $                                   | 4,400      |                               | $          | 862 |   | $ | 8,148 |   | $ | 3,577 |   |
|                                                                                 |       |                                |       |                               |       |   |   |   |   |
| Net income available to common shareholders, per  common and common equivalent share |       |                                |       |                               |       |   |   |   |   |
| Basic                                                                                |       | $                                   | 0.49       |                               | $          | 0.10 |   | $ | 0.91 |   | $ | 0.42 |   |
| Diluted                                                                              |       | $                                   | 0.48       |                               | $          | 0.10 |   | $ | 0.90 |   | $ | 0.40 |   |
|                                                                                 |       |                                |       |                               |       |   |   |   |   |
| Weighted average shares outstanding                                                  |       |                                |       |                               |       |   |   |   |   |
| Basic                                                                                |       | 8,816,860                           |       | 8,544,372                          |       | 8,720,258 |   | 8,406,158 |   |
| Diluted                                                                              |       | 8,883,085                           |       | 8,833,998                          |       | 8,793,176 |   | 8,679,983 |   |

 

See accompanying notes to the consolidated financial statements

 

4

----

 

Table ofContents

 

**CHASE CORPORATION**

**CONSOLIDATED STATEMENT OFSTOCKHOLDERS’ EQUITY**

**NINE MONTHS ENDED MAY 31, 2010**

(UNAUDITED)

 

*In thousands, except share and per share amounts*

 
| ** **                                                                        | ** ** | ** **       | ** ** | ** **  | ** ** | ** **        | ** ** | **Accumulated**   | ** ** | ** **             | ** ** | ** **        | ** ** | ** ** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------------|------------|-------------|------------|-------------------|------------|-------------------|------------|------------------------|------------|-------------------|------------|------------|------------|
| ** **                                                                        | ** ** | ** **       | ** ** | ** **  | ** ** | **Additional**    | ** ** | **Other**         | ** ** | ** **             | ** ** | **Total**         | ** ** | ** ** | ** ** |
| ** **                                                                        | ** ** | **Common Stock** | ** ** | **Paid-In** | ** ** | **Comprehensive** | ** ** | **Retained**      | ** ** | **Stockholders’** | ** ** | **Comprehensive** | ** ** |
| ** **                                                                        | ** ** | **Shares**       | ** ** | **Amount**  | ** ** | **Capital**       | ** ** | **Income (Loss)** | ** ** | **Earnings**           | ** ** | **Equity**        | ** ** | **Income** | ** ** |
| Balance at August 31, 2009                                                   |       | 8,714,431        |       | $           | 871        |              | $          | 7,489             |       | $                      | (3,563     | )                 | $          | 65,416     |       | $ | 70,213 |   |   |   |
| Restricted stock grants                                                           |       | 61,224           |       | 6           |       | (6                | )          | —            |       | —                 |       | —            |       |       |       |
| Amortization of restricted stock grants                                           |       | —           |       | —      |       | 1,224             |       | —            |       | —                 |       | 1,224             |       |       |       |
| Employee stock grant                                                              |       | 14,200           |       | 2           |       | 196               |       | —            |       | —                 |       | 198               |       |       |       |
| Amortization of stock option grants                                               |       | —           |       | —      |       | 397               |       | —            |       | —                 |       | 397               |       |       |       |
| Exercise of stock options                                                         |       | 42,500           |       | 4           |       | 227               |       | —            |       | —                 |       | 231               |       |       |       |
| Common stock retained to pay statutory minimum  withholding taxes on common stock |       | (5,076           | )          | —      |       | (65               | )          | —            |       | —                 |       | (65               | )          |       |       |
| Excess tax benefit from stock based compensation                                  |       | —           |       | —      |       | 16                |       | —            |       | —                 |       | 16                |       |       |       |
| Cash dividend paid, $0.20 per share                                               |       | —           |       | —      |       | —            |       | —            |       | (1,759                 | )          | (1,759            | )          |       |       |
| Pension amortization, net of tax of $89                                           |       | —           |       | —      |       | —            |       | 134               |       | —                 |       | 134               |       | 134        |       |
| Foreign currency translation adjustment, net of  tax of $944                      |       | —           |       | —      |       | —            |       | (1,753            | )          | —                 |       | (1,753            | )          | $          | (1,753     | ) |
| Net unrealized gain on restricted investments, net  of tax of $7                  |       | —           |       | —      |       | —            |       | 11                |       | —                 |       | 11                |       | 11         |       |
| Net income                                                                        |       | —           |       | —      |       | —            |       | —            |       | 8,148                  |       | 8,148             |       | 8,148      |       |
| Comprehensive income                                                              |       |             |       |        |       |              |       |              |       |                   |       |              |       | $          | 6,540      |   |
| Balance at May 31, 2010                                                      |       | 8,827,279        |       | $           | 883        |              | $          | 9,478             |       | $                      | (5,171     | )                 | $          | 71,805     |       | $ | 76,995 |   |   |   |

 

Seeaccompanying notes to the consolidated financial statements

 

5

----

Table ofContents

 

**CHASE CORPORATION**

**CONSOLIDATEDSTATEMENT OF CASH FLOWS**

(UNAUDITED)

 

*In thousands, except share and per share amounts*

 
| ** **                                                                                  | ** ** | **Nine Months Ended May 31,** | ** ** |
|---------------------------------------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                                                  | ** ** | **2010**                           | ** ** | **2009** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                                        |       |                               |       |   |   |
| Net income                                                                                  |       | $                                  | 8,148      |   | $ | 3,577 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities           |       |                               |       |   |   |
| Loss on impairment of fixed assets                                                          |       | —                             |       | 262 |   |
| Loss on impairment of goodwill                                                              |       | —                             |       | 237 |   |
| Depreciation                                                                                |       | 2,340                              |       | 2,168 |   |
| Amortization                                                                                |       | 2,133                              |       | 691 |   |
| Provision for losses on trade receivables                                                   |       | 174                                |       | (60 | ) |
| Stock based compensation                                                                    |       | 1,666                              |       | 1,642 |   |
| Realized loss (gain) on restricted investments                                              |       | (10                                | )          | 212 |   |
| Excess tax benefit from stock based compensation                                            |       | (16                                | )          | (6 | ) |
| Increase (decrease) from changes in assets and  liabilities (net of effect of acquisitions) |       |                               |       |   |   |
| Accounts receivable                                                                         |       | (7,084                             | )          | 4,450 |   |
| Inventories                                                                                 |       | (3,570                             | )          | 1,034 |   |
| Prepaid expenses & other assets                                                    |       | (364                               | )          | 182 |   |
| Accounts payable                                                                            |       | 1,738                              |       | (2,363 | ) |
| Accrued expenses                                                                            |       | 1,208                              |       | (1,783 | ) |
| Accrued income taxes                                                                        |       | 1,663                              |       | 96 |   |
| Deferred compensation                                                                       |       | 25                                 |       | (812 | ) |
| Net cash provided by operating activities                                                   |       | 8,051                              |       | 9,527 |   |
|                                                                                        |       |                               |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                                        |       |                               |       |   |   |
| Purchases of property, plant and equipment                                                  |       | (2,635                             | )          | (4,190 | ) |
| Contingent purchase price for acquisition                                                   |       | (44                                | )          | (65 | ) |
| Payments for acquisitions, net of cash acquired                                             |       | (25,592                            | )          | (335 | ) |
| Withdrawals from restricted investments, net of  contributions                              |       | (35                                | )          | 82 |   |
| Distributions from cost based investment                                                    |       | —                             |       | 1 |   |
| Payments for cash surrender value life insurance,  including valuation (increase)/decrease  |       | (143                               | )          | (196 | ) |
| Net cash used in investing activities                                                       |       | (28,449                            | )          | (4,703 | ) |
|                                                                                        |       |                               |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                                        |       |                               |       |   |   |
| Borrowings on long-term debt                                                                |       | 31,893                             |       | 13,284 |   |
| Payments of principal on debt                                                               |       | (16,809                            | )          | (13,284 | ) |
| Dividend paid                                                                               |       | (1,759                             | )          | (2,986 | ) |
| Proceeds from exercise of common stock options                                              |       | 231                                |       | 16 |   |
| Payments of statutory minimum taxes on stock  options and restricted stock                  |       | (65                                | )          | — |   |
| Excess tax benefit from stock based compensation                                            |       | 16                                 |       | 6 |   |
| Net cash provided by (used in) financing  activities                                        |       | 13,507                             |       | (2,964 | ) |
|                                                                                        |       |                               |       |   |   |
| INCREASE (DECREASE) IN CASH                                                                 |       | (6,891                             | )          | 1,860 |   |
| Effect of foreign exchange rates on cash                                                    |       | (431                               | )          | (447 | ) |
| CASH, BEGINNING OF PERIOD                                                                   |       | 11,643                             |       | 3,917 |   |
|                                                                                        |       |                               |       |   |   |
| CASH, END OF PERIOD                                                                         |       | $                                  | 4,321      |   | $ | 5,330 |   |
|                                                                                        |       |                               |       |   |   |
| **Non-cash Investing and Financing  Activities**                                            |       |                               |       |   |   |
| Issuance of stock based compensation previously  accrued for                                |       | $                                  | 332        |   | $ | 105 |   |
| Acquisition holdback payments, previously accrued  for                                      |       | —                             |       | $ | 303 |   |
| Property, plant & equipment additions  included in accounts payable                |       | $                                  | 110        |   | $ | 172 |   |
| Accrual for future contingent payments related to  acquisitions                             |       | $                                  | 116        |   | $ | 112 |   |
| Notes payable to C.I.M. shareholders related to  acquisition                                |       | $                                  | 3,000      |   | — |   |

 

See accompanying notes to the consolidated financial statements

 

6

----

Tableof Contents

 

**CHASE CORPORATION**

**NOTESTO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except shareand per share amounts*

 

**Note 1- Basis of Presentation**

 

Theaccompanying unaudited consolidated financial statements have been prepared inaccordance with generally accepted accounting principles for interim financialreporting and instructions to Form 10-Q and Rule 10-01 of RegulationS-X. Therefore, they do not include all information and footnote disclosurenecessary for a complete presentation of Chase Corporation’s financialposition, results of operations and cash flows, in conformity with generallyaccepted accounting principles.  ChaseCorporation (the “Company,” “Chase,” “we,” or “us”) filed audited financialstatements which included all information and notes necessary for suchpresentation for the three years ended August 31, 2009 in conjunction withits 2009 Annual Report on Form 10-K.

