CHASE CORP - Quarter Report: 2008 May (Form 10-Q)

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, 2008

Commission File Number: 1-9852

 

CHASE CORPORATION

(Exact name of registrant as specified in its charter)

 

 

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 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.

 

 

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, 2008 was 8,316,535.

 

 

CHASE CORPORATION

INDEX TO FORM 10-Q

 

For the Quarter Ended May 31, 2008

 

Part I - FINANCIAL INFORMATION
Item 1 – Unaudited Financial Statements
	Consolidated Balance Sheets as of May 31, 2008 and August 31, 2007		3
	Consolidated Statements of Operations for the three and nine months ended May 31, 2008 and 2007		4
	Consolidated Statement of Stockholders’ Equity for the nine months ended May 31, 2008		5
	Consolidated Statements of Cash Flows for the nine months ended May 31, 2008 and 2007		6
	Notes to Consolidated Financial Statements		7
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations			14
Item 3 – Quantitative and Qualitative Disclosures About Market Risk			22
Item 4 – Controls and Procedures			22
Part II – OTHER INFORMATION
Item 1 – Legal Proceedings			23
Item 1A – Risk Factors			23
Item 5 – Other Information			23
Item 6 – Exhibits			24
SIGNATURES			25

 

2

 

Part 1 – FINANCIAL INFORMATION

 

Item 1 – Unaudited Financial Statements

 

CHASE CORPORATION

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

		May 31,			August 31,
		2008			2007
ASSETS
Current Assets:
Cash		$	3,729,060		$	2,443,750
Accounts receivable, less allowance for doubtful accounts of $440,387 and $579,536		17,657,337			17,653,982
Inventories		17,860,689			15,135,773
Prepaid expenses and other current assets		848,074			753,818
Deferred income taxes		729,885			729,885
Total current assets		40,825,045			36,717,208
Property, plant and equipment, net		22,031,327			19,758,276
Other Assets
Goodwill		15,522,221			14,575,640
Intangible assets, less accumulated amortization of $3,994,501 and $3,134,274		6,226,207			7,063,178
Cash surrender value of life insurance		4,680,999			4,588,600
Restricted investments		959,430			1,187,488
Other assets		53,486			74,519
		$	90,298,715		$	83,964,909
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable		$	8,456,773		$	7,135,266
Accrued payroll and other compensation		3,280,422			2,857,524
Accrued expenses - current		4,082,090			2,864,457
Accrued income taxes		1,208,075			1,092,766
Current portion of long-term debt		800,000			2,210,000
Total current liabilities		17,827,360			16,160,013
Long-term debt, less current portion		1,200,000			3,822,500
Deferred compensation		3,527,197			3,489,763
Accrued pension expense		3,750,791			3,271,901
Accrued expenses		—			254,052
Deferred income taxes		721,431			754,718
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 at May 31, 2008 and 10,000,000 shares at August 31, 2007; 8,316,535 shares at May 31, 2008 and 8,219,350 shares at August 31, 2007 issued and outstanding		831,653			821,935
Additional paid-in capital		3,541,253			2,680,170
Accumulated other comprehensive income		513,824			583,799
Retained earnings		58,385,206			52,126,058
Total stockholders’ equity		63,271,936			56,211,962
Total liabilities and stockholders’ equity		$	90,298,715		$	83,964,909

 

See accompanying notes to the consolidated financial statements

 

3

 

CHASE CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

 

		Three Months Ended May 31,						Nine Months Ended May 31,
		2008			2007			2008			2007
Revenue
Sales		$	33,488,936		$	34,177,895		$	95,584,333		$	91,945,638
Royalty and commissions		436,851			365,362			1,223,869			1,345,903
		33,925,787			34,543,257			96,808,202			93,291,541
Costs and Expenses
Cost of products and services sold		22,922,344			23,351,724			65,594,678			65,179,083
Selling, general and administrative expenses		5,976,533			6,150,727			17,840,018			16,499,716
Loss on impairment of goodwill		—			311,000			—			311,000
Operating income		5,026,910			4,729,806			13,373,506			11,301,742
Interest expense		(34,800		)	(240,216		)	(180,503		)	(731,567		)
Other income, net		115,668			54,516			389,633			195,253
Income before income taxes		5,107,778			4,544,106			13,582,636			10,765,428
Income taxes		1,889,878			1,681,319			5,025,575			3,983,208
Net income		$	3,217,900		$	2,862,787		$	8,557,061		$	6,782,220
Net income per common and common equivalent share
Basic		$	0.39		$	0.35		$	1.04		$	0.84
Diluted		$	0.37		$	0.34		$	1.00		$	0.82
Weighted average shares outstanding
Basic		8,312,871			8,187,196			8,239,198			8,037,034
Diluted		8,666,243			8,400,792			8,592,977			8,320,576

