CHASE CORP - Quarter Report: 2010 February (Form 10-Q)

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 February 28, 2010

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 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.

 

 

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 March 31, 2010 was 8,814,355.

 

 

Table of Contents

 

CHASE CORPORATION

INDEX TO FORM 10-Q

 

For the Quarter Ended February 28, 2010

 

Part I - FINANCIAL INFORMATION
Item 1 – Unaudited Financial Statements
	Consolidated Balance Sheets as of February 28, 2010 and August 31, 2009	3
	Consolidated Statements of Operations for the three and six months ended February 28, 2010 and 2009	4
	Consolidated Statement of Stockholders’ Equity for the six months ended February 28, 2010	5
	Consolidated Statements of Cash Flows for the six months ended February 28, 2010 and 2009	6
	Notes to Consolidated Financial Statements	7
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		18
Item 3 – Quantitative and Qualitative Disclosures About Market Risk		25
Item 4 – Controls and Procedures		25
Part II – OTHER INFORMATION
Item 1 – Legal Proceedings		26
Item 1A – Risk Factors		26
Item 4 – Submission of Matters to a Vote of Security Holders		27
Item 6 – Exhibits		27
SIGNATURES		28

 

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Part I – FINANCIAL INFORMATION

 

Item 1 – Unaudited Financial Statements

 

CHASE CORPORATION
CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

In thousands, except share and per share amounts

 

		February 28,			August 31,
		2010			2009
ASSETS
Current Assets:
Cash		$	3,333		$	11,643
Accounts receivable, less allowance for doubtful accounts of $411 and $350		19,268			14,536
Inventories		16,313			13,941
Prepaid expenses and other current assets		2,440			607
Deferred income taxes		368			471
Total current assets		41,722			41,198
Property, plant and equipment, net		28,349			23,219
Other Assets:
Goodwill		23,109			14,606
Intangible assets, less accumulated amortization of $5,922 and $4,869		19,630			4,497
Cash surrender value of life insurance		5,770			5,684
Restricted investments		627			573
Deferred income taxes		—			1,264
Other assets		91			25
		$	119,298		$	91,066
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	8,065		$	6,319
Accrued payroll and other compensation		1,103			2,561
Accrued stock based compensation		335			302
Accrued expenses		2,874			2,555
Accrued income taxes		1,050			1,346
Current portion of long-term debt		4,400			—
Total current liabilities		17,827			13,083
Long-term debt, less current portion		18,708			—
Deferred compensation		1,554			1,525
Accumulated pension obligation		6,036			5,690
Other liabilities		580			555
Deferred income taxes		2,197			—
Commitments and Contingencies (Note 9)
Stockholders’ Equity:
First Serial Preferred Stock, $1.00 par value: Authorized 100,000 shares; none issued Common stock, $.10 par value: Authorized 20,000,000 shares; 8,797,215 shares at February 28, 2010 and 8,714,431 shares at August 31, 2009 issued and outstanding		880			871
Additional paid-in capital		8,515			7,489
Accumulated other comprehensive loss		(4,405		)	(3,563		)
Retained earnings		67,406			65,416
Total stockholders’ equity		72,396			70,213
Total liabilities and stockholders’ equity		$	119,298		$	91,066

 

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 February 28,						Six Months Ended February 28,
		2010			2009			2010			2009
Revenues
Sales		$	31,043		$	22,751		$	59,371		$	53,358
Royalties and commissions		346			253			749			715
		31,389			23,004			60,120			54,073
Costs and Expenses
Cost of products and services sold		21,650			17,640			40,404			39,199
Selling, general and administrative expenses		6,924			4,847			13,581			10,881
Operating income		2,815			517			6,135			3,993
Interest expense		(100		)	(5		)	(159		)	(10		)
Other income (expense)		(134		)	209			(25		)	326
Income before income taxes		2,581			721			5,951			4,309
Income taxes		955			267			2,202			1,595
Net income		$	1,626		$	454		$	3,749		$	2,714
Net income available to common shareholders, per common and common equivalent share
Basic		$	0.18		$	0.05		$	0.42		$	0.32
Diluted		$	0.18		$	0.05		$	0.42		$	0.31
Weighted average shares outstanding
Basic		8,705,638			8,402,995			8,703,880			8,401,041
Diluted		8,778,028			8,677,912			8,779,386			8,668,867