 

Theaccompanying unaudited consolidated financial statements contain alladjustments (consisting of normal recurring items) which are, in the opinion ofmanagement, necessary for a fair presentation of the Company’s financialposition as of May 31, 2010, the results of operations and cash flows forthe interim periods ended May 31, 2010 and 2009, and changes instockholders’ equity for the interim period ended May 31, 2010.

 

Thefinancial statements include the accounts of the Company and its wholly-ownedsubsidiaries.  All intercompany transactions and balances have beeneliminated in consolidation.  The Company uses the U.S. dollar as thereporting currency for financial reporting. The financial position and results of operations of the Company’sHumiSeal Europe Ltd and Chase Protective Coatings divisions are measured usingthe UK pound sterling as the functional currency and the financial position andresults of operations of the Company’s HumiSeal Europe SARL division in Franceare measured using euros as the functional currency.  Foreign currency translation gains and lossesare determined using current exchange rates for monetary items and historicalexchange rates for other balance sheet items and are recorded as a change inother comprehensive income.

 

TheCompany has evaluated events and transactions subsequent to the balance sheetdate.  Based on this evaluation, andother than the amendment to the existing credit facility with Bank of Americadescribed in Note 10 and the June 2010 sale of its electronicmanufacturing services business as detailed in Note 13, the Company is notaware of any other events or transactions that occurred subsequent to thebalance sheet date but prior to filing that would require recognition ordisclosure in its consolidated financial statements.

 

Theresults of operations for the interim period ended May 31, 2010 are notnecessarily indicative of the results to be expected for any future period orthe entire fiscal year.  These interimconsolidated financial statements should be read in conjunction with theaudited consolidated financial statements for the year ended August 31,2009, which are contained in the Company’s 2009 Annual Report on Form 10-K.

 

**Note 2 —Recent Accounting Policies**

 

*RecentlyAdopted Accounting Pronouncements*

 

InJune 2009, the Financial Accounting Standards Board’s (FASB) approved the “FASBAccounting Standards Codification” (“ASC” or the “Codification”) as the singlesource of authoritative nongovernmental U.S. GAAP.  The Codification does not change current U.S.GAAP, but is intended to simplify user access to all authoritative U.S. GAAP byproviding all the authoritative literature related to 

 

7

----

Table of Contents

 

**CHASE CORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except shareand per share amounts*

 

aparticular topic in one place.  Allexisting accounting standard documents will be superseded and all otheraccounting literature not included in the Codification will be considerednonauthoritative.  The Codificationbecame effective for the Company in the quarter ending November 30, 2009and the adoption did not have any effect on the Company’s consolidatedfinancial position, results of operations or cash flows.

 

InDecember 2007, the FASB issued new guidance under ASC Topic 805, “Business Combinations” (“ASC 805”).  The new guidance under ASC 805 establishesprinciples and requirements for how an acquirer in a business combinationrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed and any noncontrolling interest in theacquiree; recognizes and measures the goodwill acquired in the businesscombination or a gain from a bargain purchase; expenses acquisition relatedcosts as incurred; and determines what information to disclose to enable usersof the financial statements to evaluate the nature and financial effects of thebusiness combination.  The Companyadopted the new guidance under ASC 805 as of September 1, 2009, and itsrecent acquisitions of C.I.M. Industries, Inc. (“C.I.M.”) and theServiWrap® product lines (“ServiWrap”) were both accounted for under thisstandard.

 

InJune 2008, the FASB issued guidance within ASC Topic 260, Earnings PerShare (“ASC 260”), to clarify that unvested share-based payment awards with aright to receive nonforfeitable dividends are participating securities. Thestandard provides guidance on how to allocate earnings to participatingsecurities and compute earnings per share using the two-class method.  The Company adopted the provisions of thisstandard on September 1, 2009, and the presentation of earnings per sharefor previously reported periods has been adjusted to reflect the retrospectiveadoption of this standard.  See Note 4for more information on the additional disclosures required for the Company’sadoption of ASC 260.

 

*RecentlyIssued Accounting Pronouncement*

 

InDecember 2008, the FASB issued ASC Topic 715, “Compensation—Retirement Benefits” (“ASC 715”).  ASC 715 provides additional guidance on anemployer’s disclosures about plan assets of a defined benefit pension or otherpost-retirement plan enabling users of the financial statements to assess theinputs and valuation techniques used to develop fair value measurements of planassets at the annual reporting date.  The guidance requires more detaileddisclosures about the assets of a defined benefit pension or otherpost-retirement plan and is effective for fiscal years ending afterDecember 15, 2009.  Since theguidance only requires enhanced disclosures, the Company does not expect theadoption of ASC 715 to have an impact on its consolidated financial positionand results of operations.

 

**Note 3 —Inventories**

 

Inventories consist of the following as of May 31,2010 and August 31, 2009:

 
| ** **              | ** ** | **May 31, 2010** | ** ** | **August 31, 2009** | ** ** |
|-------------------------|------------|-----------------------|------------|--------------------------|------------|
| Raw materials           |       | $                     | 11,272     |                     | $          | 7,973 |   |
| Finished and in process |       | 7,204                 |       | 5,968                    |       |
| Total Inventories       |       | $                     | 18,476     |                     | $          | 13,941 |   |

 

8

----

Table ofContents

 

**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIALSTATEMENTS**

**(UNAUDITED)**

*In thousands, except shareand per share amounts*

 

**Note 4 —Net Income Per Share**

 

Thecalculation of earnings per share under the recently issued guidance within ASC260 is as follows:

 
| ** **                                   | ** ** | **Three Months Ended May 31,** | ** ** | **Nine Months Ended May 31,** | ** ** |
|----------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                   | ** ** | **2010**                            | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Basic Earnings per Share**                 | ** ** | ** **                          | ** ** | ** **                         | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income                                   |       | $                                   | 4,400      |                               | $          | 862 |   | $ | 8,148 |   | $ | 3,577 |   |
| Income allocated to participating securities |       | 119                                 |       | 19                                 |       | 232 |   | 79 |   |
| Net income available to common shareholders  |       | $                                   | 4,281      |                               | $          | 843 |   | $ | 7,916 |   | $ | 3,498 |   |
|                                         |       |                                |       |                               |       |   |   |   |   |
| Basic weighted averages shares outstanding   |       | 8,816,860                           |       | 8,544,372                          |       | 8,720,258 |   | 8,406,158 |   |
|                                         |       |                                |       |                               |       |   |   |   |   |
| Net income per share - Basic                 |       | $                                   | 0.49       |                               | $          | 0.10 |   | $ | 0.91 |   | $ | 0.42 |   |
|                                         |       |                                |       |                               |       |   |   |   |   |
| **Diluted Earnings per Share**               |       |                                |       |                               |       |   |   |   |   |
| Net income                                   |       | $                                   | 4,400      |                               | $          | 862 |   | $ | 8,148 |   | $ | 3,577 |   |
| Income allocated to participating securities |       | 118                                 |       | 18                                 |       | 230 |   | 76 |   |
| Net income available to common shareholders  |       | $                                   | 4,282      |                               | $          | 844 |   | $ | 7,918 |   | $ | 3,501 |   |
|                                         |       |                                |       |                               |       |   |   |   |   |
| Basic weighted averages shares outstanding   |       | 8,816,860                           |       | 8,544,372                          |       | 8,720,258 |   | 8,406,158 |   |
| Additional dilutive common stock equivalents |       | 66,225                              |       | 289,626                            |       | 72,918 |   | 273,825 |   |
| Diluted weighted averages shares outstanding |       | 8,883,085                           |       | 8,833,998                          |       | 8,793,176 |   | 8,679,983 |   |
|                                         |       |                                |       |                               |       |   |   |   |   |
| Net income per share - Diluted               |       | $                                   | 0.48       |                               | $          | 0.10 |   | $ | 0.90 |   | $ | 0.40 |   |

 

Forthe three and nine months ended May 31, 2010 and 2009, stock options topurchase 250,000 shares of common stock were outstanding, but were not includedin the calculation of diluted income per share in any period presented in thetable above because the options’ exercise prices were greater than the averagemarket price of the common stock and thus their inclusion would beanti-dilutive.

 

**Note 5 —Stock Based Compensation**

 

InMay 2007, pursuant to authorization by the Board of Directors, the Company’sChief Executive Officer granted a total of 17,600 restricted stock units (“RSUs”)to approximately 40 non executive officer employees of the Company for servicefor the period May 2007 through May 2010.  RSUs totaling 14,200 vested on May 15,2010 and were issued in the form of common stock.  The remaining 3,400 RSUs were forfeited inaccordance with the RSU agreements  Compensation expense was recognized over the vesting period on a ratablebasis.

 

InAugust 2008, the Board of Directors of Chase Corporation approved a planfor issuing a performance and service based restricted stock grant of 50,657shares in the aggregate, subject to adjustment, to key members of managementwith an issue date of September 1, 2008 and a vesting date of August 31,2011.  Based on the fiscal year 2009financial results, the aggregate size of the grant was reduced by 15,944 sharesof restricted stock subsequent to the end of fiscal year 2009 in accordancewith the performance measurement criteria.  The adjusted restricted stock award of 34,713 shares was finalized inthe quarter ended November 30, 2009 and no further performance-basedmeasurements apply to this award. Compensation expense is being recognized on a ratable basis over thevesting period.

 

InAugust 2009, the Board of Directors of Chase Corporation approved a planfor issuing a performance and service based restricted stock grant of 76,874shares in the aggregate, subject to adjustment, to key members of managementwith an issue date of September 1, 2009 and a vesting date of August 31,2012.  These shares are subject to aperformance measurement based upon the results of fiscal year 2010 which

 

9

----

Table of Contents

 

**CHASE CORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except shareand per share amounts*

 

willdetermine the final calculation of the number of shares that will be issued(which may be greater than or less than 76,874 shares).  Compensation expense is being recognized on aratable basis over the vesting period based on quarterly probabilityassessments.

 

InDecember 2009, restricted stock in amounts of 2,377 and 8,421 sharesrelated to the September 2008 and 2009 grants, respectively, wereforfeited in conjunction with the retirement of an executive officer of theCompany.