 

See accompanying notes to the consolidated financial statements

 

4

 

CHASE CORPORATION

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED MAY 31, 2008

(UNAUDITED)

 

										Accumulated
							Additional			Other						Total
		Common Stock					Paid-In			Comprehensive			Retained			Stockholders’			Comprehensive
		Shares		Amount			Capital			Income			Earnings			Equity			Income
Balance at August 31, 2007		8,219,350		$	821,935		$	2,680,170		$	583,799		$	52,126,058		$	56,211,962
Change in accounting for income tax uncertainties pursuant to adoption of FIN 48													(230,198		)	(230,198		)
Restricted stock grants		53,227		5,322			(5,322		)							—
Amortization of restricted stock grants							244,830									244,830
Stock grants		400		40			7,600									7,640
Exercise of stock options		38,000		3,800			202,200									206,000
Common stock received for payment of stock option exercise		(1,091	)	(109		)	(20,891		)							(21,000		)
Tax benefit from exercise of stock options							328,331									328,331
Common stock issuance pursuant to fully vested restricted stock units		6,649		665			104,335									105,000
Cash dividend paid, $0.25 per share													(2,067,715		)	(2,067,715		)
Foreign currency translation adjustment, net of tax										(29,446		)				(29,446		)	$	(29,446	)
Net unrealized (loss) on restricted investments, net of tax										(40,529		)				(40,529		)	(40,529		)
Net income													8,557,061			8,557,061			8,557,061
Comprehensive income																—			$	8,487,086
Balance at May 31, 2008		8,316,535		$	831,653		$	3,541,253		$	513,824		$	58,385,206		$	63,271,936

 

See accompanying notes to the consolidated financial statements

 

5

 

CHASE CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

		Nine Months Ended May 31,
		2008			2007
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	8,557,061		$	6,782,220
Adjustments to reconcile net income to net cash provided by operating activities
Loss (Gain) on sale of equipment		4,198			(2,900		)
Loss on impairment of goodwill		—			311,000
Depreciation		2,032,866			1,900,178
Amortization		876,715			731,854
Provision for losses on trade receivables		31,866			147,350
Stock based compensation		1,423,566			678,545
Excess tax benefit from exercise of stock options		(328,331		)	(1,968,016		)
Increase (decrease) from changes in assets and liabilities
Accounts receivable		70,204			(3,877,481		)
Inventories		(2,364,084		)	(1,063,233		)
Prepaid expenses & other assets		(96,152		)	(719,300		)
Accounts payable		645,648			322,769
Accrued expenses		722,838			1,857,125
Accrued income taxes		199,586			1,110,805
Deferred compensation		(779,022		)	(651,633		)
Net cash provided by operating activities		10,996,959			5,559,283
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment		(2,168,611		)	(3,286,677		)
Purchases of intangible assets		—			(5,999		)
Contingent purchase price for acquisition		(485,159		)	(290,967		)
Payments for acquisitions, net of cash acquired		(1,489,769		)	(3,073,892		)
Proceeds from sale of equipment		15,000			2,900
Investment in restricted investments, net of withdrawals		187,529			91,925
Distributions from cost based investment		20,619			—
Payments for cash surrender value life insurance, net of valuation decrease		(92,399		)	(123,869		)
Net cash used in investing activities		(4,012,790		)	(6,686,579		)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on long-term debt		18,826,021			28,406,163
Payments of principal on debt		(22,858,521		)	(28,094,342		)
Dividend paid		(2,067,715		)	(1,589,162		)
Proceeds from exercise of common stock options		185,000			777,160
Excess tax benefit from exercise of stock options		328,331			1,968,016
Payments of statutory minimum taxes on stock options and restricted stock		—			(1,444,852		)
Net cash provided by / (used in) financing activities		(5,586,884		)	22,983
INCREASE (DECREASE) IN CASH		1,397,285			(1,104,313		)
Effect of foreign exchange rates on cash		(111,975		)	106,782
CASH, BEGINNING OF PERIOD		2,443,750			2,416,097
CASH, END OF PERIOD		$	3,729,060		$	1,418,566
Non-cash Investing and Financing Activities
Issuance of stock based compensation previously accrued for		$	105,000		$	113,933
Common stock received for payment of stock option exercises		$	21,000		$	3,079,588
Accrued contingent payments related to acquisitions		$	—		$	110,000
Property, plant & equipment additions included in accounts payable		$	189,029		$	—
Accrual for future contingent payments related to acquisitions		$	184,422		$	—

