Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)**

**OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For the Quarterly Period Ended May 31, 2011**

 

**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)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  YES x  NO o

 

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

 

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

 

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

 

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

 

The number of shares of Common Stock outstanding as of June 30, 2011 was 8,964,058.

 

 

 

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**CHASE CORPORATION**

**INDEX TO FORM 10-Q**

 

**For the Quarter Ended May 31, 2011**

** **
| **Part I - FINANCIAL INFORMATION**                                                                    | ** **                                                                                             |
|------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------|
| ** **                                                                                                 | ** **                                                                                             | ** ** |
| Item   1 – Unaudited Financial Statements                                                             | ** **                                                                                             |
| ** **                                                                                                 | ** **                                                                                             | ** ** |
|                                                                                                       | Consolidated Balance Sheets as of May 31, 2011   and August 31, 2010                         | 3 |
|                                                                                                       |                                                                                                   |   |
|                                                                                                       | Consolidated Statements of Operations for the three   and nine months ended May 31, 2011 and 2010 | 4 |
|                                                                                                       |                                                                                                   |   |
|                                                                                                       | Consolidated Statement of Stockholders’ Equity for the   nine months ended May 31, 2011      | 5 |
|                                                                                                       |                                                                                                   |   |
|                                                                                                       | Consolidated Statements of Cash Flows for the nine   months ended May 31, 2011 and 2010           | 6 |
|                                                                                                       |                                                                                                   |   |
|                                                                                                       | Notes to Consolidated Financial Statements                                                             | 7 |
|                                                                                                       |                                                                                                   |   |
| Item 2 – Management’s Discussion and Analysis of   Financial Condition and Results of Operations | 15                                                                                                     |
|                                                                                                       |                                                                                                   |
| Item 3 – Quantitative and Qualitative Disclosures   About Market Risk                                 | 21                                                                                                     |
|                                                                                                       |                                                                                                   |
| Item 4 – Controls and Procedures                                                                      | 21                                                                                                     |
|                                                                                                       |                                                                                                   |
| **Part II   – OTHER INFORMATION**                                                                |                                                                                                   |
|                                                                                                       |                                                                                                   |
| Item   1 – Legal Proceedings                                                                          | 22                                                                                                     |
|                                                                                                       |                                                                                                   |
| Item   1A – Risk Factors                                                                              | 22                                                                                                     |
|                                                                                                       |                                                                                                   |
| Item 5 – Other   Information                                                                          | 22                                                                                                     |
|                                                                                                       |                                                                                                   |
| Item 6 –   Exhibits                                                                                   | 22                                                                                                     |
|                                                                                                       |                                                                                                   |
| **SIGNATURES**                                                                                             | 23                                                                                                     |

 

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Table of Contents

 

**Part 1 — FINANCIAL INFORMATION**

 

**Item 1 — Unaudited Financial Statements**

 

**CHASE CORPORATION CONSOLIDATED BALANCE SHEETS**

(UNAUDITED)

 

*In thousands, except share and per share amounts*

 
| ** **                                                                                                                                                                | ** ** | **May 31,** | ** ** | **August 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------|------------|---------------------|------------|
| ** **                                                                                                                                                                | ** ** | **2011**         | ** ** | **2010**            | ** ** |
| **ASSETS**                                                                                                                                                                | ** ** | ** **       | ** ** | ** **          | ** ** |
| Current Assets:                                                                                                                                                           |       |             |       |                |       |
| Cash & cash equivalents                                                                                                                                          |       | $                | 15,201     |                | $          | 17,340 |   |
| Accounts receivable, less allowance for doubtful   accounts of $365 and $347                                                                                              |       | 18,462           |       | 18,655              |       |
| Inventories                                                                                                                                                               |       | 21,411           |       | 14,678              |       |
| Prepaid expenses and other current assets                                                                                                                                 |       | 1,304            |       | 2,465               |       |
| Deferred income taxes                                                                                                                                                     |       | 258              |       | 258                 |       |
| Total current assets                                                                                                                                                      |       | 56,636           |       | 53,396              |       |
|                                                                                                                                                                      |       |             |       |                |       |
| Property, plant and equipment, net                                                                                                                                        |       | 28,907           |       | 27,414              |       |
|                                                                                                                                                                      |       |             |       |                |       |
| Other Assets:                                                                                                                                                             |       |             |       |                |       |
| Goodwill                                                                                                                                                                  |       | 18,082           |       | 17,437              |       |
| Intangible assets, less accumulated amortization   of $9,823 and $7,777                                                                                                   |       | 16,828           |       | 17,942              |       |
| Cash surrender value of life insurance                                                                                                                                    |       | 6,263            |       | 6,203               |       |
| Restricted investments                                                                                                                                                    |       | 803              |       | 611                 |       |
| Deferred income taxes                                                                                                                                                     |       | 93               |       | 120                 |       |
| Other assets                                                                                                                                                              |       | 58               |       | 78                  |       |
|                                                                                                                                                                      |       | $                | 127,670    |                | $          | 123,201 |   |
| **LIABILITIES AND STOCKHOLDERS’   EQUITY**                                                                                                                           |       |             |       |                |       |
| Current Liabilities:                                                                                                                                                      |       |             |       |                |       |
| Accounts payable                                                                                                                                                          |       | $                | 8,710      |                | $          | 6,627 |   |
| Accrued payroll and other compensation                                                                                                                                    |       | 2,630            |       | 3,546               |       |
| Accrued expenses                                                                                                                                                          |       | 4,097            |       | 3,514               |       |
| Accrued income taxes                                                                                                                                                      |       | 1,588            |       | 2,849               |       |
| Current portion of long-term debt                                                                                                                                         |       | 4,400            |       | 4,400               |       |
| Total current liabilities                                                                                                                                                 |       | 21,425           |       | 20,936              |       |
|                                                                                                                                                                      |       |             |       |                |       |
| Long-term debt, less current portion                                                                                                                                      |       | 9,117            |       | 12,667              |       |
| Deferred compensation                                                                                                                                                     |       | 1,674            |       | 1,520               |       |
| Accumulated pension obligation                                                                                                                                            |       | 6,031            |       | 6,022               |       |
| Other liabilities                                                                                                                                                         |       | 525              |       | 525                 |       |
|                                                                                                                                                                      |       |             |       |                |       |
| Commitments and Contingencies (Note 8)                                                                                                                                    |       |             |       |                |       |
|                                                                                                                                                                      |       |             |       |                |       |
| 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; 8,964,058 shares at May 31, 2011 and 8,780,988 shares   at August 31, 2010 issued and outstanding |       | 896              |       | 878                 |       |
| Additional paid-in capital                                                                                                                                                |       | 10,475           |       | 9,210               |       |
| Accumulated other comprehensive loss                                                                                                                                      |       | (2,826           | )          | (4,730              | )          |
| Retained earnings                                                                                                                                                         |       | 80,353           |       | 76,173              |       |
| Total stockholders’ equity                                                                                                                                           |       | 88,898           |       | 81,531              |       |
| Total liabilities and stockholders’ equity                                                                                                                           |       | $                | 127,670    |                | $          | 123,201 |   |

 

See accompanying notes to the consolidated financial statements

 

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**CHASE CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS**

(UNAUDITED)

 