 

Aspart of their annual retainer, non-employee members of the Board of Directorsreceive a combined total of $135,000 of Chase Corporation common stock, in theform of restricted stock valued at the closing price of the day preceding thefirst day of the new year of Board service which generally coincides with theCompany’s annual shareholder meeting. The stock award vests one year from the date of grant.  In January 2010, non-employee members ofthe Board received a total grant of 11,092 shares of restricted stock forservice for the period from January 30, 2010 through January 30,2011.  The shares of restricted stockwill vest at the conclusion of this service period.  Compensation is being recognized on a ratablebasis over the twelve month vesting period.

 

**Note 6 — Segment Information**

 

TheCompany operates in two business segments, a Specialized Manufacturing segmentand an Electronic Manufacturing Services segment.  Specialized Manufacturing products includeinsulating and conducting materials for wire and cable manufacturers, coatingand lining systems for use in liquid storage and containment applications,protective coatings for pipeline applications, moisture protective coatings forelectronics and printing services, high performance polymeric asphaltadditives, and expansion and control joint systems for use in thetransportation and architectural markets. Electronic Manufacturing Services include printed circuit board andelectro-mechanical assembly services for the electronics industry.  The Company evaluates segment performancebased upon income before income taxes.

 

Asfurther detailed in Note 13, the Electronic Manufacturing Services business wassold in June 2010 and the financial results of this segment will beclassified as discontinued operations at fiscal year end.

 

Thefollowing table summarizes information about the Company’s reportable segments:

 
| ** **                           | ** ** | **Three Months Ended May 31,** | ** ** | **Nine Months Ended May 31,** | ** ** |
|--------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **2010**                            | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Revenues from external customers** |       |                                |       |                               |       |   |   |   |   |
| Specialized Manufacturing            |       | $                                   | 33,281     |                               | $          | 21,165 |   | $ | 83,308 |   | $ | 66,836 |   |
| Electronic Manufacturing Services    |       | 6,345                               |       | 3,924                              |       | 16,438 |   | 12,326 |   |
| Total                                |       | $                                   | 39,626     |                               | $          | 25,089 |   | $ | 99,746 |   | $ | 79,162 |   |
|                                 |       |                                |       |                               |       |   |   |   |   |
| **Income before income taxes**       |       |                                |       |                               |       |   |   |   |   |
| Specialized Manufacturing            |       | $                                   | 7,880      |                               | $          | 2,528 | (a) | $ | 15,522 |   | $ | 8,880 | (a) |
| Electronic Manufacturing Services    |       | 938                                 |       | 444                                |       | 2,112 |   | 1,166 |   |
| Total for reportable segments        |       | 8,818                               |       | 2,972                              |       | 17,634 |   | 10,046 |   |
| Corporate and Common Costs           |       | (1,997                              | )          | (1,603                             | )(b)       | (4,862 | ) | (4,369 | )(b) |
| Total                                |       | $                                   | 6,821      |                               | $          | 1,369 |   | $ | 12,772 |   | $ | 5,677 |   |

 

----

(a)          Includes loss on impairmentof goodwill of $237,000.

(b)         Includes loss on impairmentof fixed assets of $262,322.

 

10

----

Tableof Contents

 

**CHASE CORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except shareand per share amounts*

 

TheCompany’s products are sold world-wide. For the quarters ended May 31, 2010 and 2009, sales from itsoperations located in the United Kingdom accounted for 11% and 6% of totalCompany revenues, respectively.  In thefiscal year to date period, sales from its operations located in the UnitedKingdom accounted for 11% of total Company revenues compared to 8% in the sameperiod in fiscal 2009.   No other foreigngeographic area accounted for more than 10% of consolidated revenues for thethree and nine month periods ended May 31, 2010 and 2009.

 
| ** **                        | ** ** | **May 31, 2010** | ** ** | **August 31, 2009** | ** ** |
|-----------------------------------|------------|-----------------------|------------|--------------------------|------------|
| **Total assets**                  |       |                  |       |                     |       |
| Specialized Manufacturing         |       | $                     | 97,273     |                     | $          | 60,713 |   |
| Electronic Manufacturing Services |       | 14,374                |       | 12,666                   |       |
| Total for reportable segments     |       | 111,647               |       | 73,379                   |       |
| Corporate and Common Assets       |       | 10,072                |       | 17,687                   |       |
| Total                             |       | $                     | 121,719    |                     | $          | 91,066 |   |

 

Theincrease in total assets of the Company’s Specialized Manufacturing segment asof May 31, 2010 is primarily due to the acquisitions of C.I.M. in September 2009and ServiWrap in December 2009 (see Note 8 below).

 

Asof May 31, 2010 and August 31, 2009, the Company had long-livedassets (defined as tangible assets providing the Company with a future economicbenefit beyond the current year or operating period, including buildings,equipment and leasehold improvements) of $2,116 and $1,770, respectively,located in the United Kingdom.  Thesebalances exclude goodwill and intangibles of $13,405 and $7,199, as of May 31,2010 and August 31, 2009, respectively.

 

**Note 7 —Goodwill and Other Intangibles**

 

Thechanges in the carrying value of goodwill, by reportable segment, are asfollows:

 
| ** **                                      | ** ** | **Specialized Manufacturing** | ** ** | **Electronic  Manufacturing  Services** | ** ** | **Consolidated** | ** ** |
|-------------------------------------------------|------------|-------------------------------|------------|-----------------------------------------|------------|------------------|------------|
| Balance at August 31, 2009                 |       | $                             | 8,607      |                                    | $          | 5,999            |       | $ | 14,606 |   |
| Acquisition of C.I.M.                           |       | 8,573                         |       | —                                  |       | 8,573            |       |
| Acquisition of ServiWrap                        |       | 258                           |       | —                                  |       | 258              |       |
| Acquisition of Paper Tyger - additional earnout |       | 43                            |       | —                                  |       | 43               |       |
| Acquisition of Metronelec - additional earnout  |       | 116                           |       | —                                  |       | 116              |       |
| FX translation adjustment                       |       | (623                          | )          | —                                  |       | (623             | )          |
| Balance at May 31, 2010                    |       | $                             | 16,974     |                                    | $          | 5,999            |       | $ | 22,973 |   |

 

TheCompany evaluates the possible impairment of goodwill annually each fourthquarter and whenever events or circumstances indicate the carrying value ofgoodwill may not be recoverable.

 

11

----

Table ofContents

 

**CHASE CORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except shareand per share amounts*

 

Intangibleassets subject to amortization consist of the following at May 31, 2010and August 31, 2009:

 
| ** **                       | ** ** | **Weighted-Average**    | ** ** | **Gross Carrying** | ** ** | **Accumulated**  | ** ** | **Net Carrying** | ** ** |
|----------------------------------|------------|-------------------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| ** **                       | ** ** | **Amortization Period** | ** ** | **Value**          | ** ** | **Amortization** | ** ** | **Value**        | ** ** |
| May 31, 2010                | ** ** | ** **              | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Patents and agreements           |       | 12.7 years              |       | $                  | 2,230      |             | $          | 2,094            |       | $ | 136 |   |
| Formulas and technology          |       | 9.8 years               |       | 3,470              |       | 805              |       | 2,665            |       |
| Trade names                      |       | 4.6 years               |       | 1,282              |       | 370              |       | 912              |       |
| Customer lists and relationships |       | 10.3 years              |       | 17,800             |       | 3,368            |       | 14,432           |       |
|                             |       |                    |       | $                  | 24,782     |             | $          | 6,637            |       | $ | 18,145 |   |
| ** **                       | ** ** | ** **              | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| August 31, 2009             |       |                    |       |               |       |             |       |             |       |
| Patents and agreements           |       | 12.6 years              |       | $                  | 2,258      |             | $          | 2,059            |       | $ | 199 |   |
| Formulas and technology          |       | 9.3 years               |       | 1,191              |       | 552              |       | 639              |       |
| Trade names                      |       | 3.8 years               |       | 277                |       | 255              |       | 22               |       |
| Customer lists and relationships |       | 10.4 years              |       | 5,640              |       | 2,003            |       | 3,637            |       |
|                             |       |                    |       | $                  | 9,366      |             | $          | 4,869            |       | $ | 4,497 |   |

 

Theincrease in gross carrying value of intangible assets for the nine months endedMay 31, 2010 is due to the Company’s acquisitions of C.I.M. in September 2009and ServiWrap in December 2009 (see Note 8 below).  These increases were partially offset by a$1,664 decrease in gross carrying value of intangible assets over the ninemonths ended May 31, 2010 due to a foreign currency translation lossrelated to the intangible assets associated with the Company’s Europeanoperations.

 

Aggregateamortization expense related to intangible assets for the nine months ended May 31,2010 and 2009 was $2,133 and $691, respectively.  Estimated amortization expense for theremainder of fiscal year 2010 and for each of the five succeeding fiscal yearsis as follows:

 
| **Years ending August 31,** | ** ** | **Amount** | ** ** |
|----------------------------------|------------|------------|------------|
| 2010 (remaining three  months)   |       | $          | 959        |   |
| 2011                             |       | 2,393      |       |
| 2012                             |       | 2,373      |       |
| 2013                             |       | 2,256      |       |
| 2014                             |       | 2,199      |       |
| 2015                             |       | 2,001      |       |
|                             |       | $          | 12,181     |   |

 

**Note 8 —Acquisitions**

 

**C.I.M.Industries Inc.**

 

InSeptember 2009, Chase Corporation acquired all of the outstanding capitalstock of C.I.M. Industries Inc. (“C.I.M.”) which is based in Peterborough, NHand has a manufacturing facility in Texas. C.I.M. is a specialized manufacturer of high performance coating andlining systems used worldwide in the liquid storage and containmentapplications.  The total purchase price, net of cash received, was$18,894.

 

12

----

Table ofContents

 

**CHASE CORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except share and per share amounts*

 

*Allocationof Purchase Price*

 

Theacquisition was accounted for as a business combination under ASC Topic 805, “BusinessCombinations.”  In accordance with thisaccounting standard, the Company expensed $130 of acquisition related costs.