 

See accompanying notes to the consolidated financial statements

 

6

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

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 (“Chase” or the “Company”) filed audited financial statements which included all information and notes necessary for such presentation for the three years ended August 31, 2007 in conjunction with the Company’s 2007 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, 2008, the results of operations and cash flows for the interim periods ended May 31, 2008 and 2007, and changes in stockholders’ equity for the interim period ended May 31, 2008.

 

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 U.S. dollar as the reporting currency for financial reporting.  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.

 

Certain amounts reported in prior years have been reclassified to be consistent with the current year presentation.  These reclassifications had no effect on the Company’s financial position or results of operations.

 

The results of operations for the interim period ended May 31, 2008 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year.  These interim consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended August 31, 2007, which are contained in the Company’s 2007 Annual Report on Form 10-K.

 

Note 2 – Inventories

 

Inventories consist of the following as of May 31, 2008 and August 31, 2007:

 

		May 31, 2008			August 31, 2007
Raw materials		$	10,126,137		$	8,245,933
Finished and in process		7,734,552			6,889,840
Total Inventories		$	17,860,689		$	15,135,773

 

7

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 3 – Net Income Per Share

 

Net income per share is calculated as follows:

 

		Three Months Ended May 31,						Nine Months Ended May 31,
		2008			2007			2008			2007
Net income		$	3,217,900		$	2,862,787		$	8,557,061		$	6,782,220
Weighted average common shares outstanding		8,312,871			8,187,196			8,239,198			8,037,034
Additional dilutive common stock equivalents		353,372			213,596			353,779			283,542
Diluted shares outstanding		8,666,243			8,400,792			8,592,977			8,320,576
Net income per share - Basic		$	0.39		$	0.35		$	1.04		$	0.84
Net income per share - Diluted		$	0.37		$	0.34		$	1.00		$	0.82

 

Note 4 – Stock Based Compensation

 

As part of their annual retainer, non-employee members of the Board of Directors receive $15,000 of Chase Corporation common stock, in the form of Restricted Stock or Restricted Stock Units valued at the closing price of the day preceding the first day of the new year of Board service which generally coincides with the Company’s annual shareholder meeting.  The stock award will vest one year from the date of grant. In January 2008, non-employee members of the Board received a total grant of 4,569 shares of restricted stock for service for the period from February 1, 2008 through February 1, 2009.  The shares of restricted stock will vest at the conclusion of this service period. The Company is recognizing this compensation expense over the twelve month vesting period on a ratable basis.

 

In April 2008, William H Dykstra retired from the Company’s Board of Directors.  In accordance with the vesting provisions of his restricted stock agreement he forfeited 634 of the restricted shares granted to him in January 2008.  In April 2008, a total of 692 shares of restricted stock were issued to existing members of the Board for committee reassignments, as well as new Board member Thomas Wroe, as a result of Mr. Dykstra’s retirement.  These shares are for service on the Company’s Board from April 1, 2008 through February 1, 2009 and will vest at the conclusion of the service period.

 

In August 2007, the Board of Directors of Chase Corporation approved a plan for issuing a performance and service based restricted stock grant of approximately 48,600 shares to key members of management with an issue date of September 1, 2007 and a vesting date of August 31, 2010.  These shares are subject to a performance measurement based upon the results of fiscal 2008 which will determine the final calculation of the number of shares that will be issued (which may be greater than or less than 48,600 shares). Compensation expense is being recognized on a ratable basis over the vesting period based on quarterly probability assessments.