*In thousands, except share and per share amounts*

 
| ** **                                                                            | ** ** | **Three Months Ended May 31,** | ** ** | **Nine Months Ended May 31,** | ** ** |
|---------------------------------------------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2011**                                           | ** ** | **2010**                                          | ** ** | **2011** | ** ** | **2010** | ** ** |
| ** **                                                                            | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues                                                                              |       |                                               |       |                                              |       |   |   |   |   |
| Sales                                                                                 |       | $                                                  | 32,132     |                                              | $          | 32,854 |   | $ | 88,622 |   | $ | 82,132 |   |
| Royalties and commissions                                                             |       | 494                                                |       | 426                                               |       | 1,532 |   | 1,175 |   |
|                                                                                  |       | 32,626                                             |       | 33,280                                            |       | 90,154 |   | 83,307 |   |
| Costs and Expenses                                                                    |       |                                               |       |                                              |       |   |   |   |   |
| Cost of products and services sold                                                    |       | 21,230                                             |       | 20,318                                            |       | 58,732 |   | 52,461 |   |
| Selling, general and administrative expenses                                          |       | 7,209                                              |       | 7,078                                             |       | 20,461 |   | 20,001 |   |
|                                                                                  |       |                                               |       |                                              |       |   |   |   |   |
| Operating income                                                                      |       | 4,187                                              |       | 5,884                                             |       | 10,961 |   | 10,845 |   |
|                                                                                  |       |                                               |       |                                              |       |   |   |   |   |
| Interest expense                                                                      |       | (45                                                | )          | (100                                              | )          | (154 | ) | (259 | ) |
| Other income (expense)                                                                |       | 48                                                 |       | 99                                                |       | 172 |   | 74 |   |
|                                                                                  |       |                                               |       |                                              |       |   |   |   |   |
| Income from continuing operations before income   taxes                               |       | 4,190                                              |       | 5,883                                             |       | 10,979 |   | 10,660 |   |
|                                                                                  |       |                                               |       |                                              |       |   |   |   |   |
| Income taxes                                                                          |       | 1,224                                              |       | 2,048                                             |       | 3,668 |   | 3,783 |   |
|                                                                                  |       |                                               |       |                                              |       |   |   |   |   |
| Income from continuing operations, net of taxes                                       |       | 2,966                                              |       | 3,835                                             |       | 7,311 |   | 6,877 |   |
|                                                                                  |       |                                               |       |                                              |       |   |   |   |   |
| Income from discontinued operations, net of taxes   of $373 & $841           |       | —                                             |       | 565                                               |       | — |   | 1,271 |   |
|                                                                                  |       |                                               |       |                                              |       |   |   |   |   |
| Net income                                                                            |       | $                                                  | 2,966      |                                              | $          | 4,400 |   | $ | 7,311 |   | $ | 8,148 |   |
|                                                                                  |       |                                               |       |                                              |       |   |   |   |   |
| Net income available to common shareholders, per common   and common equivalent share |       |                                               |       |                                              |       |   |   |   |   |
|                                                                                  |       |                                               |       |                                              |       |   |   |   |   |
| Basic                                                                                 |       |                                               |       |                                              |       |   |   |   |   |
| Continuing operations                                                                 |       | $                                                  | 0.33       |                                              | $          | 0.43 |   | $ | 0.82 |   | $ | 0.78 |   |
| Discontinued operations                                                               |       | —                                             |       | 0.06                                              |       | — |   | 0.14 |   |
|                                                                                  |       |                                               |       |                                              |       |   |   |   |   |
| Net income per common and common equivalent share                                     |       | $                                                  | 0.33       |                                              | $          | 0.50 |   | $ | 0.82 |   | $ | 0.93 |   |
|                                                                                  |       |                                               |       |                                              |       |   |   |   |   |
| Diluted                                                                               |       |                                               |       |                                              |       |   |   |   |   |
| Continuing operations                                                                 |       | $                                                  | 0.33       |                                              | $          | 0.43 |   | $ | 0.81 |   | $ | 0.78 |   |
| Discontinued operations                                                               |       | —                                             |       | 0.06                                              |       | — |   | 0.14 |   |
|                                                                                  |       |                                               |       |                                              |       |   |   |   |   |
| Net income per common and common equivalent share                                     |       | $                                                  | 0.33       |                                              | $          | 0.50 |   | $ | 0.81 |   | $ | 0.92 |   |
|                                                                                  |       |                                               |       |                                              |       |   |   |   |   |
| The sum of individual share amounts may not total   due to rounding                   |       |                                               |       |                                              |       |   |   |   |   |
|                                                                                  |       |                                               |       |                                              |       |   |   |   |   |
| Weighted average shares outstanding                                                   |       |                                               |       |                                              |       |   |   |   |   |
| Basic                                                                                 |       | 8,733,336                                          |       | 8,576,066                                         |       | 8,717,427 |   | 8,543,773 |   |
| Diluted                                                                               |       | 8,778,884                                          |       | 8,642,291                                         |       | 8,763,850 |   | 8,618,548 |   |
|                                                                                  |       |                                               |       |                                              |       |   |   |   |   |
| Cash dividends declared per share                                                     |       |                                               |       |                                              |       | $ | 0.35 |   | $ | 0.20 |   |

 

See accompanying notes to the consolidated financial statements

 

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**CHASE CORPORATION CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY**

**NINE MONTHS ENDED MAY 31, 2011**

(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, 2010                                                    |       | 8,780,988             |       | $           | 878        |              | $          | 9,210                  |       | $                      | (4,730     | )                 | $          | 76,173     |       | $ | 81,531 |   |   |   |
| Restricted stock grants, net of forfeitures                                        |       | 132,985               |       | 13          |       | (13               | )          |                   |       |                   |       | —            |       |       |       |
| Amortization of restricted stock grants                                            |       |                  |       |        |       | 867               |       |                   |       |                   |       | 867               |       |       |       |
| Amortization of stock option grants                                                |       |                  |       |        |       | 395               |       |                   |       |                   |       | 395               |       |       |       |
| Stock grants                                                                       |       | 390                   |       | —      |       | 7                 |       |                   |       |                   |       | 7                 |       |       |       |
| Exercise of stock options                                                          |       | 73,500                |       | 7           |       | 379               |       |                   |       |                   |       | 386               |       |       |       |
| Common stock received for payment of stock option   exercises                      |       | (23,053               | )          | (2          | )          | (384              | )          |                   |       |                   |       | (386              | )          |       |       |
| Excess tax benefit from stock based compensation                                   |       |                  |       |        |       | 27                |       |                   |       |                   |       | 27                |       |       |       |
| Common stock retained to pay statutory minimum   withholding taxes on common stock |       | (752                  | )          | —      |       | (13               | )          |                   |       |                   |       | (13               | )          |       |       |
| Cash dividend paid, $0.35 per share                                                |       |                  |       |        |       |              |       |                   |       | (3,131                 | )          | (3,131            | )          |       |       |
| Pension amortization, net of tax of $94                                            |       |                  |       |        |       |              |       | 141                    |       |                   |       | 141               |       | $          | 141        |   |
| Foreign currency translation adjustment                                            |       |                  |       |        |       |              |       | 1,680                  |       |                   |       | 1,680             |       | 1,680      |       |
| Net unrealized gain on restricted investments, net   of tax of $55                 |       |                  |       |        |       |              |       | 83                     |       |                   |       | 83                |       | 83         |       |
| Net income                                                                         |       |                  |       |        |       |              |       |                   |       | 7,311                  |       | 7,311             |       | 7,311      |       |
| Comprehensive income                                                               |       |                  |       |        |       |              |       |                   |       |                   |       | —            |       | $          | 9,215      |   |
| Balance at May 31, 2011                                                       |       | 8,964,058             |       | $           | 896        |              | $          | 10,475                 |       | $                      | (2,826     | )                 | $          | 80,353     |       | $ | 88,898 |   |   |   |

 

See accompanying notes to the consolidated financial statements

 

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**CHASE CORPORATION**

**CONSOLIDATED STATEMENT OF CASH FLOWS**

(UNAUDITED)

 