 

Thepurchase price has been allocated to the acquired tangible and identifiableintangible assets and liabilities assumed based on their fair values as of thedate of the acquisition:

 
| **Assets & Liabilities**     | ** ** | **Amount** | ** ** |
|---------------------------------------|------------|------------|------------|
| Current assets (net of cash acquired) |       | $          | 1,991      |   |
| Property, plant & equipment  |       | 4,262      |       |
| Goodwill                              |       | 8,573      |       |
| Intangible assets                     |       | 8,100      |       |
| Accounts payable and accrued expenses |       | (439       | )          |
| Deferred tax liabilities              |       | (3,593     | )          |
|                                  |       |       |       |
| Total purchase price                  |       | $          | 18,894     |   |

 

Theexcess of the purchase price over the net tangible and intangible assetsacquired resulted in goodwill of $8,573 that is largely attributable to thesynergies and economies of scale from combining the operations and technologiesof Chase and C.I.M., particularly as it pertains to the global expansion of theCompany’s product and service offerings, and marketing efforts.  This goodwill is not deductible for incometax purposes.

 

Allassets, including goodwill, acquired as part of C.I.M. are included in theSpecialized Manufacturing segment. Identifiable intangible assets purchased with this transaction are asfollows:

 
| **Intangible Asset**             | ** ** | **Amount** | ** ** | **Useful life** | ** ** |
|----------------------------------|------------|------------|------------|-----------------|------------|
| Formulas and technology          |       | $          | 1,880      |            | 10 years   |   |
| Trade names                      |       | 260        |       | 5 years         |       |
| Customer lists and relationships |       | 5,960      |       | 10 years        |       |
|                             |       |       |       |            |       |
| Total intangible assets          |       | $          | 8,100      |            |       |   |

 

**ServiWrapProduct Lines**

 

OnDecember 18, 2009, the Company acquired the full range of ServiWrappipeline protection products (“ServiWrap”) from Grace Construction ProductsLimited, a UK based unit of W.R. Grace & Co. (the “Seller”).  ServiWrap / ServiShield® anti-corrosionsystems provide protection for new and refurbished oil, gas and water pipelinesin projects around the world.  The totalpurchase price for this acquisition was £5,983 (US $9,699 at the time ofacquisition) and the assets acquired by the Company include product lines,manufacturing equipment and certain intellectual property rights.

 

Beginningon the date of the acquisition through no later than September 30, 2010,the Seller will manufacture the ServiWrap products for exclusive supply to theCompany, while the Company transitions production to its own facility in theUK.

 

13

----

Table of Contents

 

**CHASE CORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except shareand per share amounts*

 

*Allocationof Purchase Price*

 

Theacquisition was accounted for as a business combination under ASC Topic 805, “BusinessCombinations.”  In accordance with thisaccounting standard, the Company expensed $286 of acquisition related costs.

 

Thepurchase price has been allocated to the acquired tangible and identifiableintangible assets and liabilities assumed based on their fair values as of thedate of the acquisition:

 
| **Assets & Liabilities**    | ** ** | **Amount** | ** ** |
|--------------------------------------|------------|------------|------------|
| Property, plant & equipment |       | $          | 460        |   |
| Goodwill                             |       | 258        |       |
| Intangible assets                    |       | 8,981      |       |
|                                 |       |       |       |
| Total purchase price                 |       | $          | 9,699      |   |

 

Theexcess of the purchase price over the net tangible and intangible assetsacquired resulted in goodwill of $258 that is primarily attributable to thepotential synergies from the integration of the ServiWrap product lines intothe Company’s current product offerings.  This goodwill is deductible for income tax purposes.

 

Allassets, including goodwill, acquired as part of the ServiWrap product lineacquisition are included in the Specialized Manufacturing segment.  Identifiable intangible assets purchased withthis transaction are as follows:

 
| **Intangible Asset**             | ** ** | **Amount** | ** ** | **Useful life** | ** ** |
|----------------------------------|------------|------------|------------|-----------------|------------|
| Backlog                          |       | $          | 924        |            | 9 months   |   |
| Formulas and technology          |       | 486        |       | 10 years        |       |
| Trade names                      |       | 876        |       | 5 years         |       |
| Customer lists and relationships |       | 6,695      |       | 12 years        |       |
|                             |       |       |       |            |       |
| Total intangible assets          |       | $          | 8,981      |            |       |   |

 

**Supplemental Pro Forma Data**

 

The following table presents the pro forma results of the Company for thethree and nine month periods ended May 31, 2010 and 2009, as though theC.I.M. and ServiWrap acquisitions described above occurred on September 1,2008.  The actual revenues and expensesfor the C.I.M. and ServiWrap acquisitions are included in our fiscal 2010consolidated results beginning on September 4, 2009 and December 18,2009, respectively.  Revenues for C.I.M.and ServiWrap since the acquisition dates included in the consolidatedstatement of operations were $8,582 and $3,219, respectively.  Adjustments have been made for the estimatedamortization of intangibles, estimated interest expense in connection with debtfinancing of the acquisition, and the income tax impact of the pro formaadjustments at the statutory rate of 38%. The following pro forma informationis not necessarily indicative of the results that would have been achieved ifthe acquisitions had been effective on September 1, 2008.

 

14

----

Table ofContents

 

**CHASE CORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except shareand per share amounts*

 
| ** **                                                                           | ** ** | **Three Months Ended May 31,** | ** ** | **Nine Months Ended May 31,** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                                                           | ** ** | **2010**                            | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Revenues                                                                             |       | $                                   | 39,626     |                               | $          | 30,415 |   | $ | 104,576 |   | $ | 95,888 |   |
| Net income                                                                           |       | 4,400                               |       | 1,544                              |       | 8,614 |   | 5,346 |   |
|                                                                                 |       |                                |       |                               |       |   |   |   |   |
| Net income available to common shareholders, per  common and common equivalent share |       |                                |       |                               |       |   |   |   |   |
| Basic                                                                                |       | $                                   | 0.49       |                               | $          | 0.18 |   | $ | 0.96 |   | $ | 0.62 |   |
| Diluted                                                                              |       | $                                   | 0.48       |                               | $          | 0.17 |   | $ | 0.95 |   | $ | 0.60 |   |

 

**Note 9 —Commitments and Contingencies**

 

TheCompany is one of over 100 defendants in a lawsuit pending in Ohio whichalleges personal injury from exposure to asbestos contained in certain Chaseproducts.  The case is captioned MarieLou Scott, Executrix of the Estate of James T. Scott v. A-Best Products, etal., No. 312901 in the Court of Common Pleas for Cuyahoga County,Ohio.  The plaintiff in the case issueddiscovery requests to Chase in August 2005, to which Chase timelyresponded in September 2005.  Thetrial had initially been scheduled to begin on April 30, 2007.  However, that date had been postponed and nonew trial date has been set.  As of May 2010,there have been no new developments as this Ohio lawsuit has been inactive withrespect to Chase.

 

TheCompany was named as one of the defendants in a complaint filed on June 25,2009, in a lawsuit captioned Lois Jansen, Individually and as SpecialAdministrator of the Estate of Thomas Jansen v. Beazer East, Inc., et al.,No: 09-CV-6248 in the Milwaukee County (Wisconsin) Circuit Court.  The plaintiff alleges that her husbandsuffered and died from malignant mesothelioma resulting from exposure toasbestos in his workplace.  The plaintiffhas sued seven alleged manufacturers or distributors of asbestos-containingproducts, including Royston Laboratories (formerly an independent company andnow a division of Chase Corporation). Chase has filed an answer to the claim denying the material allegationsin the complaint.  The parties are currentlyengaged in discovery.

 

Inaddition to the matters described above, the Company is involved from time totime in litigation incidental to the conduct of its business.  Although the Company does not expect that theoutcome in any of these matters, individually or collectively, will have amaterial adverse effect on its financial condition or results of operations,litigation is inherently unpredictable. Therefore, judgments could be rendered or settlements entered, thatcould adversely affect the Company’s operating results or cash flows in aparticular period.  The Company routinelyassesses all of its litigation and threatened litigation as to the probabilityof ultimately incurring a liability, and records its best estimate of theultimate loss in situations where the Company assesses the likelihood of lossas probable.

 

**Note 10— Debt**

 

TheCompany borrowed $10,000 from Bank of America in September 2009 in orderto fund its acquisition of C.I.M.  Thisborrowing involved an unsecured, three year term note (“Term Note”) withinterest and principal payments due monthly. Interest is calculated at the applicable London Interbank Offered Rate (“LIBOR”)plus a margin of 1.75% per annum, with interest payments due on the last day ofeach month.  At May 31, 2010, theapplicable interest rate was 2.02% per annum. In addition to monthly interest payments, Chase Corporation is repayingthe principal in equal installments of $167 per month, beginning on September 30,2009, and on the last day of each month thereafter, ending on August 31,2012 (the “Repayment Period”).  In anyevent, on the last day of the Repayment Period, Chase will repay the remainingprincipal balance plus any interest then due.

 

15

----

Table ofContents

 

**CHASE CORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except shareand per share amounts*

 

TheTerm Note is subject to certain covenants which require the Company to maintaincertain financial ratios, which include (a) the ratio of total liabilitiesto tangible net worth and (b) the ratio of operating cash flow to debtservice on a rolling twelve month basis. The Company was in compliance with these debt covenants as of May 31,2010.   Prepayment of the Term Note isallowed at any time during the term of the loan.

 

Aspart of the C.I.M. acquisition in September 2009, the Company delivered$3,000 in non-negotiable promissory notes (the “Notes”) payable to five C.I.M.shareholders, who were the holders of all of the issued and outstanding sharesof capital stock of C.I.M. as of the acquisition date.   The principal of the Notes will be paid inthree consecutive annual installments of $1,000 each, with the initial paymentdue on September 4, 2010.  Intereston the unpaid principal balance of the Notes will accrue at a rate per annumequal to the applicable Federal rate, and will be paid annually with eachprincipal payment.  At May 31, 2010,the applicable interest rate was 0.79% per annum.

 

TheCompany borrowed $7,000 from RBS Citizens in December 2009 in order tofund its acquisition of the ServiWrap product line.  The loan from RBS Citizens (the “Term Loan”)is an unsecured, three year term note with interest and principal payments duemonthly.  Interest is calculated at theapplicable LIBOR rate plus a margin of 1.90% per annum, with interest paymentsdue on the last day of each month.  Inaddition to monthly interest payments, the Company is repaying the principal inequal installments of $117 each, beginning on January 15, 2010, and on the15th day of each month thereafter, ending on December 15, 2012, on whichdate the Company will repay the remaining principal balance plus any interestthen due.  The Term Loan is subject tothe same debt covenants as the Company’s other term debt.  Prepayment of the Term Loan is allowed at anytime.  At May 31, 2010, theapplicable interest rate was 2.24% per annum.