 

Note 5 – Segment Information

 

The Company operates in two business segments, a Specialized Manufacturing segment and an Electronic Manufacturing Services segment.  Specialized Manufacturing products include insulating and conducting materials for wire and cable manufacturers, custom pressure sensitive labels, protective coatings for pipeline applications and moisture protective coatings for electronics, as well as high performance polymeric asphalt additives.  Electronic Manufacturing Services include printed circuit board and electro-mechanical

 

8

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

assembly services for the electronics industry.  The Company evaluates segment performance based upon income before income taxes.

 

The following table summarizes information about the Company’s reportable segments:

 

		Three Months Ended May 31,						Nine Months Ended May 31,
		2008			2007			2008			2007
Revenues from external customers
Specialized Manufacturing		$	28,596,079		$	29,621,788		$	82,391,948		$	79,230,789
Electronic Manufacturing Services		5,329,708			4,921,469			14,416,254			14,060,752
Total		$	33,925,787		$	34,543,257		$	96,808,202		$	93,291,541
Income before income taxes
Specialized Manufacturing		$	5,674,590		$	5,986,199		$	15,875,360		$	14,045,395
Electronic Manufacturing Services		679,869			690,832			1,726,089			1,642,286
Total for reportable segments		6,354,459			6,677,031			17,601,449			15,687,681
Corporate and Common Costs		(1,246,681		)	(2,132,925		)	(4,018,813		)	(4,922,253		)
Total		$	5,107,778		$	4,544,106		$	13,582,636		$	10,765,428

 

		May 31, 2008			August 31, 2007
Total assets
Specialized Manufacturing		$	63,915,675		$	59,725,253
Electronic Manufacturing Services		14,286,865			12,988,314
Total for reportable segments		78,202,540			72,713,567
Corporate and Common Assets		12,096,175			11,251,342
Total		$	90,298,715		$	83,964,909

 

Note 6 – Goodwill and Other Intangibles

 

The changes in the carrying value of goodwill, by reportable segment, are as follows:

 

		Specialized Manufacturing			Electronic Manufacturing Services			Consolidated
Balance at August 31, 2007		$	8,576,752		$	5,998,888		$	14,575,640
Acquisition of E-Poxy Engineered Materials - additional earnout		5,277			—			5,277
Chase Protective Coatings Ltd.		322,542			—			322,542
Acquisition of Paper Tyger - additional earnout		479,882			—			479,882
Acquisition of Metronelec - additional earnout		184,422			—			184,422
FX translation adjustment		(45,542		)	—			(45,542		)
Balance at May 31, 2008		$	9,523,333		$	5,998,888		$	15,522,221

 

Management is still finalizing the purchase price allocation for assets acquired by the Company’s wholly owned subsidiary, Chase Protective Coatings Ltd. (see Note 7).  The amount allocated to goodwill above as well as other identifiable intangible assets will be finalized no later than the end of the current fiscal year (August 31, 2008).

 

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.

 

9

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Intangible assets subject to amortization consist of the following at May 31, 2008 and August 31, 2007:

 

		Weighted-Average		Gross Carrying		Accumulated		Net Carrying
		Amortization Period		Value		Amortization		Value
May 31, 2008
Patents and agreements		12.7 years		2,243,678		1,821,280		422,398
Formulas		9.2 years		1,261,235		306,291		954,944
Trade names		3.8 years		281,294		191,103		90,191
Customer lists and relationships		10.7 years		6,422,886		1,675,827		4,747,059
August 31, 2007
Patents and agreements		12.7 years		2,243,678		1,660,166		583,512
Formulas		9.2 years		1,261,235		279,647		981,588
Trade names		3.8 years		281,294		136,056		145,238
Customer lists and relationships		10.7 years		6,399,630		1,058,405		5,341,225

 

In addition to the intangible assets summarized above, the Company also has corporate trademarks with an indefinite life and a carrying value of $11,615 at May 31, 2008 and August 31, 2007.

 

Aggregate amortization expense related to intangible assets for the nine months ended May 31, 2008 and 2007 was $876,715 and $731,854, respectively.  Estimated amortization expense for the remainder of fiscal year 2008 and for each of the five succeeding fiscal years is as follows:

 

Years ending August 31,
2008 (remaining three months)			$	246,405
2009			927,641
2010			828,631
2011			775,577
2012			754,986
2013			638,098
			$	4,171,338

 

Note 7 – Acquisitions

 

Chase Protective Coatings Ltd.