*In thousands, except share and per share amounts*

 
| ** **                                                                         | ** ** | **Nine Months Ended May 31,** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2011**                                          | ** ** | **2010** | ** ** |
| CASH FLOWS FROM OPERATING ACTIVITIES                                               |       |                                              |       |   |   |
| Net income                                                                         |       | $                                                 | 7,311      |   | $ | 8,148 |   |
| Adjustments to reconcile net income to net cash   provided by operating activities |       |                                              |       |   |   |
| Depreciation                                                                       |       | 1,868                                             |       | 2,340 |   |
| Amortization                                                                       |       | 1,729                                             |       | 2,133 |   |
| Provision for losses on accounts receivable                                        |       | 14                                                |       | 174 |   |
| Stock based compensation                                                           |       | 1,269                                             |       | 1,666 |   |
| Realized loss (gain) on restricted investments                                     |       | (16                                               | )          | (10 | ) |
| Increase (decrease) in cash surrender value life   insurance                       |       | (15                                               | )          | (6 | ) |
| Excess tax benefit from stock based compensation                                   |       | (27                                               | )          | (16 | ) |
| Increase (decrease) from changes in assets and   liabilities                       |       |                                              |       |   |   |
| Accounts receivable                                                                |       | 470                                               |       | (7,084 | ) |
| Inventories                                                                        |       | (6,619                                            | )          | (3,570 | ) |
| Prepaid expenses & other assets                                           |       | (266                                              | )          | (364 | ) |
| Accounts payable                                                                   |       | 1,943                                             |       | 1,738 |   |
| Accrued payroll, compensation and expenses                                         |       | (560                                              | )          | 1,208 |   |
| Accrued income taxes                                                               |       | (1,337                                            | )          | 1,663 |   |
| Deferred compensation                                                              |       | 154                                               |       | 25 |   |
| Net cash provided by operating activities                                          |       | 5,918                                             |       | 8,045 |   |
|                                                                               |       |                                              |       |   |   |
| CASH FLOWS FROM INVESTING ACTIVITIES                                               |       |                                              |       |   |   |
| Purchases of property, plant and equipment                                         |       | (3,079                                            | )          | (2,635 | ) |
| Contingent purchase price for acquisition                                          |       | (57                                               | )          | (44 | ) |
| Payments for acquisitions, net of cash acquired                                    |       | —                                            |       | (25,592 | ) |
| Additional proceeds from sale of discontinued   operations                         |       | 1,478                                             |       | — |   |
| Withdrawals from restricted investments, net of   contributions                    |       | (37                                               | )          | (35 | ) |
| Payments for cash surrender value life insurance                                   |       | (137                                              | )          | (137 | ) |
| Net cash used in investing activities                                              |       | (1,832                                            | )          | (28,443 | ) |
|                                                                               |       |                                              |       |   |   |
| CASH FLOWS FROM FINANCING ACTIVITIES                                               |       |                                              |       |   |   |
| Borrowings on long-term debt                                                       |       | 1,191                                             |       | 31,893 |   |
| Payments of principal on debt                                                      |       | (4,741                                            | )          | (16,809 | ) |
| Dividend paid                                                                      |       | (3,131                                            | )          | (1,759 | ) |
| Proceeds from exercise of common stock options                                     |       | —                                            |       | 231 |   |
| Payments of statutory minimum taxes on stock   options and restricted stock        |       | (13                                               | )          | (65 | ) |
| Excess tax benefit from stock based compensation                                   |       | 27                                                |       | 16 |   |
| Net cash (used in) provided by financing   activities                              |       | (6,667                                            | )          | 13,507 |   |
|                                                                               |       |                                              |       |   |   |
| DECREASE IN CASH                                                                   |       | (2,581                                            | )          | (6,891 | ) |
| Effect of foreign exchange rates on cash                                           |       | 442                                               |       | (431 | ) |
| CASH, BEGINNING OF PERIOD                                                          |       | 17,340                                            |       | 11,643 |   |
|                                                                               |       |                                              |       |   |   |
| CASH, END OF PERIOD                                                                |       | $                                                 | 15,201     |   | $ | 4,321 |   |
|                                                                               |       |                                              |       |   |   |
| **Non-cash Investing and Financing   Activities**                                  |       |                                              |       |   |   |
| Issuance of stock based compensation previously   accrued for                      |       | $                                                 | —     |   | $ | 332 |   |
| Common stock received for payment of stock option   exercises                      |       | $                                                 | 386        |   | $ | — |   |
| Accrual for future contingent payments related to   acquisitions                   |       | $                                                 | 217        |   | $ | 116 |   |
| Property, plant & equipment additions   included in accounts payable      |       | $                                                 | 150        |   | $ | 110 |   |
| Notes payable to CIM shareholders related to   acquisition                         |       | $                                                 | —     |   | $ | 3,000 |   |

 

See accompanying notes to the consolidated financial statements

 

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except share and per share amounts*

 

**Note 1 - Basis of Presentation**

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial reporting and instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Therefore, they do not include all information and footnote disclosure necessary for a complete presentation of Chase Corporation’s financial position, results of operations and cash flows, in conformity with generally accepted accounting principles.  Chase Corporation (the “Company,” “Chase,” “we,” or “us”) filed audited financial statements which included all information and notes necessary for such presentation for the three years ended August 31, 2010 in conjunction with its 2010 Annual Report on Form 10-K.

 

The accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring items) which are, in the opinion of management, necessary for a fair presentation of the Company’s financial position as of May 31, 2011, the results of operations and cash flows for the interim periods ended May 31, 2011 and 2010, and changes in stockholders’ equity for the interim period ended May 31, 2011.

 

The financial statements include the accounts of the Company and its wholly-owned subsidiaries.  All intercompany transactions and balances have been eliminated in consolidation.  The Company uses the US dollar as the reporting currency for financial reporting.  The financial position and results of operations of the Company’s HumiSeal Europe Ltd and Chase Protective Coatings Ltd divisions are measured using the UK pound sterling as the functional currency and the financial position and results of operations of the Company’s HumiSeal Europe SARL division in France are measured using the euro as the functional currency.  Foreign currency translation gains and losses are determined using current exchange rates for monetary items and historical exchange rates for other balance sheet items and are recorded as a change in other comprehensive income.  Translation gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of our foreign operations are included in other (expense) / income on the consolidated statements of operations.

 

On June 30, 2010, the Company divested its contract manufacturing services business in an all cash transaction, structured as a sale of substantially all of the assets of the Chase Electronic Manufacturing Services (“EMS”) business.  The Company has reflected the results of this business as discontinued operations in the consolidated statements of operations for the prior period presented.  This business was historically reported by the Company as a separate reporting segment called Electronic Manufacturing Services.  Accordingly, the Company currently operates in one segment.  In the first quarter of fiscal 2011, pursuant to the asset purchase agreement, the Company received additional proceeds of $1,478 based on the final net working capital of the Chase EMS business.

 

The Company has evaluated events and transactions subsequent to the balance sheet date.  Based on this evaluation, the Company is not aware of any events or transactions that occurred subsequent to the balance sheet date but prior to filing that would require recognition or disclosure in its consolidated financial statements.

 

The results of operations for the interim period ended May 31, 2011 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.  These interim consolidated financial

 

7

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except share and per share amounts*

 

statements should be read in conjunction with the audited consolidated financial statements for the year ended August 31, 2010, which are contained in the Company’s 2010 Annual Report on Form 10-K.