 

TheCompany has a long-term unsecured credit facility available up to $10 millionwith Bank of America at the bank’s base lending rate or, at the option of theCompany, at the effective London Interbank Offered Rate (LIBOR) plus 1.50percent.  As of May 31, 2010, theentire amount of $10 million was available for use.  Any future outstanding balance on thislong-term unsecured credit facility will be included in scheduled principalpayments at its maturity.  On June 8,2010, the Company executed an amendment to this credit facility, extending thematurity to March 31, 2013.  As partof this amendment, the interest rate was increased to the effective LIBOR plus1.50 percent (previously the effective LIBOR plus 1.25). All other terms of thecredit facility remain the same.

 

16

----

Table ofContents

 

**CHASE CORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except shareand per share amounts*

 

**Note 11- Pensions and Other Post Retirement Benefits**

 

Thecomponents of net periodic benefit cost for the three and nine months ended May 31,2010 and 2009 are as follows:

 
| ** **                         | ** ** | **Three Months Ended May 31,** | ** ** | **Nine Months Ended May 31,** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                         | ** ** | **2010**                            | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Service cost                       |       | $                                   | 124        |                               | $          | 108 |   | $ | 371 |   | $ | 324 |   |
| Interest cost                      |       | 123                                 |       | 137                                |       | 368 |   | 410 |   |
| Expected return on plan assets     |       | (102                                | )          | (107                               | )          | (302 | ) | (331 | ) |
| Amortization of prior service cost |       | 21                                  |       | 23                                 |       | 64 |   | 69 |   |
| Amortization of unrecognized loss  |       | 53                                  |       | 13                                 |       | 159 |   | 40 |   |
| Net periodic benefit cost          |       | $                                   | 219        |                               | $          | 174 |   | $ | 660 |   | $ | 512 |   |

 

Whenfunding is required, the Company’s policy is to contribute amounts that aredeductible for federal income tax purposes. As of May 31, 2010, the Company had not made any contributions inthe current fiscal year to fund its obligations under the pension plan.  However, the Company plans to contribute $750to fund pension plan obligations in the fiscal year ending August 31,2010.

 

**Note 12— Fair Value Measurements**

 

TheCompany adopted the guidance of FASB ASC Topic 820, “Fair Value Measurementsand Disclosures” (“ASC 820”) as of September 1, 2008, as it related to allfinancial assets and financial liabilities. ASC 820 provided for a one-year deferral of the effective date as itrelated to non-financial assets and non-financial liabilities that arerecognized or disclosed at fair value in the financial statements on anon-recurring basis.

 

EffectiveSeptember 1, 2009, the Company adopted ASC 820 for all non-financialassets and non-financial liabilities that are recognized or disclosed at fairvalue in the financial statements on a non-recurring basis.  Other than the assets acquired from C.I.M.and the assets acquired as part of the ServiWrap acquisition, the Company hasnot valued any non-financial assets at fair value.  Accordingly, there was no cumulative effectof adoption and the adoption did not have an impact on the Company’s financialposition, results of operations, or cash flows. The adoption may impact futureevaluations of impairment of goodwill and long-lived assets.

 

TheCompany generally defines fair value as the price that would be received tosell an asset or paid to transfer a liability in an orderly transaction betweenmarket participants at the measurement date (exit price).  The Company uses a three-tier fair valuehierarchy, which classifies the inputs used in measuring fair values. Thesetiers include: Level 1, defined as observable inputs such as quoted prices foridentical instruments in active markets; Level 2, defined as inputs other thanquoted prices in active markets that are either directly or indirectlyobservable; and Level 3, defined as unobservable inputs in which little or nomarket data exists, therefore requiring an entity to develop its ownassumptions.

 

TheCompany endeavors to utilize the best available information in measuring fairvalue.  Financial assets and liabilitiesare classified in their entirety based on the lowest level of input that issignificant to the fair value measurement. The Company has determined that it does not have any financialliabilities measured at fair value and that its financial assets are currentlyall classified within Level 1 and Level 2 in the fair value hierarchy.

 

17

----

Table ofContents

 

**CHASE CORPORATION**

**NOTES TO CONSOLIDATEDFINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except shareand per share amounts*

 

Thefollowing tables set forth the Company’s financial assets that were accountedfor at fair value on a recurring basis as of May 31, 2010 and August 31,2009:

 
| ** **             | ** ** | ** **            | ** ** | **Fair value measurements at May 31, 2010 using:** | ** ** |
|------------------------|------------|-----------------------|------------|---------------------------------------------------------|------------|
| ** **             | ** ** | **May 31, 2010** | ** ** | **Quoted prices  in active markets  (Level 1)**         | ** ** | **Significant other  observable inputs  (Level 2)** | ** ** | **Significant  unobservable inputs  (Level 3)** | ** ** |
| Restricted investments |       | $                     | 635        |                                                    | $          | 601 |   | $ | 34 |   | $ | — |   |
|                   |       |                  |       |                                                    |       |   |   |   |   |
| Total                  |       | $                     | 635        |                                                    | $          | 601 |   | $ | 34 |   | $ | — |   |

 
| ** **             | ** ** | ** **               | ** ** | **Fair value measurements at August 31, 2009  using:** | ** ** |
|------------------------|------------|--------------------------|------------|-------------------------------------------------------------|------------|
| ** **             | ** ** | **August 31, 2009** | ** ** | **Quoted prices  in active markets  (Level 1)**             | ** ** | **Significant other  observable inputs  (Level 2)** | ** ** | **Significant  unobservable inputs  (Level 3)** | ** ** |
| Restricted investments |       | $                        | 573        |                                                        | $          | 239 |   | $ | 334 |   | $ | — |   |
|                   |       |                     |       |                                                        |       |   |   |   |   |
| Total                  |       | $                        | 573        |                                                        | $          | 239 |   | $ | 334 |   | $ | — |   |

 

**Note 13— Subsequent Event**

 

OnJune 30, 2010, the Company completed the sale of its electronicmanufacturing services business to MC Assembly LLC, a Delaware corporation (the“Buyer”) and a wholly-owned subsidiary of MC Test Service, Inc., a Floridacorporation (“MC Test”).   The Company’selectronic manufacturing services business was conducted through itswholly-owned subsidiary, RWA, Inc., d/b/a Chase EMS (the “Seller”).  The sale of the Chase EMS business was madepursuant to an Asset Purchase Agreement (the “Agreement”) dated June 28,2010, by and among the Company, the Seller, the Buyer and (solely for purposesof guaranteeing the performance of Buyer’s obligations under the Agreement) MCTest.

 

Underthe Agreement, the Company sold to the Buyer all of the assets relating to theChase EMS business, excluding cash and certain other enumerated assets, and theBuyer assumed certain of the liabilities of the Seller.  The purchase price paid by the Buyer to Chaseat the closing was $13,000.  The purchaseprice will be adjusted upward after the closing to the extent that the networking capital of the business sold (as calculated under the Agreement)exceeds $4,500.

 

Theeffective date for this sale was June 30, 2010 and the results of theElectronic Manufacturing Services business will be included in the Company’sfinancial statements through that date and be classified as discontinuedoperations at fiscal year end.

 

18

----

Table of Contents

 

**Item 2 — Management’s Discussion and Analysis of Financial Conditionand Results of Operations**

 

Thefollowing discussion provides an analysis of the Company’s financial conditionand results of operations and should be read in conjunction with theConsolidated Financial Statements and notes thereto included in Item 1 of Part Iof this Quarterly Report on Form 10-Q and with the Company’s Annual Reporton Form 10-K filed for the fiscal year ended August 31, 2009.

 

**Recent Developments**

 

InSeptember 2009, we acquired all of the outstanding capital stock of C.I.M.Industries Inc. (“C.I.M.”), which is based in Peterborough, NH and has amanufacturing facility in Houston, TX. C.I.M. is a specialized manufacturer of high performance coating andlining systems used worldwide in the liquid storage and containmentindustry.  With a primary focus on thewater and wastewater industry, C.I.M. has the preferred products that complementour product line of high performance tapes and coatings.  The total purchase price for this acquisitionwas $18.9 million (net of cash acquired).

 

InDecember 2009, we acquired the full range of ServiWrap® pipelineprotection products (“ServiWrap”) from Grace Construction Products Limited, aUK based unit of W.R. Grace & Co. (the “Seller”).  ServiWrap / ServiShield® anti-corrosionsystems provide protection for new and refurbished oil, gas and water pipelinesin projects around the world.  Theacquisition of ServiWrap will complement the portfolio of our pipelineprotection tapes, coatings and accessories and will extend our global customerbase.  The total purchase price for thisacquisition was £5.98 million (approximately US $9.7 million at the time ofacquisition).  The purchase was fundedthrough a combination of cash on hand and a term loan in the amount of $7.0million from RBS Citizens.

 

Theassets acquired by us include product lines, manufacturing equipment andcertain intellectual property rights. Beginning on the date of the acquisition through no later than September 30,2010, the Seller will manufacture the ServiWrap products for exclusive supplyto us, while we transition production to our own facility in the UK.  The effective date for this acquisition was December 18,2009, and the results of this acquisition have been included in our financialstatements since that date.

 

OnJune 30, 2010, we completed the sale of our contract electronicmanufacturing services business, Chase EMS, to MC Assembly.  As part of this sale, we sold all of theassets relating to the Chase EMS business, excluding cash and certain otherenumerated assets, and MC Assembly assumed certain of the liabilities.  The purchase price paid at the closing was$13.0 million and will be adjusted upward after the closing to the extent thatthe net working capital of the business sold (as calculated under the AssetPurchase Agreement) exceeds $4.5 million.  The proceeds from the sale will be used fordebt reduction and continued investment in our core tapes and coatingsbusinesses.