 

On September 1, 2007, Chase Corporation purchased certain product lines and a related manufacturing facility in Rye, East Sussex, England through its wholly owned subsidiary, Chase Protective Coatings Ltd.  For over 35 years, this business has been a leading manufacturer of waterproofing and corrosion protection systems for oil, gas and water pipelines and has been a major supplier to Europe, the Middle East and Southeast Asia.   The purchase price for this acquisition was £738,936 (US $1,489,769 at the time of the acquisition) and was financed out of cash flow from the Company’s operations.  The effective date for this acquisition was September 1, 2007 and the results of this acquisition have been included in the Company’s financial statements since then.

 

Management is still finalizing the purchase price allocation as it relates to the value of the intangible assets acquired.  All assets acquired, including goodwill, are included in the Company’s Specialized Manufacturing Segment.

 

10

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 8 – Commitments and Contingencies

 

From time to time, the Company is involved in litigation incidental to the conduct of its business. The Company is not party to any lawsuit or proceeding that, in management’s opinion, is likely to seriously harm the Company’s business, results of operations, financial conditions or cash flows.

 

The Company is one of over 100 defendants in a personal injury lawsuit, pending in Ohio, which alleges personal injury from exposure to asbestos contained in certain Chase products.  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 has since been postponed and no new trial date has been set.  Since that time, the Ohio lawsuit has been inactive with respect to Chase.

 

Note 9 – Long Term Debt

 

The Company has a long-term unsecured revolving credit facility available up to a maximum amount of $10 million at the bank’s base lending rate or, at the option of the Company, at the effective 30-Day London Interbank Offered Rate (LIBOR) plus 1.25 percent.  As of May 31, 2008, the entire amount of $10 million was available for use.  Any future outstanding balance on this long-term unsecured credit facility will be included in scheduled principal payments at its maturity.  On February 29, 2008, the Company executed an amendment to this credit facility, extending its maturity to March 31, 2011.  All other terms of the credit facility remain the same.

 

Note 10 - Pensions and Other Post Retirement Benefits

 

The components of net periodic benefit cost for the three and nine months ended May 31, 2008 and 2007 are as follows:

 

		Three Months Ended						Nine Months Ended
		May 31, 2008			May 31, 2007			May 31, 2008			May 31, 2007
Service cost		$	103,313		$	104,220		$	309,939		$	312,660
Interest cost		125,913			125,320			377,739			375,960
Expected return on plan assets		(101,714		)	(110,778		)	(305,142		)	(332,334		)
Amortization of prior service cost		21,996			21,996			65,988			65,988
Amortization of unrecognized loss		10,122			12,242			30,366			36,726
Net periodic benefit cost		$	159,630		$	153,000		$	478,890		$	459,000

 

When funding is required, the Company’s policy is to contribute amounts that are deductible for federal income tax purposes.  As of May 31, 2008, the Company was not required to make any contributions nor did it make any voluntary contributions to the pension plan.  In June 2008, the Company made a $500,000 voluntary contribution.

 

11

 

CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Note 11 – Income Taxes

 

Effective September 1, 2007, the Company adopted the provisions of Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in the financial statements by prescribing a recognition threshold and measurement attribute for recognition and measurement of a tax position taken or expected to be taken in a tax return.  As a result of the implementation of FIN 48, the Company performed a comprehensive review of its uncertain tax positions and identified $230,198 in unrecognized tax benefits that were accounted for as a reduction to the September 1, 2007 balance of retained earnings, in accordance with the adoption provisions of FIN 48.  At September 1, 2007, the total amount of unrecognized tax benefits was $639,530.  If this amount were recognized, it would favorably impact the effective tax rate for the period of recognition.  The Company does not anticipate unrecognized tax benefits will significantly increase or decrease within the next twelve months.

 

The unrecognized tax benefits mentioned above include an aggregate $291,338 of interest and accrued penalties. Upon adoption of FIN 48, the Company has elected an accounting policy to classify interest expense on underpayments of income taxes and accrued penalties related to unrecognized tax benefits in the income tax provision. Prior to the adoption of FIN 48, the Company’s policy was to classify interest expense on underpayments of income taxes as interest expense and to classify penalties as an operating expense in arriving at earnings before income taxes.