 

See accompanying notes to the consolidated financial statements

 

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CHASE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY

SIX MONTHS ENDED FEBRUARY 28, 2010

(UNAUDITED)

 

In thousands, except share and per share amounts

 

													Accumulated
								Additional					Other										Total
		Common Stock						Paid-In					Comprehensive					Retained					Stockholders’					Comprehensive
		Shares		Amount				Capital					Income (Loss)					Earnings					Equity					Income
Balance at August 31, 2009		8,714,431		$	871				$	7,489				$	(3,563		)		$	65,416				$	70,213
Restricted stock grants		69,645		7				(7			)		—					—					—
Amortization of restricted stock grants		—		—				694					—					—					694
Amortization of stock option grants		—		—				264					—					—					264
Exercise of stock options		13,700		2				71					—					—					73
Common stock retained to pay statutory minimum withholding taxes on common stock		(561	)	—				(7			)		—					—					(7			)
Tax benefit from exercise of stock options		—		—				11					—					—					11
Cash dividend paid, $0.20 per share		—		—				—					—					(1,759			)		(1,759			)
Pension amortization, net of tax of $60		—		—				—					90					—					90					90
Foreign currency translation adjustment, net of tax of $509		—		—				—					(944			)		—					(944			)		$		(944	)
Net unrealized gain on restricted investments, net of tax of $8		—		—				—					12					—					12					12
Net income		—		—				—					—					3,749					3,749					3,749
Comprehensive income																												$		2,907
Balance at February 28, 2010		8,797,215		$	880				$	8,515				$	(4,405		)		$	67,406				$	72,396

 

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

 

		Six Months Ended February 28,
		2010			2009
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	3,749		$	2,714
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation		1,533			1,416
Amortization		1,241			469
Provision for losses on trade receivables		100			(77		)
Stock based compensation		991			1,121
Realized loss (gain) on restricted investments		(5		)	190
Excess tax benefit from stock based compensation		(11		)	(6		)
Increase (decrease) from changes in assets and liabilities (net of effect of acquisitions)
Accounts receivable		(4,344		)	5,949
Inventories		(1,344		)	255
Prepaid expenses & other assets		(1,797		)	(407		)
Accounts payable		1,605			(3,125		)
Accrued expenses		(953		)	(3,458		)
Accrued income taxes		268			1,415
Deferred compensation		29			(717		)
Net cash provided by operating activities		1,062			5,739
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment		(1,860		)	(3,607		)
Payments for acquisitions, net of cash acquired		(25,593		)	(335		)
Withdrawals from restricted investments, net of contributions		(28		)	61
Distributions from cost based investment		—			1
Payments for cash surrender value life insurance, including valuation (increase)/decrease		(86		)	(79		)
Net cash used in investing activities		(27,567		)	(3,959		)
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on long-term debt		27,112			12,290
Payments of principal on debt		(7,005		)	(11,635		)
Dividend paid		(1,759		)	(2,986		)
Proceeds from exercise of common stock options		73			16
Payments of statutory minimum taxes on stock options and restricted stock		(7		)	—
Excess tax benefit from stock based compensation		11			6
Net cash provided by (used in) financing activities		18,425			(2,309		)
INCREASE (DECREASE) IN CASH		(8,080		)	(529		)
Effect of foreign exchange rates on cash		(230		)	(816		)
CASH, BEGINNING OF PERIOD		11,643			3,917
CASH, END OF PERIOD		$	3,333		$	2,572
Non-cash Investing and Financing Activities
Issuance of stock based compensation previously accrued for		$	135		$	105
Acquisition holdback payments, previously accrued for		—			$	303
Property, plant & equipment additions included in accounts payable		$	228		$	132
Notes payable to C.I.M. 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, 2009 in conjunction with its 2009 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 February 28, 2010, the results of operations and cash flows for the interim periods ended February 28, 2010 and 2009, and changes in stockholders’ equity for the interim period ended February 28, 2010.

 

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.  The financial position and results of operations of the Company’s HumiSeal Europe Ltd and Chase Protective Coatings 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 euros 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.

 

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 February 28, 2010 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, 2009, which are contained in the Company’s 2009 Annual Report on Form 10-K.