 

**Note 2 — Recent Accounting Policies**

 

*Recently Issued Accounting Pronouncements*

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (ASC Topic 820) — Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”). The updated standard requires new disclosures around transfers into and out of Levels 1 and 2 in the fair value hierarchy and separate disclosures about purchases, sales, issuances, and settlements related to Level 3 measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009 with early adoption permitted, except for the Level 3 reconciliation disclosures which are effective for fiscal years beginning after December 15, 2010.  The portion of the update which was effective for fiscal years beginning after December 15, 2009 was adopted by the Company effective March 1, 2010 and the adoption did not have any effect on its consolidated financial position, results of operations or cash flows. The portion of the update which is effective for fiscal years beginning after December 15, 2010 will not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

 

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”) which amends current comprehensive income guidance.  This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity.  Instead, the Company must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements.  ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after Dec. 15, 2011 with early adoption permitted.  The adoption of ASU 2011-05 will not have an impact on the Company’s consolidated financial position, results of operations or cash flows as it only requires a change in the format of the current presentation.

 

**Note 3 — Inventories**

 

Inventories consist of the following as of May 31, 2011 and August 31, 2010: 

 
| ** **              | ** ** | **May 31, 2011** | ** ** | **August 31, 2010** | ** ** |
|-------------------------|------------|----------------------------|------------|-------------------------------|------------|
| Raw materials           |       | $                          | 12,712     |                          | $          | 8,497 |   |
| Finished and in process |       | 8,699                      |       | 6,181                         |       |
| Total inventories       |       | $                          | 21,411     |                          | $          | 14,678 |   |

 

8

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except share and per share amounts*

 

**Note 4 — Net Income Per Share**

 

In June 2008, the FASB issued guidance within ASC Topic 260, Earnings Per Share (“ASC 260”), to clarify that unvested share-based payment awards with a right to receive nonforfeitable dividends are participating securities. The standard provides guidance on how to allocate earnings to participating securities and compute earnings per share using the two-class method.  The determination of earnings per share under the standard is as follows:

 
| ** **                                        | ** ** | **Three Months Ended May 31,** | ** ** | **Nine Months Ended May 31,** | ** ** |
|---------------------------------------------------|------------|----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                        | ** ** | **2011**                                           | ** ** | **2010**                                          | ** ** | **2011** | ** ** | **2010** | ** ** |
| ** **                                        | ** ** | ** **                                         | ** ** | ** **                                        | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Basic Earnings per Share**                      |       |                                               |       |                                              |       |   |   |   |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| Income from continuing operations, net of taxes   |       | $                                                  | 2,966      |                                              | $          | 3,835 |   | $ | 7,311 |   | $ | 6,877 |   |
| Less: Allocated to participating securities       |       | 75                                                 |       | 105                                               |       | 186 |   | 194 |   |
| Available to common shareholders                  |       | $                                                  | 2,891      |                                              | $          | 3,730 |   | $ | 7,125 |   | $ | 6,683 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| Income from discontinued operations, net of taxes |       | $                                                  | —     |                                              | $          | 565 |   | $ | — |   | $ | 1,271 |   |
| Less: Allocated to participating securities       |       | —                                             |       | 16                                                |       | — |   | 36 |   |
| Available to common shareholders                  |       | $                                                  | —     |                                              | $          | 549 |   | $ | — |   | $ | 1,235 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| Net income                                        |       | $                                                  | 2,966      |                                              | $          | 4,400 |   | $ | 7,311 |   | $ | 8,148 |   |
| Less: Allocated to participating securities       |       | 75                                                 |       | 121                                               |       | 186 |   | 230 |   |
| Available to common shareholders                  |       | $                                                  | 2,891      |                                              | $          | 4,279 |   | $ | 7,125 |   | $ | 7,918 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| Basic weighted averages shares outstanding        |       | 8,733,336                                          |       | 8,576,066                                         |       | 8,717,427 |   | 8,543,773 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| Income from continuing operations per share       |       | $                                                  | 0.33       |                                              | $          | 0.43 |   | $ | 0.82 |   | $ | 0.78 |   |
| Income from discontinued operations per share     |       | —                                             |       | 0.06                                              |       | — |   | 0.14 |   |
| Net income per common and common equivalent share |       | $                                                  | 0.33       |                                              | $          | 0.50 |   | $ | 0.82 |   | $ | 0.93 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| **Diluted Earnings per Share**                    |       |                                               |       |                                              |       |   |   |   |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| Income from continuing operations, net of taxes   |       | $                                                  | 2,966      |                                              | $          | 3,835 |   | $ | 7,311 |   | $ | 6,877 |   |
| Less: Allocated to participating securities       |       | 75                                                 |       | 104                                               |       | 185 |   | 192 |   |
| Available to common shareholders                  |       | $                                                  | 2,891      |                                              | $          | 3,731 |   | $ | 7,126 |   | $ | 6,685 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| Income from discontinued operations, net of taxes |       | $                                                  | —     |                                              | $          | 565 |   | $ | — |   | $ | 1,271 |   |
| Less: Allocated to participating securities       |       | —                                             |       | 16                                                |       | — |   | 35 |   |
| Available to common shareholders                  |       | $                                                  | —     |                                              | $          | 549 |   | $ | — |   | $ | 1,236 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| Net income                                        |       | $                                                  | 2,966      |                                              | $          | 4,400 |   | $ | 7,311 |   | $ | 8,148 |   |
| Less: Allocated to participating securities       |       | 75                                                 |       | 120                                               |       | 185 |   | 227 |   |
| Available to common shareholders                  |       | $                                                  | 2,891      |                                              | $          | 4,280 |   | $ | 7,126 |   | $ | 7,921 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| Basic weighted averages shares outstanding        |       | 8,733,336                                          |       | 8,576,066                                         |       | 8,717,427 |   | 8,543,773 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| Additional dilutive common stock equivalents      |       | 45,548                                             |       | 66,225                                            |       | 46,423 |   | 74,775 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| Diluted weighted averages shares outstanding      |       | 8,778,884                                          |       | 8,642,291                                         |       | 8,763,850 |   | 8,618,548 |   |
|                                              |       |                                               |       |                                              |       |   |   |   |   |
| Income from continuing operations per share       |       | $                                                  | 0.33       |                                              | $          | 0.43 |   | $ | 0.81 |   | $ | 0.78 |   |
| Income from discontinued operations per share     |       | —                                             |       | 0.06                                              |       | — |   | 0.14 |   |
| Net income per common and common equivalent share |       | $                                                  | 0.33       |                                              | $          | 0.50 |   | $ | 0.81 |   | $ | 0.92 |   |

 

The sum of individual share amounts may not total due to rounding

 

For the three months ended May 31, 2010, stock options to purchase 250,000 shares of common stock were outstanding, but were not included in the calculation of diluted income per share because the options’ exercise prices were greater than the average market price of the common stock and thus their inclusion would be anti-dilutive.  For the nine months ended May 31, 2011 and 2010, stock options to purchase 265,201 and 250,000 shares of common stock were outstanding, respectively, but were not included in the calculation of diluted income per share.

 

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except share and per share amounts*

 

As previously reported, the Company identified an immaterial error in the calculation of previously reported basic and diluted shares outstanding resulting in earnings per share being understated in certain periods in fiscal 2010.  The Company has revised the prior period financial statements to reflect the appropriate earnings per share.  This immaterial change results in basic earnings per share increasing from $.49 to $.50 for the three months ended May 31, 2010 and from $.91 to $.93 for the nine months ended May 31, 2010.  Similarly, diluted earnings per share increased from $.48 and $.50 for the three months ended May 31, 2010 and from $.90 to $.92 for the nine months ended May 31, 2010.

 

**Note 5 — Stock Based Compensation**

 

In August 2009, the Board of Directors of Chase Corporation approved a plan for issuing a performance and service based restricted stock grant of 76,874 shares in the aggregate, subject to adjustment, to key members of management with an issue date of September 1, 2009 and a vesting date of August 31, 2012.  In December 2009, restricted stock in the amount of 8,421 shares related to this grant was forfeited in conjunction with the retirement of an executive officer of the Company.  Based on the fiscal year 2010 financial results exceeding the target, the grant was increased by 68,453 shares of restricted stock subsequent to the end of fiscal year 2010 in accordance with the performance measurement criteria of the award.  The adjusted restricted stock award of 136,906 shares was finalized in the quarter ended November 30, 2010 and no further performance-based measurements apply to this award.  Compensation expense is being recognized on a ratable basis over the vesting period.