 

**Overview**

 

Thefirst nine months of fiscal 2010 resulted in significant revenue and profitincreases over the prior year results for both the quarter and year to dateperiods.  Benefitting from some of thesame trends we observed in the first half of the fiscal year, revenues for theSpecialized Manufacturing segment increased over last year primarily due to newsales from C.I.M. and ServiWrap, which were acquired in September andDecember, respectively, and continued increased sales from electronic coatings,specialty products and construction products. Additionally, in the third quarter we saw a rebound in wire &cable product sales.  The revenue growthin fiscal 2010 is being partially offset by the negative impact of the weakenedpound sterling and euro whose values against the dollar have decreased 11% and13%, respectively, from May 2009 to May 2010.  We will continue to integrate C.I.M. and 

 

19

----

Table of Contents

 

ServiWrapwhile maximizing our existing resources and remain focused on our product andmarketing development efforts for all of our product lines in order to seizenew business opportunities as they arise.

 

OurElectronic Manufacturing Services segment continued to see increased demandfrom many of its existing customers resulting in higher revenues and profits inboth the quarter and year to date periods compared to the prior year periods.

 

Forthe remainder of 2010, we will continue with our renovation of our facility inOxford, MA, that will be developed to provide capacity for storage needs andfuture growth.

 

Asof the quarter ended May 31, 2010, the Company had two reportable segmentssummarized below:

 
| **Segment**                        | ** ** | **Product  Lines**                                                                                                                                              | ** ** | **Manufacturing  Focus and Products**                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Specialized  Manufacturing         |       | ·  Wire and  Cable

·  Electronic Coatings

·  Pipeline  & Construction

·  Specialty  Products |       | Produces  protective coatings and tape products including insulating and conducting  materials for wire and cable manufacturers, fluid applied coating and lining  systems for use in the water and wastewater industry, protective coatings for  pipeline applications, moisture protective coatings for electronics, high  performance polymeric asphalt additives, and expansion and control joint  systems for use in the transportation and architectural markets. |
|                               |       |                                                                                                                                                            |       |                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Electronic  Manufacturing Services |       | ·  Contract  Electronic  Manufacturing Services

                                                                                           |       | Provides  assembly and turnkey contract manufacturing services including printed  circuit board and electromechanical assembly services to the electronics  industry operating principally in the United States.                                                                                                                                                                                                                                                        |

 

Asdetailed in Note 13 to the Consolidated Financial Statements included in thisReport, the Electronic Manufacturing Services business was sold in June 2010and the financial results of this segment will be classified as discontinuedoperations at fiscal year end.

 

**Results of Operations**

 

***Revenues and Operating Profit bySegment are as follows (dollars in thousands)***

 
| ** **                           | ** ** | **Three Months Ended May 31,** | ** ** | **Nine Months Ended May 31,** | ** ** |
|--------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                           | ** ** | **2010**                            | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Revenues from external customers** |       |                                |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialized Manufacturing            |       | $                                   | 33,281     |                               | 84%        |   | $ | 21,165 |   | 84% |   | $ | 83,308 |   | 84% |   | $ | 66,836 |   | 84% |   |
| Electronic Manufacturing Services    |       | 6,345                               |       | 16%                                |       | 3,924 |   | 16% |   | 16,438 |   | 16% |   | 12,326 |   | 16% |   |
| Total                                |       | $                                   | 39,626     |                               |       |   | $ | 25,089 |   |   |   | $ | 99,746 |   |   |   | $ | 79,162 |   |   |   |
|                                 |       |                                |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| **Income before income taxes**       |       |                                |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Specialized Manufacturing            |       | $                                   | 7,880      |                               | 24%        |   | $ | 2,528 |   | 12% |   | $ | 15,522 |   | 19% |   | $ | 8,880 |   | 13% |   |
| Electronic Manufacturing Services    |       | 938                                 |       | 15%                                |       | 444 |   | 11% |   | 2,112 |   | 13% |   | 1,166 |   | 9% |   |
| Total for reportable segments        |       | 8,818                               |       | 22%                                |       | 2,972 |   | 12% |   | 17,634 |   | 18% |   | 10,046 |   | 13% |   |
| Corporate and Common Costs           |       | (1,997                              | )          |                               |       | (1,603 | ) |   |   | (4,862 | ) |   |   | (4,369 | ) |   |   |
| Total                                |       | $                                   | 6,821      |                               | 17%        |   | $ | 1,369 |   | 5% |   | $ | 12,772 |   | 13% |   | $ | 5,677 |   | 7% |   |

 

***Total Revenues***

 

Totalrevenues increased $14,537,000 or 58% to $39,626,000 for the quarter ended May 31,2010 compared to $25,089,000 in the same quarter of the prior year.  Total revenues increased $20,584,000 or 26%to $99,746,000 in the fiscal year to date period compared to $79,162,000 in thesame period in fiscal 2009.

 

20

----

Table of Contents

 

Revenuesfrom our Specialized Manufacturing segment increased $12,116,000 and$16,472,000, in the current quarter and year to date periods,respectively.  The increase in revenuescompared to the prior year is primarily due to the following for the currentquarter and year to date periods, respectively: (a) the inclusion of salesof $3,070,000 and $8,582,000 from C.I.M. which we acquired in September 2009;(b) increased sales of $5,173,000 and $5,542,000 from specialty andconstruction products; (c) increased sales of $2,624,000 and $5,290,000 inthe electronic coatings product line; and (d) the inclusion of sales of$1,314,000 and $3,219,000 from ServiWrap which was acquired in December 2009.  The current quarter also included positiveresults from our wire & cable product line with increased sales overthe prior year quarter of $1,612,000 primarily due to increased demand in theenergy market. The revenue growth was partially offset by decreased sales of$1,551,000 and $3,547,000 in the current quarter and year to date periods,respectively in the transportation market. Additionally, despite positive results for the current quarter, the wireand cable product line reflects decreased year to date sales of $1,971,000 fromthe prior period.

 

Revenuesfrom our Electronic Manufacturing Services segment increased $2,421,000 and$4,112,000 in the current quarter and year to date periods, respectively,compared to the prior year periods.  Thehigher sales reflect continued growth as a result of new opportunities withexisting customers.

 

***Cost of Products and Services Sold***

 

Costof products and services sold increased $7,495,000 or 42% to $25,132,000 forthe quarter ended May 31, 2010 compared to $17,637,000 in the prior yearquarter.  Cost of products and servicessold increased $8,700,000 or 15% to $65,536,000 in the fiscal year to dateperiod compared to $56,836,000 in the same period in fiscal 2009.

 

Costof products and services sold in our Specialized Manufacturing segment were$20,318,000 and $52,461,000 in the current quarter and year to date periodscompared to $14,437,000 and $46,554,000 in the comparable periods in the prioryear.  Cost of products and services soldin our Electronic Manufacturing Services segment were $4,814,000 and$13,075,000 in the current quarter and year to date periods compared to$3,200,000 and $10,282,000 in the comparable periods in the prior year.

 

The following table summarizes the relativepercentages of revenues for costs of products and services sold for ourreporting segments:

 
| ** **                         | ** ** | **Three Months Ended May 31,** | ** ** | **Nine Months Ended May 31,** | ** ** |
|------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                         | ** ** | **2010**                            | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| Specialized Manufacturing          |       | 61%                                 |       | 68%                                |       | 63% |   | 70% |   |
| Electronic Manufacturing  Services |       | 76%                                 |       | 82%                                |       | 80% |   | 83% |   |
| **Total**                          |       | 63%                                 |       | 70%                                |       | 66% |   | 72% |   |

 

Asa percentage of revenues, cost of products and services sold in our SpecializedManufacturing segment decreased primarily due to increased sales of highermargin products, management’s ability to leverage its fixed overhead costs on ahigher revenue base, and the favorable impact of ongoing cost reductionefforts.

 

Asa percentage of revenues, cost of products and services sold in our ElectronicManufacturing Services segment decreased as a result of greater leverage on fixedmanufacturing costs given the higher revenues coupled with a one time nonrecurring benefit of $294,000 on inventory purchase obligations.  Additionally, cost savings initiatives thatwere implemented over the past year and scrutiny on raw material purchaseshelped overall margins.

 

21

----

Table of Contents

 

***Selling, General and Administrative Expenses***

 

Selling,general and administrative expenses increased $2,090,000 or 37% to $7,672,000for the quarter ended May 31, 2010 compared to $5,582,000 in the prioryear quarter.  Selling, general andadministrative expenses increased $4,790,000 or 29% to $21,253,000 in thefiscal year to date period compared to $16,463,000 in the same period in fiscal2009.  The increase in the currentquarter and year to date periods over the prior year periods is primarilyattributable to incremental expenses from the C.I.M. and ServiWrapacquisitions, including year to date acquisition costs of $416,000.  Additionally, increased revenues for thecurrent quarter and year to date periods compared to the prior year periodshave led to increased sales commissions and other selling relatedexpenses.  These increases were partiallyoffset by our continued emphasis on controlling costs, including reduced traveland external consulting costs.

 

***Loss on Impairment of Goodwill***

 

Inthe quarter ended May 31, 2009, based on the decrease in sales activity inthe current year and the completion of the fiscal year 2010 budget, managementdetermined that the carrying value of goodwill associated with the Company’sNortheast Quality Products (NEQP) division may not be recoverable.  Accordingly, we performed a goodwillimpairment analysis.  Based on thepresent value of future cash flows utilizing projected results for the balanceof fiscal year 2009 and projections for future years based on the fiscal year2010 budgeting process, the goodwill impairment analysis yielded results thatwould not support the current book value of the goodwill associated with thisdivision. As a result, we concluded the carrying amount of goodwill for theNEQP division was not fully recoverable and an impairment charge of $237,000was recorded as of May 31, 2009. Goodwill related to NEQP, having apre-impairment book value of $349,000, was written down to its fair value of$112,000 in accordance with generally accepted accounting principles.  The NEQP division was sold on August 14,2009, and the adjusted fair value of $112,000 was realized upon the sale.

 

***Loss on Impairment of Fixed Assets***

 

Duringthe fiscal quarter ending May 31, 2009, we recorded a $262,000 chargerelated to the impairment of real property (land and building) located in WestBridgewater, MA which was being leased to Sunburst Electronics ManufacturingSolutions, Inc.  The real property,having a pre-impairment book value of $1,632,000, was written down to its fairvalue of $1,370,000, which was realized upon the June 24, 2009 sale of theproperty.