 

Note 2 — Recent Accounting Policies

 

Recently Adopted Accounting Pronouncements

 

In June 2009, the Financial Accounting Standards Board’s (FASB) approved the “FASB Accounting Standards Codification” (“ASC” or the “Codification”) as the single source of authoritative nongovernmental U.S. GAAP.  The Codification does not change current U.S. GAAP, but is intended to simplify user access to all authoritative U.S. GAAP by providing all the authoritative literature related to a particular topic in one place.  All existing accounting standard documents will be superseded and all

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

other accounting literature not included in the Codification will be considered nonauthoritative.  The Codification became effective for the Company in the quarter ending November 30, 2009 and the adoption did not have any effect on the Company’s consolidated financial position, results of operations or cash flows.

 

In December 2007, the FASB issued new guidance under ASC Topic 805, “Business Combinations” (“ASC 805”).  The new guidance under ASC 805 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 noncontrolling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase; expenses acquisition related costs as incurred; and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination.  The Company adopted the new guidance under ASC 805 as of September 1, 2009, and its recent acquisitions of C.I.M. Industries, Inc. (“C.I.M.”) and the ServiWrap® product lines (“ServiWrap”) were both accounted for under this standard.

 

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 Company adopted the provisions of this standard on September 1, 2009, and the presentation of earnings per share for previously reported periods has been adjusted to reflect the retrospective adoption of this standard.

 

Recently Issued Accounting Pronouncement

 

In December 2008, the FASB issued ASC Topic 715, “Compensation—Retirement Benefits” (“ASC 715”).  ASC 715 provides additional guidance on an employer’s disclosures about plan assets of a defined benefit pension or other post-retirement plan enabling users of the financial statements to assess the inputs and valuation techniques used to develop fair value measurements of plan assets at the annual reporting date.  The guidance requires more detailed disclosures about the assets of a defined benefit pension or other post-retirement plan and is effective for fiscal years ending after December 15, 2009.  Since the guidance only requires enhanced disclosures, the Company does not expect the adoption of ASC 715 to have an impact on its consolidated financial position and results of operations.

 

Note 3 — Inventories

 

Inventories consist of the following as of February 28, 2010 and August 31, 2009:

 

		February 28, 2010			August 31, 2009
Raw materials		$	9,123		$	7,973
Finished and in process		7,190			5,968
Total Inventories		$	16,313		$	13,941

 

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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

 

The calculation of earnings per share under the recently issued guidance within ASC 260 is as follows:

 

		Three Months Ended February 28,						Six Months Ended February 28,
		2010			2009			2010			2009
Basic Earnings per Share
Net income		$	1,626		$	454		$	3,749		$	2,714
Income allocated to participating securities		46			10			109			60
Net income available to common shareholders		$	1,580		$	444		$	3,640		$	2,654
Basic weighted averages shares outstanding		8,705,638			8,402,995			8,703,880			8,401,041
Net income per share - Basic		$	0.18		$	0.05		$	0.42		$	0.32
Diluted Earnings per Share
Net income		$	1,626		$	454		$	3,749		$	2,714
Income allocated to participating securities		46			9			108			58
Net income available to common shareholders		$	1,580		$	445		$	3,641		$	2,656
Basic weighted averages shares outstanding		8,705,638			8,402,995			8,703,880			8,401,041
Additional dilutive common stock equivalents		72,390			274,917			75,506			267,826
Diluted weighted averages shares outstanding		8,778,028			8,677,912			8,779,386			8,668,867
Net income per share - Diluted		$	0.18		$	0.05		$	0.42		$	0.31

 

For the three and six months ended February 28, 2010 and 2009, stock options to purchase 250,000 shares of common stock were outstanding, but were not included in the calculation of diluted income per share in either period because the options’ exercise prices were greater than the average market price of the common stock and thus their inclusion would be anti-dilutive.