 

In August 2010, the Board of Directors of the Company approved the fiscal year 2011 Long Term Incentive Plan (“LTIP”) for the executive officers.  The fiscal 2011 LTIP is an equity based plan with a grant date of September 1, 2010 and containing the following components:

 

*Restricted Shares* — (a) a performance and service based restricted stock grant of 32,835 shares in the aggregate, subject to adjustment, with a vesting date of August 31, 2013.  These shares are subject to a performance measurement based upon the results of fiscal year 2011 which will determine the final calculation of the number of shares that will be issued (which may be greater than or less than 32,835 shares).  Compensation expense is being recognized on a ratable basis over the vesting period based on quarterly probability assessments. (b) a time-based restricted stock grant of 16,417 shares in the aggregate, and a vesting date of August 31, 2013.  Compensation expense is being recognized on a ratable basis over the vesting period.

 

*Stock options* — options to purchase 62,425 shares of common stock in the aggregate with an exercise price of $12.70 per share.  The options will vest in three equal annual allotments beginning on August 31, 2011 and ending on August 31, 2013. The options will expire on August 31, 2020.  Compensation expense is being recognized over the period of the award on an annual basis consistent with the vesting terms.

 

As part of their annual retainer, non-employee members of the Board of Directors receive a combined total of $169 of Chase Corporation common stock, in the form of restricted stock valued in conjunction with the start of the new year of Board service which generally coincides with the Company’s annual shareholder meeting.  The stock award vests one year from the date of grant.  In February 2011, non-employee members of the Board received a total grant of 11,031 shares of restricted stock for service for the period from January 31, 2011 through January 31, 2012.  The shares of restricted stock will vest at the conclusion of this service period.  Compensation is being recognized on a ratable basis over the twelve month vesting period.

 

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except share and per share amounts*

 

In April 2011, the Board of Directors of the Company approved a plan for issuing a time-based restricted stock grant of 4,249 shares in the aggregate to certain non executive officer employees, with an issue date of April 30, 2011 and a vesting date of April 30, 2014.  Compensation expense is being recognized on a ratable basis over the vesting period.

 

In April 2011, the Board of Directors of the Company authorized a grant of stock options to certain non executive officer employees to purchase 15,201 shares of common stock in the aggregate with an exercise price of $16.53 per share.  The options will vest in three equal annual allotments beginning on April 30, 2012 and ending on April 30, 2014. The options will expire on April 30, 2021.  Compensation expense is being recognized over the period of the award on an annual basis consistent with the vesting terms.

 

**Note 6 — Segment Data & Foreign Operations**

 

The Company currently views its operations and manages its business as one operating segment.  The Specialized Manufacturing segment consists of specialty tapes, laminates, sealants and coatings, and products include insulating and conducting materials for wire and cable manufacturers, coating and lining systems for use in liquid storage and containment applications, protective coatings for pipeline applications, moisture protective coatings for electronics and printing services, high performance polymeric asphalt additives, and expansion and control joint systems for use in the transportation and architectural markets.

 

The Company’s products are sold worldwide.  For the quarters ended May 31, 2011 and 2010, sales from its operations located in the United Kingdom accounted for 12% and 13%, respectively, of total Company revenues.  For both the nine months ended May 31, 2011 and 2010, sales from its operations located in the United Kingdom accounted for 13% of total Company revenues.  No other foreign geographic area accounted for more than 10% of consolidated revenues for the three and nine month periods ended May 31, 2011 and 2010.

 

As of May 31, 2011 and August 31, 2010, the Company had long-lived assets (defined as tangible assets providing the Company with a future economic benefit beyond the current year or operating period, including buildings, equipment and leasehold improvements) of $2,348 and $2,020, respectively, located in the United Kingdom.  These balances exclude goodwill and intangibles in the United Kingdom of $13,676 and $13,757 as of May 31, 2011 and August 31, 2010, respectively.

 

**Note 7 — Goodwill and Other Intangibles**

 

The changes in the carrying value of goodwill are as follows:

 
| ** **                                      | ** ** | **Goodwill** | ** ** |
|-------------------------------------------------|------------|--------------|------------|
| Balance at August 31, 2010                      |       | $            | 17,437     |   |
| Acquisition of Paper Tyger - additional earnout |       | 57           |       |
| Acquisition of Metronelec - additional earnout  |       | 217          |       |
| FX translation adjustment                       |       | 371          |       |
| Balance at May 31, 2011                         |       | $            | 18,082     |   |

 

The Company evaluates the possible impairment of goodwill annually each fourth quarter and whenever events or circumstances indicate the carrying value of goodwill may not be recoverable.

 

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except share and per share amounts*

 

Intangible assets subject to amortization consist of the following at May 31, 2011 and August 31, 2010:

 
| ** **                       | ** ** | **Weighted-Average**    | ** ** | **Gross Carrying** | ** ** | **Accumulated**  | ** ** | **Net Carrying** | ** ** |
|----------------------------------|------------|-------------------------|------------|--------------------|------------|------------------|------------|------------------|------------|
| ** **                       | ** ** | **Amortization Period** | ** ** | **Value**          | ** ** | **Amortization** | ** ** | **Value**        | ** ** |
| May 31, 2011                     | ** ** | ** **              | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| Patents and agreements           |       | 12.7 years              |       | $                  | 2,242      |             | $          | 2,162            |       | $ | 80 |   |
| Formulas and technology          |       | 9.7 years               |       | 3,594              |       | 1,223            |       | 2,371            |       |
| Trade names                      |       | 4.7 years               |       | 1,417              |       | 638              |       | 779              |       |
| Customer lists and relationships |       | 10.4 years              |       | 19,398             |       | 5,800            |       | 13,598           |       |
|                             |       |                    |       | $                  | 26,651     |             | $          | 9,823            |       | $ | 16,828 |   |
| ** **                       | ** ** | ** **              | ** ** | ** **         | ** ** | ** **       | ** ** | ** **       | ** ** |
| August 31, 2010                  |       |                    |       |               |       |             |       |             |       |
| Patents and agreements           |       | 12.7 years              |       | $                  | 2,237      |             | $          | 2,118            |       | $ | 119 |   |
| Formulas and technology          |       | 9.8 years               |       | 3,530              |       | 914              |       | 2,616            |       |
| Trade names                      |       | 4.7 years               |       | 1,348              |       | 445              |       | 903              |       |
| Customer lists and relationships |       | 10.4 years              |       | 18,604             |       | 4,300            |       | 14,304           |       |
|                             |       |                    |       | $                  | 25,719     |             | $          | 7,777            |       | $ | 17,942 |   |

 

Aggregate amortization expense related to intangible assets for the nine months ended May 31, 2011 and 2010 was $1,729 and $2,133, respectively.  Estimated amortization expense for the remainder of fiscal year 2011 and for each of the five succeeding fiscal years is as follows:

 
| **Years ending August 31,**     | ** ** | ** ** | ** ** |
|---------------------------------|------------|------------|------------|
| 2011 (remaining three   months) |       | $          | 596        |   |
| 2012                            |       | 2,373      |       |
| 2013                            |       | 2,256      |       |
| 2014                            |       | 2,199      |       |
| 2015                            |       | 2,001      |       |
| 2016                            |       | 1,939      |       |
|                            |       | $          | 11,364     |   |

 

**Note 8 — Commitments and Contingencies**

 

The Company is one of over 100 defendants in a lawsuit pending in Ohio which alleges personal injury from exposure to asbestos contained in certain Chase products.  The case is captioned Marie Lou Scott, Executrix of the Estate of James T. Scott v. A-Best Products, et al., No. 312901 in the Court of Common Pleas for Cuyahoga County, Ohio.  The plaintiff in the case issued discovery requests to Chase in August 2005, to which Chase timely responded in September 2005.  The trial had initially been scheduled to begin on April 30, 2007.  However, that date had been postponed and no new trial date has been set.  As of May 2011, there have been no new developments as this Ohio lawsuit has been inactive with respect to Chase.