 

***Interest Expense***

 

Interestexpense increased $97,000 to $100,000 for the quarter ended May 31, 2010compared to $3,000 in the prior year quarter. Interest expense increased $246,000 to $259,000 for the fiscal year todate period ended May 31, 2010 compared to $13,000 in the same period infiscal 2009.  The increase in interestexpense in both the current quarter and year to date period as compared to theprior year periods is a direct result of the $10 million term note and $3million promissory notes related to the acquisition of C.I.M., and the $7million term loan agreement related to the acquisition of ServiWrap.

 

***Other Income (Expense)***

 

Otherincome increased $98,000 to $99,000 for the quarter ended May 31, 2010compared to $1,000 in the prior year quarter. Other income decreased $252,000 or 77% to $74,000 for the fiscal year todate period compared to other income of $326,000 in the same period in fiscal2009. Other income primarily includes bank interest and foreign exchange gains(losses) caused by changes in exchange rates on transactions or balancesdenominated in currencies other than the functional currency of oursubsidiaries.  The increase in otherincome for the quarter as compared to the prior year period is primarily due toforeign exchange gains caused by the continued weakening of both the sterlingand the euro, and the 

 

22

----

Table of Contents

 

subsequentrevaluation of some of our European sales transactions completed in otherfunctional currencies.  The decrease inother income for the fiscal year to date as compared to the prior year periodis primarily due to us no longer receiving rental income on previously ownedreal property sold in June 2009.

 

***Net Income***

 

Netincome increased $3,538,000 or 410% to $4,400,000 in the quarter ended May 31,2010 compared to $862,000 in the prior year quarter.  Net income increased $4,571,000 or 128% to$8,148,000 for the fiscal year to date period ended May 31, 2010 comparedto $3,577,000 in the same period in fiscal 2009.  The increase in net income in both thecurrent quarter and year to date periods is primarily a result of additionalrevenue discussed previously.

 

**Liquidity and Sources of Capital**

 

Ouroverall cash balance decreased $7,322,000 to $4,321,000 at May 31, 2010from $11,643,000 at August 31, 2009. Generally, we manage our borrowings and payments under our revolvingline of credit in order to maintain a low cash balance.  The higher cash balance at August 31,2009 was a result of cash flow generated from operations being held for theC.I.M. acquisition which closed in September 2009 and the acquisition ofServiWrap which closed in December 2009. We will continue to review our current cash balances denominated inforeign currency in light of current tax guidelines, working capitalrequirements, infrastructure improvements and potential acquisitions.

 

Cashflow provided by operations was $8,051,000 in the first nine months of fiscalyear 2010 compared to $9,527,000 in the prior year period.  Cash providedby operations during fiscal 2010 was primarily due to operating income andincreases in accounts payable and accrued expenses, offset by increasedaccounts receivable and raw material purchases due to higher sales volumes.

 

Theratio of current assets to current liabilities was 2.2 as of May 31, 2010compared to 3.2 as of August 31, 2009. The decrease in our current ratio at May 31, 2010 was primarilyattributable to the increase in the current portion of long-term debt anddecrease in cash used to finance the C.I.M. and ServiWrap acquisitions alongwith increases in accounts payable and accrued expenses.  This was partially offset by increases inaccounts receivable and inventory due to increased demand and overall salesvolume.

 

Cashflow used in investing activities of $28,449,000 was primarily due to theacquisitions of C.I.M. and ServiWrap, and cash paid for purchases of machineryand equipment at our other manufacturing locations during fiscal 2010.

 

Cashflow provided by financing activities of $13,507,000 was primarily due to atotal of $17 million in term debt used to finance our acquisitions of C.I.M.and ServiWrap.  Additionally, theincreased utilization of our existing line of credit was a result of enhancedworking capital needs.  These werepartially offset by payments made on the acquisition loans and our line ofcredit arrangement, as well as our annual dividend.

 

OnOctober 15, 2009, we announced a cash dividend of $0.20 per share(totaling $1,759,000) to shareholders of record on October 31, 2009, whichwas paid on December 3, 2009.

 

Wecontinue to have long-term unsecured credit available up to $10 million withBank of America at the bank’s base lending rate or, at the option of theCompany, at the effective London Interbank Offered Rate (LIBOR) plus 1.50percent.  As of May 31, 2010 and June 30,2010, the entire amount of $10 million was available for use under this creditfacility.  We plan to use thisavailability to help finance our cash needs, including acquisitions, in fiscal2010 and future periods.  On June 8,2010, we executed an amendment to this credit facility, extending its maturityto March 31, 2013.  As part of thisamendment, 

 

23

----

Table of Contents

 

theinterest rate was increased to the effective LIBOR plus 1.50 percent(previously the effective LIBOR plus 1.25). All other terms of the creditfacility remain the same.

 

Underthe terms of our line of credit, we must comply with certain debt covenantsrelated to (a) the ratio of total liabilities to tangible net worth and (b) theratio of operating cash flow to debt service on a rolling twelve monthbasis.  We were in compliance with ourdebt covenants as of May 31, 2010.

 

Weborrowed $10.0 million from Bank of America in September 2009 in order tofund our acquisition of C.I.M.  Thisborrowing involved an unsecured, three year term note (the “Term Note”) withinterest and principal payments due monthly. Interest is calculated at the applicable LIBOR rate plus a margin of1.75% per annum, with interest payments due on the last day of each month.  At May 31, 2010, the applicable interestrate was 2.02% per annum.  In addition tomonthly interest payments, we are repaying the principal in equal installmentsof $167,000 per month, beginning on September 30, 2009, and on the lastday of each month thereafter, ending on August 31, 2012, when we willrepay the remaining principal balance plus any interest then due.  The Term Note is subject to the same debtcovenants as our line of credit discussed above.  Prepayment of the Term Note is allowed at anytime during the term of the loan.

 

Aspart of the C.I.M. acquisition in September 2009, we also delivered$3,000,000 in non-negotiable promissory notes (the “Notes”) payable to fiveC.I.M. shareholders, who were the holders of all of the issued and outstandingshares of capital stock of C.I.M. as of the acquisition date.  The principal of the Notes will be paid inthree consecutive annual installments of $1,000,000 each, with the initialpayment due on September 4, 2010. Interest on the unpaid principal balance of the Notes is accruing at arate per annum equal to the applicable Federal rate, and will be paid annuallywith each principal payment.  At May 31,2010, the applicable interest rate was 0.79% per annum.

 

InDecember 2009, we borrowed $7.0 million from RBS Citizens in order to fundour acquisition of the ServiWrap product lines. This borrowing involved an unsecured, three year term note (the “TermLoan”) with interest and principal payments due monthly.  Interest is calculated at the applicableLIBOR rate plus a margin of 1.90% per annum, with interest payments due on thelast day of each month.  In addition tomonthly interest payments, we are repaying the principal in equal installmentsof $117,000 each, beginning on January 15, 2010, and on the 15th day ofeach month thereafter, ending on December 15, 2012, when we will repay theremaining principal balance plus any interest then due.  The Term Loan is subject to the same debtcovenants as our line of credit discussed above.  Prepayment of the Term Loan is allowed at anytime.  At May 31, 2010, theapplicable interest rate was 2.24% per annum.

 

Tothe extent that interest rates increase in future periods, we will assess theimpact of these higher interest rates on the financial and cash flowprojections of our potential acquisitions.

 

Wehave no significant off balance sheet arrangements.

 

Weare currently renovating our facility (land and building) in Oxford, MA,purchased in 2008, to provide capacity for storage needs and future growth; andassessing building and equipment improvements needed in order to integrateServiWrap production into our existing operations in England.  Machinery and equipment will be added asneeded to increase capacity or enhance operating efficiencies in our othermanufacturing plants.

 

Wemay consider the acquisition of companies or other assets this year or infuture periods which are complementary to our business.  We believe that our existing resources,including our line of credit, together with cash generated from operations andadditional bank borrowings, will be sufficient to fund our cash flowrequirements through at least the next twelve months.  However, there can be no assurances thatadditional financing will be available at favorable terms, if at all.

 

24

----

Table of Contents

 

**ContractualObligations**

 

Pleaserefer to Item 7 “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”section in our Form 10-K for the fiscal year ended August 31,2009 for a complete discussion of our contractual obligations.  In addition to those items reported for thefiscal year ended August 31, 2009, we entered into the followingcontractual cash obligations during the nine months ended May 31, 2010:

 
| **Contractual Obligations** | ** ** | **Total** | ** ** | **Payments Due  Less than 1 Year** | ** ** | **Payments Due   1 - 3 Years** | ** ** | **Payments Due   4 - 5 Years** | ** ** | **Payments   After 5 Years** | ** ** |
|-----------------------------|------------|-----------|------------|------------------------------------|------------|--------------------------------|------------|--------------------------------|------------|------------------------------|------------|
|                        |       |      |       |                               |       |                           |       |                           |       |                         |       |
| Long-term debt (1)          |       | $         | 18,083     |                               | $          | 4,400                          |       | $                              | 13,683     |                         | $          | — |   | $ | — |   |
| Operating leases (2)        |       | 4,731     |       | 466                                |       | 1,031                          |       | 1,087                          |       | 2,147                        |       |
|                        |       |      |       |                               |       |                           |       |                           |       |                         |       |
| **Total**                   |       | $         | 22,814     |                               | $          | 4,866                          |       | $                              | 14,714     |                         | $          | 1,087 |   | $ | 2,147 |   |

 

----

(1)          Includes the remainingpayment obligations used to finance our acquisitions of C.I.M. andServiWrap.  See Note 10 to the ConsolidatedFinancial Statements included in this Report for further information regardingthese debt agreements.

(2)          Includes the new officelease in Westwood, MA and an amended and extended property lease in Winchester,MA for our Electronic Manufacturing Services business (subsequently sold in June 2010as detailed in Note 13 to the Consolidated Financial Statements included inthis Report).

 

**Recently Issued Accounting Standards**

 

InJune 2009, the Financial Accounting Standards Board’s (FASB) approved the “FASBAccounting Standards Codification” (“ASC” or the “Codification”) as the singlesource of authoritative nongovernmental U.S. GAAP.  The Codification does not change current U.S.GAAP, but is intended to simplify user access to all authoritative U.S. GAAP byproviding all the authoritative literature related to a particular topic in oneplace.  All existing accounting standarddocuments will be superseded and all other accounting literature not includedin the Codification will be considered nonauthoritative.  The Codification became effective for us inthe quarter ending November 30, 2009 and the adoption did not have aneffect on our consolidated financial position, results of operations or cashflows.