 

The Company is subject to U.S. federal income tax as well as to income tax of multiple state jurisdictions and foreign tax jurisdictions.  The statute of limitations for all material federal, state, and local tax filings remains open for tax years subsequent to 2003.  All tax years in foreign jurisdictions currently remain open, as the Company’s international operations did not commence until 2005.

 

Note 12 – Recent Accounting Pronouncements

 

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“FAS 157”). The provisions of FAS 157 define fair value, establish a framework for measuring fair value in generally accepted accounting principles, and expand disclosures about fair value measurements. The provisions of FAS 157 are effective for fiscal years beginning after November 15, 2007.  In February 2008, the FASB issued FASB Staff Position 157-2 (“FSP 157-2”) which defers the effective date of FAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).  FSP 157-2 will apply to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years.  The Company is currently evaluating the impact of the provisions of FAS 157.

 

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — including an amendment of FAS No. 115”, (“FAS 159”). FAS 159 allows measurement at fair value of eligible financial assets and liabilities that are not otherwise measured at fair value. If the fair value option for an eligible item is elected, unrealized gains and losses on that item shall be reported in current earnings at each subsequent reporting date. FAS 159 also establishes presentation and disclosure requirements designed to draw comparison between the different measurements attributes a company elects for similar types of assets and liabilities. FAS 159 is effective for fiscal years beginning after November 15, 2007. The Company is assessing the impact, if any, the adoption of FAS 159 will have on its consolidated financial statements.

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“FAS 141R”), which replaces FAS 141. FAS 141R establishes principles and requirements for how an acquirer in a business combination recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any controlling interest; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. FAS 141R is to be applied prospectively to business combinations for which the acquisition date is on or after an entity’s fiscal year that begins after December 15, 2008. Earlier adoption is prohibited.  The Company expects that FAS 141R will have an impact on accounting for business combinations once adopted, but the effect is dependent upon acquisitions at that time.

 

In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51 (“FAS 160”). FAS 160 establishes accounting and reporting standards that require the ownership interest in subsidiaries held by parties other than the parent be clearly identified and presented in the consolidated balance sheets within equity, but separate from the parent’s equity; the amount of consolidated net income attributable to the parent and the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of earnings; and changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently. This statement is effective for fiscal years beginning on or after December 15, 2008.  Earlier adoption is prohibited. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.

 

In September 2006, the FASB ratified Emerging Issues Task Force (“EITF”) Issue 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements.”  In accordance with EITF Issue 06-4, an agreement by the employer to share a portion of the proceeds of a life insurance policy with the employee during the post retirement period is a postretirement benefit arrangement that must be accounted for under FASB Statement No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (FAS 106), or APB Opinion No. 12, Omnibus Opinion—1967 (APB 12).  EITF Issue 06-4 becomes effective in the first quarter of fiscal 2009 (fiscal year beginning September 1, 2008).  The Company is currently evaluating the potential impact of EITF Issue 06-4.

 

In March 2007, the FASB ratified Emerging Issues Task Force (“EITF”) Issue 06-10, “Accounting for the Deferred Compensation and Postretirement Benefits Aspects of Collateral Assignment Split-Dollar Life Insurance Arrangements.”  In accordance with EITF Issue 06-10, an employer should recognize a liability for the postretirement benefit related to a collateral assignment split-dollar life insurance arrangement in accordance with either FASB Statement No. 106, Employers’ Accounting for Postretirement Benefits Other Than Pensions (FAS 106), or APB Opinion 12, Omnibus Opinion—1967 (APB 12).  EITF Issue 06-10 becomes effective in the first quarter of fiscal 2009 (fiscal year beginning September 1, 2008).  The Company is currently evaluating the potential impact of EITF Issue 06-10.

 

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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 the Company’s Annual Report on Form 10-K filed for the fiscal year ended August 31, 2007.

 

Recent Developments

 

In September 2007, Chase Corporation purchased certain product lines and a related manufacturing facility in Rye, East Sussex, England through its wholly owned subsidiary, Chase Protective Coatings Ltd.  For over 35 years, this business has been a leading manufacturer of waterproofing and corrosion protection systems for oil, gas and water pipelines and has been a major supplier to Europe, the Middle East and Southeast Asia.  This new acquisition joins Chase’s North American based Tapecoat® and Royston® brands to broaden the protective coatings product line and better address increasing global demand.