 

The Company was named as one of the defendants in a complaint filed on June 25, 2009, in a lawsuit captioned Lois Jansen, Individually and as Special Administrator 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 husband suffered and died from malignant mesothelioma resulting from exposure to asbestos in his workplace.  The plaintiff has sued seven alleged manufacturers or distributors of asbestos-containing products, including Royston Laboratories (formerly an independent company and 

 

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except share and per share amounts*

 

now a division of Chase Corporation).  Chase has filed an answer to the claim denying the material allegations in the complaint.  The parties are currently engaged in discovery.

 

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

 

**Note 9 - Pensions and Other Post Retirement Benefits**

 

The components of net periodic benefit cost for the three and nine months ended May 31, 2011 and 2010 are as follows:

 
| ** **                         | ** ** | **Three Months Ended May 31,** | ** ** | **Nine Months Ended May 31,** | ** ** |
|------------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| ** **                         | ** ** | **2011**                       | ** ** | **2010**                      | ** ** | **2011** | ** ** | **2010** | ** ** |
| Service cost                       |       | $                              | 132        |                          | $          | 124 |   | $ | 395 |   | $ | 371 |   |
| Interest cost                      |       | 107                            |       | 123                           |       | 323 |   | 368 |   |
| Expected return on plan assets     |       | (110                           | )          | (102                          | )          | (330 | ) | (302 | ) |
| Amortization of prior service cost |       | 18                             |       | 21                            |       | 55 |   | 64 |   |
| Amortization of unrecognized loss  |       | 60                             |       | 53                            |       | 179 |   | 159 |   |
| Net periodic benefit cost          |       | $                              | 207        |                          | $          | 219 |   | $ | 622 |   | $ | 660 |   |

 

When funding is required, the Company’s policy is to contribute amounts that are deductible for federal income tax purposes.  As of May 31, 2011, the Company has made contributions of $375 in the current fiscal year to fund its obligations under its pension plan, and plans to contribute an additional $375 over the remainder of the fiscal year ending August 31, 2011.

 

**Note 10 — Fair Value Measurements**

 

The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).  The Company uses a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values. These tiers include: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.

 

The Company endeavors to utilize the best available information in measuring fair value.  Financial assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.  The Company has determined that it does not have any financial liabilities measured at fair value and that its financial assets are currently all classified within Level 1 in the fair value hierarchy.  The financial assets classified as Level 1 as of May 31, 2011 and August 31, 2010 represent investments which are restricted for use in a nonqualified retirement savings plan for certain key employees and directors.

 

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**CHASE CORPORATION**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(UNAUDITED)**

*In thousands, except share and per share amounts*

 

The following tables set forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of May 31, 2011 and August 31, 2010:

 
| ** **             | ** ** | ** **                        | ** ** | ** ** | ** ** | **Fair value measurement category**               | ** ** |
|------------------------|------------|-----------------------------------|------------|------------|------------|---------------------------------------------------|------------|
| ** **             | ** ** | **Fair value   measurement date** | ** ** | **Total**  | ** ** | **Quoted prices   in active markets   (Level 1)** | ** ** | **Significant other   observable inputs   (Level 2)** | ** ** | **Significant   unobservable inputs   (Level 3)** | ** ** |
| Assets:                |       |                              |       |       |       |                                              |       |   |   |   |   |
| Restricted investments |       | May   31, 2011                    |       | $          | 803        |                                              | $          | 803 |   | $ | — |   | $ | — |   |
|                   |       |                              |       |       |       |                                              |       |   |   |   |   |
| Restricted investments |       | August   31, 2010                 |       | $          | 611        |                                              | $          | 611 |   | $ | — |   | $ | — |   |

 

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

 

The following discussion provides an analysis of the Company’s financial condition and results of operations and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in Item 1 of Part I of this Quarterly Report on Form 10-Q and with the Company’s Annual Report on Form 10-K filed for the fiscal year ended August 31, 2010.

 

**Overview**

 

Revenues and net income from continuing operations through nine months of fiscal year 2011 exceeded prior year results as greater demand in the industrial controls, automotive and electrical cable markets drove increased sales from our wire & cable and electronic coatings product lines.  The third quarter results fell short of last year primarily due to decreased sales of custom products to the construction and building sectors coupled with increased raw material costs.

 

We continue to renovate our facility in Oxford, MA and plan to successfully conclude the transition from Webster, MA in the first quarter of fiscal 2012.  This plant will allow for increased space with modern technology for our existing operations as well as provide space to integrate future acquisitions.  Additionally, our HumiSeal Europe LTD manufacturing operations will be moving from Camberley, UK to a modern state-of-the-art facility in Winnersh, UK.

 

We remain focused on our key strategies and initiatives while the continued uncertainty of the global economy and the rising cost of raw materials, including petroleum related goods, is a critical variable to our business.  The resulting effect on our core product lines has a direct impact on our profitability.  Our product and marketing development efforts for our established product lines continue and will allow us to seize new business opportunities as they arise.

 

We have one reportable segment which is summarized below:

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

·         Electronic Coatings 

·         Pipeline &   Construction 

·         Custom Products |       | Provides   protective coatings and tape products including insulating and conducting   materials for wire and cable manufacturers, coating and lining systems for   use in liquid storage and containment applications, protective coatings for   pipeline and general construction applications, moisture protective coatings   for electronics and printing services, high performance polymeric asphalt   additives, and expansion and control joint systems for use in the   transportation and architectural markets. |

 

**Results of Continuing Operations**

 

***Total Revenues***

 

Total revenues decreased $654,000 or 2% to $32,626,000 for the quarter ended May 31, 2011 compared to $33,280,000 in the same quarter of the prior year.  Total revenues increased $6,847,000 or 8% to $90,154,000 in the fiscal year to date period compared to $83,307,000 in the same period in fiscal 2010.

 

The decrease in revenues in the current quarter compared to the prior year is a result of decreased sales of custom products of $1,701,000 due to less demand for our custom products.  This decline was offset by increased sales of $1,372,000 from our wire & cable product line, which benefitted from continued increased demand in the electrical cable market.

 

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The increase in revenues in the fiscal year to date period compared to the prior year is a result of increased sales of (a) $5,538,000 from our wire & cable product line; (b) $2,301,000 in the electronic coatings product line, primarily due to increased demand in the industrial controls and automotive markets; and (c) $638,000 from our fiscal 2010 acquisition of CIM.  These increases were offset by decreased sales of $2,137,000 from our custom products product line.

 

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

 

Cost of products and services sold increased $912,000 or 4% to $21,230,000 for the quarter ended May 31, 2011 compared to $20,318,000 in the prior year quarter.  Cost of products and services sold increased $6,271,000 or 12% to $58,732,000 in the fiscal year to date period compared to $52,461,000 in the same period in fiscal 2010.

 

As a percentage of sales, cost of products and services sold increased to 66% in both the current fiscal quarter and year to date periods compared to 62% and 64% in the quarter and year to date periods in fiscal 2010.  The increase in the cost of products and services sold as a percentage of sales was primarily due to rising prices in certain commodity and petroleum based raw materials as well as greater sales of lower margin products.