 

InDecember 2007, the FASB issued new guidance under ASC Topic 805, “Business Combinations” (“ASC 805”).  The new guidance under ASC 805 establishesprinciples and requirements for how an acquirer in a business combinationrecognizes and measures in its financial statements the identifiable assets acquired,the liabilities assumed and any noncontrolling interest in the acquiree;recognizes and measures the goodwill acquired in the business combination or again from a bargain purchase; expenses acquisition related costs as incurred;and determines what information to disclose to enable users of the financialstatements to evaluate the nature and financial effects of the businesscombination.  We adopted the new guidanceunder ASC 805 as of September 1, 2009, and our recent acquisitions ofC.I.M. and ServiWrap were both accounted for under this standard.

 

InJune 2008, the FASB issued guidance within ASC Topic 260, Earnings Per Share (“ASC 260”), toclarify that unvested share-based payment awards with a right to receivenonforfeitable dividends are participating securities. The standardprovides guidance on how to allocate earnings to participating securities andcompute earnings per share using the two-class method.  We adopted theprovisions of this standard on September 1, 2009 and the disclosures requiredby ASC 260 have been made in Note 4 to the Consolidated Financial Statementsincluded in this Report.

 

InDecember 2008, the FASB issued ASC Topic 715, “Compensation—Retirement Benefits” (“ASC 715”).  ASC 715 provides additional guidance on anemployer’s disclosures about plan assets of a defined 

 

25

----

Table of Contents

 

benefitpension or other post-retirement plan enabling users of the financialstatements to assess the inputs and valuation techniques used to develop fairvalue measurements of plan assets at the annual reporting date.  Theguidance requires more detailed disclosures about the assets of a definedbenefit pension or other post-retirement plan and is effective for fiscal yearsending after December 15, 2009. Since the guidance only requires enhanceddisclosures, we do not expect the adoption of ASC 715 to have an impact on ourconsolidated financial position and results of operations.

 

**CriticalAccounting Policies**

 

Our financial statements are prepared in accordancewith accounting principles generally accepted in the United States.  To apply these principles, we must makeestimates and judgments that affect our reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities.  In many instances, wereasonably could have used different accounting estimates and, in other instances,changes in the accounting estimates are reasonably likely to occur from periodto period. Accordingly, actual results could differ significantly from ourestimates.  To the extent that there arematerial differences between these estimates and actual results, our financialcondition or results of operations will be affected.  We base our estimates and judgments onhistorical experience and other assumptions that we believe to be reasonable atthe time and under the circumstances, and we evaluate these estimates andjudgments on an ongoing basis.  We referto accounting estimates and judgments of this type as critical accountingpolicies, judgments, and estimates. Management believes there have been no material changes during the ninemonths ended May 31, 2010 to the critical accounting policies reported inItem 7 “Management’s Discussion and Analysis of Financial Condition and Resultsof Operations” section in our Form 10-K for the fiscal year ended August 31,2009.

 

**Forward Looking Information**

 

Thepart of this Quarterly Report on Form 10-Q captioned “Management’sDiscussion and Analysis of Financial Condition and Results of Operations”contains certain forward-looking statements, which involve risks anduncertainties.  Forward-lookingstatements include, without limitation, statements as to our future operatingresults, future economic conditions and expectations or plans relating to theimplementation or realization of our strategic goals.  These statements are based on currentexpectations, estimates and projections about the industries in which weoperate, 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 Reporton Form 10-K for the fiscal year ended August 31, 2009 concerningcertain factors that could cause our actual results to differ materially fromthe results anticipated in such forward-looking statements. These discussionsand Risk Factors are hereby incorporated by reference into this QuarterlyReport.

 

26

----

 

Table ofContents

 

**Item 3 - Quantitative and Qualitative Disclosures about Market Risk**

 

Welimit the amount of credit exposure to any one issuer.  At May 31, 2010, other than our restrictedinvestments (which are restricted for use in a non qualified retirement savingsplan for certain key employees and Directors), all of our funds were either indemand deposit accounts or investment instruments that meet high credit qualitystandards such as money market funds, government securities, or commercialpaper.

 

Ourdomestic operations have limited currency exposure since substantially alltransactions are denominated in U.S. dollars. However, our European operationsare subject to currency exchange fluctuations. We continue to review our policies and procedures to reduce thisexposure while maintaining the benefit from these operations and sales to otherEuropean customers.  As of May 31,2010, we had cash balances in the United Kingdom for our HumiSeal Europe Ltdand Chase Protective Coatings Ltd divisions denominated primarily in poundssterling and equal to US $3,335,000 and cash balances in France for ourHumiSeal Europe SARL division denominated primarily in euros and equal to US$387,000.  We will continue to review ourcurrent cash balances denominated in foreign currency in light of current taxguidelines, working capital requirements, infrastructure improvements andpotential acquisitions.

 

Weincurred a foreign currency translation loss, net of tax, for the nine monthsended May 31, 2010 in the amount of $1,753,000 related to our Europeanoperations which is recorded in other comprehensive income within our Statementof Stockholders’ Equity.  We do not haveor utilize any derivative financial instruments.

 

**Item 4 - Controls and Procedures**

 

*Evaluation of disclosure controls and procedures*

 

Wemaintain disclosure controls and procedures that are designed to ensure thatinformation required to be disclosed in our reports under the SecuritiesExchange Act of 1934, as amended, is recorded, processed, summarized andreported within the time periods specified in the Commission’s rules andforms and that such information is accumulated and communicated to ourmanagement, including our Chief Executive Officer and Chief Financial Officer,as appropriate, to allow for timely decisions regarding requireddisclosure.  In designing and evaluatingthe disclosure controls and procedures, management recognizes that any controlsand procedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, andmanagement is required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

Wecarry out a variety of ongoing procedures, under the supervision and with theparticipation of our  management,including our Chief Executive Officer and Chief Financial Officer, to evaluatethe effectiveness of the design and operation of our disclosure controls andprocedures. Based on the foregoing, our Chief Executive Officer and ChiefFinancial Officer concluded that our disclosure controls and procedures wereeffective at a reasonable assurance level as of the end of the period coveredby this report.

 

*Changes in internal control over financial reporting*

 

Therewas no change in our internal control over financial reporting during our mostrecent fiscal quarter that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

27

----

Table of Contents

 

**Part II — OTHER INFORMATION**

 

**Item 1 — Legal Proceedings**

 

Weare one of over 100 defendants in a lawsuit pending in Ohio which allegespersonal injury from exposure to asbestos contained in certain Chaseproducts.  The case is captioned Marie Lou Scott, Executrix of the Estateof James T. Scott v. A-Best Products, et al., No. 312901 in the Court ofCommon Pleas for Cuyahoga County, Ohio. The plaintiff in the case issued discovery requests to us in August 2005,to which we timely responded in September 2005.  The trial hadinitially been scheduled to begin on April 30, 2007.  However, that date had been postponed and nonew trial date has been set.  As of May 2010,there have been no new developments as this Ohio lawsuit has been inactive withrespect to us.

 

Wewere named as one of the defendants in a complaint filed on June 25, 2009,in a lawsuit captioned Lois Jansen, Individually and as SpecialAdministrator of the Estate of Thomas Jansen v. Beazer East, Inc., et al.,No: 09-CV-6248 in the Milwaukee County (Wisconsin) Circuit Court.  Theplaintiff alleges that her husband suffered and died from malignantmesothelioma resulting from exposure to asbestos in his workplace.  Theplaintiff has sued seven alleged manufacturers or distributors ofasbestos-containing products, including Royston Laboratories (formerly anindependent company and now a division of Chase Corporation).  We havefiled an answer to the claim denying the material allegations in thecomplaint.  The parties are currently engaged in discovery.

 

Inaddition to the matters described above, we are involved from time to time inlitigation incidental to the conduct of our business.  Although we do not expect that the outcome inany of these matters, individually or collectively, will have a materialadverse effect on our financial condition or results of operations, litigationis inherently unpredictable.  Therefore,judgments could be rendered or settlements entered, that could adversely affectour operating results or cash flows in a particular period.  We routinely assess all of our litigation andthreatened litigation as to the probability of ultimately incurring aliability, and record our best estimate of the ultimate loss in situationswhere we assess the likelihood of loss as probable.

 

**Item 1A — Risk Factors**

 

Pleaserefer to Item 1A in our Form 10-K for the fiscal year ended August 31,2009 for a discussion of the risk factors which could materially affect ourbusiness, financial condition or future results.

 

**Item 5 — Other Information**

 

OnJune 8, 2010, we entered into an amendment to our existing unsecured $10million credit facility with Bank of America, extending its maturity to March 31,2013.  As part of this amendment, theinterest rate was increased to the effective London Interbank Offered Rate(LIBOR) plus 1.50 percent (previously the effective LIBOR plus 1.25).  All other terms of the credit facility remainthe same.

 

**Item 6 - Exhibits**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                                                              |
|---------------------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------|
| 10.1                      |       | First  Amendment to Second Amended and Restated Loan Agreement, dated June 8,  2010 between Chase Corporation and Bank of America, N.A. |
| 31.1                      |       | Certification  of principal executive officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                |
| 31.2                      |       | Certification  of principal financial officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002                                |
| 32.1                      |       | Certification  of principal executive officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                |
| 32.2                      |       | Certification  of principal financial officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002                                |

 

28

----

Table of Contents

 

**SIGNATURES**

 

Pursuantto the requirements of the Securities Exchange Act of 1934, the Registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                      | **Chase  Corporation** |
|---------------------------|------------------------|
|                      |                   |   |
|                      |                   |   |
| Dated: July 12, 2010 | By:                    | /s/  Peter R. Chase |
|                      |                   | Peter  R. Chase, |
|                      |                   | Chairman  and Chief Executive Officer |
|                      |                   |   |
|                      |                   |   |
| Dated: July 12, 2010 | By:                    | /s/  Kenneth L. Dumas |
|                      |                   | Kenneth  L. Dumas |
|                      |                   | Chief  Financial Officer and Treasurer |

 

29

----