 

Overview

 

Overall performance in the first nine months of fiscal year 2008 continues to exceed prior year results as a result of strong demand, favorable product mix, diligent cost management practices, and efficiency improvements.  Although revenue for the Company in the current quarter was slightly below the record high observed in the same period last year, product mix and proactive cost containment have resulted in net income surpassing the prior year quarter.  The formation of Humiseal Europe SARL in March 2007 and Chase Protective Coatings Ltd. in September 2007 contributed to the revenue growth for the year to date period along with the organic sales growth seen from existing facilities and product lines.  In spite of the inflation that has impacted raw materials prices, management’s emphasis on making strategic purchases has helped maintain margins on most of the Company’s key product lines through the first nine months of fiscal 2008.  During the remainder of the fiscal year, management will closely monitor raw material purchasing efforts as additional pressure on profit margins is expected with increasing raw material and energy costs.

 

The Chase Electronic Manufacturing Services segment experienced strong demand during the third quarter that resulted in a record high in revenues.   This segment is benefiting from management’s continued emphasis on expanding its customer base in order to utilize investments made in capital equipment over the past few years, although rising manufacturing costs and ongoing pressure from key customers to keep sale prices low continues to negatively impact margins.  For the remainder of fiscal 2008, management’s attention will be to maintain a healthy backlog of customer orders and proactively manage overhead costs to assist with profitability.

 

The Company continues to renovate its manufacturing plant (acquired in April 2007) in the Pittsburgh area and anticipates that the majority of the building improvements will be completed over the remainder of the current calendar year. This facility will allow for additional production capacity and improved  productivity with existing product lines as the Company continues to review efficiency enhancements to its manufacturing operations as a means of better positioning its businesses and maximizing resources.

 

For the remainder of the fiscal year, management will continue to pay close attention to the overall economy, including the housing market, inflation, and cost of petroleum related goods and services and the impact that the global markets will have on the Company’s eight core product lines.  Brands such as HumiSeal®, Paper Tyger®, Chase & Sons® and Chase BlH2Ock® remain a primary focus in the Company’s effort to grow sales organically; however, management continues to seek strategic acquisitions to drive future growth.

 

 

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The Company has two reportable segments summarized below:

 

Segment		Product Lines			Manufacturing Focus and Products
Specialized Manufacturing Segment			·  Wire and Cable ·  Electronic Coatings ·  Transportation ·  Pipeline ·  Construction ·  Packaging and Industrial ·  Digital and Print Media		Produces protective coatings and tape products including insulating and conducting materials for wire and cable manufacturers, protective coatings for pipeline applications, moisture protective coatings for electronics, high performance polymeric asphalt additives and custom pressure sensitive labels.
Electronic Manufacturing Services Segment			·  Contract Electronic Manufacturing Services		Provides assembly and turnkey contract manufacturing services including printed circuit board and electromechanical assembly services to the electronics industry operating principally in the United States.

 

Results of Operations

 

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

 

							Income Before			% of
				Revenue			Income Taxes			Revenue
Three Months Ended May 31, 2008
Specialized Manufacturing				$	28,596		$	5,675		20	%
Electronic Manufacturing Services				5,330			680			13
				$	33,926		6,355			19
	Less corporate and common costs						(1,247		)
	Income before income taxes						$	5,108
Three Months Ended May 31, 2007
Specialized Manufacturing				$	29,622		$	5,986		20	%
Electronic Manufacturing Services				4,921			691			14
				$	34,543		6,677			19
	Less corporate and common costs						(2,133		)
	Income before income taxes						$	4,544
Nine Months Ended May 31, 2008
Specialized Manufacturing				$	82,392		$	15,875		19	%
Electronic Manufacturing Services				14,416			1,726			12
				$	96,808		17,601			18
	Less corporate and common costs						(4,018		)
	Income before income taxes						$	13,583
Nine Months Ended May 31, 2007
Specialized Manufacturing				$	79,231		$	14,045		18	%
Electronic Manufacturing Services				14,061			1,642			12
				$	93,292		15,687			17
	Less corporate and common costs						(4,922		)
	Income before income taxes						$	10,765

 

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