 

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

 

Selling, general and administrative expenses increased $131,000 or 2% to $7,209,000 for the quarter ended May 31, 2011 compared to $7,078,000 in the prior year quarter.  Selling, general and administrative expenses increased $460,000 or 2% to $20,461,000 in the fiscal year to date period compared to $20,001,000 in the same period in fiscal 2010.

 

As a percentage of revenues, selling, general and administrative expenses increased to 22% in the quarter ended May 31, 2011 compared to 21% in the prior year period.  This increase was primarily due to greater emphasis and spending on research and development and marketing efforts.  For the current fiscal year to date period, selling, general and administrative expenses as a percentage of revenues decreased to 23% from 24% in the same period in fiscal 2010.  This decrease was primarily due to acquisition costs of $401,000 incurred in fiscal 2010 and lower stock based compensation expense in fiscal 2011. These were partially offset by increased research and development, sales commissions and other selling related expenses resulting from increased revenues in the current year.

 

***Interest Income (Expense)***

 

Interest expense decreased $55,000 to $45,000 for the quarter ended May 31, 2011 compared to $100,000 in the prior year quarter.  Interest expense decreased $105,000 to $154,000 for the fiscal year to date period ended May 31, 2011 compared to $259,000 in the same period in fiscal 2010.  The decrease in interest expense in both the current quarter and year to date period is primarily due to the capitalization of imputed interest on construction in process projects related to our Oxford, MA and Pittsburgh, PA facilities.

 

***Other Income (Expense)***

 

Other income decreased $51,000 or 52% to $48,000 for the quarter ended May 31, 2011 compared to $99,000 in the prior year quarter.  Other income increased $98,000 or 132% to $172,000 for the fiscal year to date period compared to $74,000 in the same period in fiscal 2010.

 

Other income primarily includes interest income and foreign exchange gains caused by changes in exchange rates on transactions or balances denominated in currencies other than the functional currency of our subsidiaries.  The fluctuation in other income in both the quarter and year to date period is

 

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primarily due to foreign exchange gains (losses) caused by the volatility of the pound sterling and the euro, and the subsequent revaluation of some of our European sales transactions completed in other functional currencies (and subsequently translated to the pound sterling and the euro).

 

***Net Income***

 

Consolidated net income decreased $1,434,000 or 33% to $2,966,000 in the quarter ended May 31, 2011 compared to $4,400,000 in the prior year quarter.  Consolidated net income decreased $837,000 or 10% to $7,311,000 for the fiscal year to date period ended May 31, 2011 compared to $8,148,000 in the same period in fiscal 2010.

 

Income from continuing operations decreased $869,000 or 23% to $2,966,000 in the current quarter compared to $3,835,000 in the same period in fiscal 2010.  The decrease in the current quarter was primarily due to increased raw material costs and to a lesser extent from increased sales of lower margin products as compared to the prior year.

 

Income from continuing operations increased $434,000 or 6% to $7,311,000 in the current fiscal year to date period compared to $6,877,000 in the same period in fiscal 2010.  The increase was a result of increased revenues offset by increased raw material costs.

 

Income from discontinued operations of $565,000 and $1,271,000 for the prior year quarter and year to date periods, respectively, was from our Chase EMS business which was sold in June 2010.

 

**Liquidity and Sources of Capital**

 

Our overall cash balance decreased $2,139,000 to $15,201,000 at May 31, 2011 from $17,340,000 at August 31, 2010.  The higher cash balance at August 31, 2010 was a result of the June 2010 sale of our Electronic Manufacturing Services business as well as cash flows generated from operations during that year.  A portion of cash held as of August 31, 2010 was subsequently used in December 2010 to pay our annual dividend.  We will continue to review our current cash balances denominated in foreign currency in light of current tax guidelines, working capital requirements, infrastructure improvements and potential acquisition opportunities.

 

Cash flow provided by operations was $5,918,000 in the first nine months of fiscal 2011 compared to $8,045,000 in the prior year period.  Cash provided by operations during the first half of fiscal 2011 was primarily due to operating income offset by increased purchases of raw material inventory.

 

The ratio of current assets to current liabilities was 2.6 as of both May 31, 2011 and August 31, 2010.

 

Cash flow used in investing activities of $1,832,000 in the nine months ended May 31, 2011 was primarily due to purchases of machinery and equipment and improvements made to our Oxford, MA facility offset by additional proceeds of $1,478,000 received from the sale of our Chase EMS business.

 

Cash flow used in financing activities of $6,667,000 during the period was primarily due to our annual dividend payment and payments made on the bank loans we used to finance our prior year acquisitions of CIM and ServiWrap.  Additionally, we paid the first of three scheduled promissory note payments of $1,000,000 to the CIM shareholders in accordance with the CIM stock purchase agreement, described in more detail below.

 

On October 14, 2010, we announced a cash dividend of $0.35 per share (totaling approximately $3,131,000).  This comprised $0.30 related to earnings from continuing operations and $0.05 related to earnings from discontinued operations.  The dividend was paid on December 3, 2010 to shareholders of record on October 31, 2010.

 

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We continue to have long-term unsecured credit available up to $10 million with Bank of America at the bank’s base lending rate or, at our option, at the effective London Interbank Offered Rate (LIBOR) plus 150 basis points.  As of May 31, 2011 and June 30, 2011, the entire amount of $10 million was available for use under this credit facility.

 

Under the terms of our line of credit, we must comply with certain debt covenants related to (a) the ratio of total liabilities to tangible net worth and (b) the ratio of operating cash flow to debt service on a rolling twelve month basis.  We were in compliance with our debt covenants as of May 31, 2011.  The line of credit currently has a maturity date of March 31, 2013.

 

We borrowed $10.0 million from Bank of America in September 2009 in order to fund our acquisition of CIM.  This borrowing involved an unsecured, three year term note (the “Term Note”) with interest and principal payments due monthly.  Interest is calculated at the applicable LIBOR rate plus a margin of 175 basis points, with interest payments due on the last day of each month.  In addition to monthly interest payments, we are repaying the principal in equal installments of $167,000 per month, beginning on September 30, 2009, and on the last day of each month thereafter, ending on August 31, 2012, when we will repay the remaining principal balance plus any interest then due.  At May 31, 2011, the applicable interest rate was 1.94% per annum and the remaining principal balance was $6.5 million.  The Term Note is subject to the same debt covenants as our line of credit discussed above.  Prepayment of the Term Note is allowed at any time during the term of the loan.

 

As part of the CIM acquisition, we also delivered $3.0 million in non-negotiable promissory notes (the “Notes”) payable to five CIM shareholders, who were the holders of all of the issued and outstanding shares of capital stock of CIM as of the acquisition date.  The principal of the Notes is being paid in three consecutive annual installments of $1 million each, with the first installment paid in September 2010.  The second and third installments will be paid in September 2011 and 2012, respectively.  Interest on the unpaid principal balance of the Notes is accruing at a rate per annum equal to the applicable Federal rate, and will be paid annually with each principal payment.  At May 31, 2011, the applicable interest rate was 0.84% per annum.

 

In December 2009, we borrowed $7.0 million from RBS Citizens in order to fund our acquisition of the ServiWrap product line.  This borrowing involved an unsecured, three year term note (the “Term Loan”) with interest and principal payments due monthly.  Interest is calculated at the applicable LIBOR rate plus a margin of 190 basis points, with interest payments due on the last day of each month.  In addition to monthly interest payments, we are repaying the principal in equal installments of $117,000 each, beginning on January 15, 2010, and on the 15th day of each month thereafter, ending on December 15, 2012, when we will repay the remaining principal balance plus any interest then due.  The Term Loan is subject to the same debt covenants as our line of credit discussed above.  Prepayment of the Term Loan is allowed at any time.  At May 31, 2011, the applicable interest rate was 2.10% per annum and the remaining principal balance was $5,017,000.