 

Note 5 — Stock Based Compensation

 

In August 2008, the Board of Directors of Chase Corporation approved a plan for issuing a performance and service based restricted stock grant of 50,657 shares in the aggregate, subject to adjustment, to key members of management with an issue date of September 1, 2008 and a vesting date of August 31, 2011.  Based on the fiscal year 2009 financial results coming in below the target, the aggregate size of the grant was reduced by 15,944 shares of restricted stock subsequent to the end of fiscal year 2009 in accordance with the performance measurement criteria.   The adjusted restricted stock award of 34,713 shares was finalized in the quarter ended November 30, 2009 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 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.  These shares are subject to a performance measurement based upon the results of fiscal year 2010 which will determine the final calculation of the number of shares that will be issued (which may be greater than or less than 76,874 shares).  Compensation expense is being recognized on a ratable basis over the vesting period based on quarterly probability assessments.

 

In December 2009, restricted stock in amounts of 2,377 shares and 8,421 shares related to the September 2008 and 2009 grants, respectively, were forfeited in conjunction with the retirement of an executive officer of the Company.

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

As part of their annual retainer, non-employee members of the Board of Directors receive a combined total of $135,000 of Chase Corporation common stock, in the form of restricted stock 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 vests one year from the date of grant.  In January 2010, non-employee members of the Board received a total grant of 11,092 shares of restricted stock for service for the period from January 30, 2010 through January 30, 2011.  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.

 

Note 6 — 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, coating and lining systems for use in liquid storage and containment applications, protective coatings for pipeline applications, and moisture protective coatings for electronics and printing services.  Electronic Manufacturing Services include printed circuit board and electro-mechanical 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 February 28,						Six Months Ended February 28,
		2010			2009			2010			2009
Revenues from external customers
Specialized Manufacturing		$	25,763		$	18,963		$	50,027		$	45,671
Electronic Manufacturing Services		5,626			4,041			10,093			8,402
Total		$	31,389		$	23,004		$	60,120		$	54,073
Income before income taxes
Specialized Manufacturing		$	3,266		$	1,429		$	7,642		$	6,352
Electronic Manufacturing Services		719			397			1,174			722
Total for reportable segments		3,985			1,826			8,816			7,074
Corporate and Common Costs		(1,404		)	(1,105		)	(2,865		)	(2,765		)
Total		$	2,581		$	721		$	5,951		$	4,309

 

The Company’s products are sold world-wide.  For the quarters ended February 28, 2010 and 2009, sales from its operations located in the United Kingdom accounted for 15% and 7% of total Company revenues, respectively.  In the fiscal year to date period, sales from its operations located in the United Kingdom accounted for 12% of total Company revenues compared to 9% in the same period in fiscal 2009.   No other foreign geographic area accounted for more than 10% of consolidated revenues for the three and six month periods ended February 28, 2010 and 2009.

 

		February 28, 2010			August 31, 2009
Total assets
Specialized Manufacturing		$	95,823		$	60,713
Electronic Manufacturing Services		14,084			12,666
Total for reportable segments		109,907			73,379
Corporate and Common Assets		9,391			17,687
Total		$	119,298		$	91,066

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

The increase in total assets of the Company’s Specialized Manufacturing segment as of February 28, 2010 is primarily due to the acquisitions of C.I.M. in September 2009 and ServiWrap in December 2009 (see Note 8 below).

 

As of February 28, 2010 and August 31, 2009, 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 $2,215 and $1,770, respectively, located in the United Kingdom.  These balances exclude goodwill and intangibles of $14,780 and $7,199, as of February 28, 2010 and August 31, 2009, respectively.

 

Note 7 — 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, 2009		$	8,607		$	5,999		$	14,606
Acquisition of C.I.M.		8,573			—			8,573
Acquisition of ServiWrap		258			—			258
FX translation adjustment		(328		)	—			(328		)
Balance at February 28, 2010		$	17,110		$	5,999		$	23,109

 

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.

 

Intangible assets subject to amortization consist of the following at February 28, 2010 and August 31, 2009:

 

		Weighted-Average Amortization Period		Gross Carrying Value			Accumulated Amortization			Net Carrying Value
February 28, 2010
Patents and agreements		12.7 years		$	2,232		$	2,072		$	160
Formulas and technology		9.8 years		3,521			726			2,795
Trade names		4.6 years		1,337			327			1,010
Customer lists and relationships		10.4 years		18,462			2,797			15,665
				$	25,552		$	5,922		$	19,630
August 31, 2009
Patents and agreements		12.6 years		$	2,258		$	2,059		$	199
Formulas and technology		9.3 years		1,191			552			639
Trade names		3.8 years		277			255			22
Customer lists and relationships		10.4 years		5,640			2,003			3,637
				$	9,366		$	4,869		$	4,497

 

The increase in gross carrying value of intangible assets for the six months ended February 28, 2010 is due to the addition of intangible assets associated with the Company’s acquisitions of C.I.M. in September 2009 and ServiWrap in December 2009 (see Note 8 below).  These increases were partially offset by an $895 decrease in gross carrying value of intangible assets over the six months ended February 28, 2010 due to a foreign currency translation loss related to the intangible assets associated with the Company’s European operations.