 

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

 

We have no significant off balance sheet arrangements.

 

We currently have several on-going capital projects that are important to our long term strategic goals.  These include the renovation of our facility in Oxford, MA and our facility in O’Hara Township, PA.  Machinery and equipment will also be added as needed to increase capacity or enhance operating efficiencies in our other manufacturing plants.

 

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

 

**Recently Issued Accounting Standards**

 

In January 2010, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2010-06, “Fair Value Measurements and Disclosures (ASC Topic 820) — Improving Disclosures about Fair Value Measurements” (“ASU 2010-06”).  The updated standard requires new disclosures around transfers into and out of Levels 1 and 2 in the fair value hierarchy and separate disclosures about purchases, sales, issuances, and settlements to be presented separately on a gross basis in the reconciliation of Level 3 fair value measurements.  The three-level fair value hierarchy is described in more detail in Note 10 to the financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.  ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009 with early adoption permitted, except for the Level 3 reconciliation disclosures which are effective for fiscal years beginning after December 15, 2010.  The portion of the update which was effective for fiscal years beginning after December 15, 2009 was adopted by us effective March 1, 2010 and the adoption did not have any effect on our consolidated financial position, results of operations or cash flows. The portion of the update which is effective for fiscal years beginning after December 15, 2010 will not have an impact on our consolidated financial position, results of operations or cash flows.

 

In June 2011, the FASB issued ASU No. 2011-05, “Comprehensive Income (ASC Topic 220): Presentation of Comprehensive Income,” (“ASU 2011-05”) which amends current comprehensive income guidance.  This accounting update eliminates the option to present the components of other comprehensive income as part of the statement of shareholders’ equity.  Instead, we must report comprehensive income in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements.  ASU 2011-05 will be effective for public companies during the interim and annual periods beginning after Dec. 15, 2011 with early adoption permitted.  The adoption of ASU 2011-05 will not have an impact on our consolidated financial position, results of operations or cash flows as it only requires a change in the format of our current presentation.

 

**Critical Accounting Policies**

 

Our financial statements are prepared in accordance with accounting principles generally accepted in the United States.  To apply these principles, we must make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  In many instances, we reasonably could have used different accounting estimates and, in other instances, changes in the accounting estimates are reasonably likely to occur from period to period. Accordingly, actual results could differ significantly from our estimates.  To the extent that there are material differences between these estimates and actual results, our financial condition or results of operations will be affected.  We base our estimates and judgments on historical experience and other assumptions that we believe to be reasonable at the time and under the circumstances, and we evaluate these estimates and judgments on an ongoing basis.  We refer to accounting estimates and judgments of this type as critical accounting policies, judgments, and estimates.  Management believes there have been no material changes during the nine months ended May 31, 2011 to the critical accounting policies reported in Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section in our Form 10-K for the fiscal year ended August 31, 2010.

 

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**Forward Looking Information**

 

The part of this Quarterly Report on Form 10-Q captioned “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains certain forward-looking statements, which involve risks and uncertainties.  Forward-looking statements include, without limitation, statements as to our future operating results, future economic conditions and expectations or plans relating to the implementation or realization of our strategic goals.  These statements are based on current expectations, estimates and projections about the industries in which we operate, and the beliefs and assumptions made by management.  Readers should refer to the discussions under “Forward Looking Information” and “Risk Factors” contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 2010 concerning certain factors that could cause our actual results to differ materially from the results anticipated in such forward-looking statements. These discussions and risk factors are hereby incorporated by reference into this Quarterly Report.

 

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

 

We limit the amount of credit exposure to any one issuer.  As of May 31, 2011, other than our restricted investments (which are restricted for use in a nonqualified retirement savings plan for certain key employees and directors), all of our funds were either in demand deposit accounts or investment instruments that meet high credit quality standards such as money market funds, government securities, or commercial paper.

 

Our domestic operations have limited currency exposure since substantially all transactions are denominated in U.S. dollars. However, our European operations are subject to currency exchange fluctuations.  We continue to review our policies and procedures to reduce this exposure while maintaining the benefit from these operations and sales to other European customers.  As of May 31, 2011, we had cash balances in the United Kingdom denominated primarily in pounds sterling and equal to US $6,049,000 and cash balances in France denominated primarily in euros and equal to US $673,000.  We will continue to review our current cash balances denominated in foreign currency in light of current tax guidelines, working capital requirements, infrastructure improvements and potential acquisitions.

 

We incurred a foreign currency translation gain for the nine months ended May 31, 2011 in the amount of $1,679,000 related to our European operations which was recorded in other comprehensive income within our Statement of Stockholders’ Equity.  We do not have or utilize any derivative financial instruments.

 

**Item 4 - Controls and Procedures**

 

*Evaluation of disclosure controls and procedures*

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.  In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

We carry out a variety of ongoing procedures, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, to evaluate the effectiveness of the design and operation of our disclosure controls and procedures. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at a reasonable assurance level as of the end of the period covered by this report.

 

*Changes in internal control over financial reporting*

 

There was no change in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

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**Part II — OTHER INFORMATION**

 

**Item 1 — Legal Proceedings**

 

We are one of over 100 defendants in a lawsuit pending in Ohio which alleges personal injury from exposure to asbestos contained in certain Chase products.  The case is captioned Marie Lou Scott, Executrix of the Estate of James T. Scott v. A-Best Products, et al., No. 312901 in the Court of Common 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 had initially been scheduled to begin on April 30, 2007.  However, that date had been postponed and no new trial date has been set.  As of May 2011, there have been no new developments as this Ohio lawsuit has been inactive with respect to us.

 

We were named as one of the defendants in a complaint filed on June 25, 2009, in a lawsuit captioned Lois Jansen, Individually and as Special Administrator 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 husband suffered and died from malignant mesothelioma resulting from exposure to asbestos in his workplace.  The plaintiff has sued seven alleged manufacturers or distributors of asbestos-containing products, including Royston Laboratories (formerly an independent company and now a division of Chase Corporation).  We have filed an answer to the claim denying the material allegations in the complaint.  The parties are currently engaged in discovery.

 

In addition to the matters described above, we are involved from time to time in litigation incidental to the conduct of our business.  Although we do not expect that the outcome in any of these matters, individually or collectively, will have a material adverse effect on our financial condition or results of operations, litigation is inherently unpredictable.  Therefore, judgments could be rendered or settlements entered, that could adversely affect our operating results or cash flows in a particular period.  We routinely assess all of our litigation and threatened litigation as to the probability of ultimately incurring a liability, and record our best estimate of the ultimate loss in situations where we assess the likelihood of loss as probable.

 

**Item 1A — Risk Factors**

 

Please refer to Item 1A in our Form 10-K for the fiscal year ended August 31, 2010 for a discussion of the risk factors which could materially affect our business, financial condition or future results.

 

**Item 6 - Exhibits**

 
| **Exhibit   Number** | ** ** | **Description**                                                                                            |
|----------------------|------------|------------------------------------------------------------------------------------------------------------|
| 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 |

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 
|                   |   | **Chase   Corporation** |
|------------------------|--------|-------------------------|
|                   |   | ** **              |
|                   |   |                    |   |
| Dated:   July 11, 2011 |   | By:                     | /s/   Peter R. Chase |
|                   |   |                    | Peter   R. Chase, |
|                   |   |                    | Chairman   and Chief Executive Officer |
|                   |   |                    |   |
|                   |   |                    |   |
| Dated:   July 11, 2011 |   | By:                     | /s/   Kenneth L. Dumas |
|                   |   |                    | Kenneth   L. Dumas |
|                   |   |                    | Chief   Financial Officer and Treasurer |

 

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