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Aggregate amortization expense related to intangible assets for the six months ended February 28, 2010 and 2009 was $1,241 and $469, respectively.  Estimated amortization expense for the remainder of fiscal year 2010 and for each of the five succeeding fiscal years is as follows:

 

Years ending August 31,		Amount
2010 (remaining six months)		$	1,919
2011		2,393
2012		2,373
2013		2,256
2014		2,199
2015		2,001
		$	13,141

 

Note 8 — Acquisitions

 

C.I.M. Industries Inc.

 

In September 2009, Chase Corporation acquired all of the outstanding capital stock of C.I.M. Industries Inc. (“C.I.M.”) which is based in Peterborough, NH and has a manufacturing facility in Texas.  C.I.M. is a specialized manufacturer of high performance coating and lining systems used worldwide in the liquid storage and containment applications.  The total purchase price, net of cash received, was $18,894.

 

Allocation of Purchase Price

 

The acquisition was accounted for as a business combination under ASC Topic 805, “Business Combinations.”  In accordance with this accounting standard, the Company expensed $130 of acquisition related costs.

 

The purchase price has been allocated to the acquired tangible and identifiable intangible assets and liabilities assumed based on their fair values as of the date of the acquisition:

 

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

 

The excess of the purchase price over the net tangible and intangible assets acquired resulted in goodwill of $8,573 that is largely attributable to the synergies and economies of scale from combining the operations and technologies of Chase and C.I.M., particularly as it pertains to the global expansion of the Company’s product and service offerings, and marketing efforts.  This goodwill is not deductible for income tax purposes.

 

All assets, including goodwill, acquired as part of C.I.M. are included in the Specialized Manufacturing segment.  Identifiable intangible assets purchased with this transaction are as follows:

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

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

 

ServiWrap Product Lines

 

On December 18, 2009, the Company acquired the full range of ServiWrap pipeline protection products (“ServiWrap”) from Grace Construction Products Limited, a UK based unit of W.R. Grace & Co. (the “Seller”).  ServiWrap / ServiShield® anti-corrosion systems provide protection for new and refurbished oil, gas and water pipelines in projects around the world.  The total purchase price for this acquisition was £5,983 (US $9,699 at the time of acquisition) and the assets acquired by the Company include product lines, manufacturing equipment and certain intellectual property rights.

 

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

 

Allocation of Purchase Price

 

The acquisition was accounted for as a business combination under ASC Topic 805, “Business Combinations.”  In accordance with this accounting standard, the Company expensed $271 of acquisition related costs.

 

The purchase price has been allocated to the acquired tangible and identifiable intangible assets and liabilities assumed based on their fair values as of the date of the acquisition:

 

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

 

The excess of the purchase price over the net tangible and intangible assets acquired resulted in goodwill of $258 that is primarily attributable to the potential synergies from the integration of the ServiWrap product lines into the Company’s current product offerings.   This goodwill is deductible for income tax purposes.

 

All assets, including goodwill, acquired as part of the ServiWrap product line acquisition are included in the Specialized Manufacturing segment.  Identifiable intangible assets purchased with this transaction are as follows:

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

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

 

Supplemental Pro Forma Data

 

The following table presents the pro forma results of the Company for the three and six month periods ended February 28, 2010 and 2009, as though the C.I.M. and ServiWrap acquisitions described above occurred on September 1, 2008.  The actual revenues and expenses for the C.I.M. and ServiWrap acquisitions are included in our fiscal 2010 consolidated results beginning on September 4, 2009 and December 18, 2009, respectively.  Revenues for C.I.M and ServiWrap since the acquisition dates included in the consolidated statement of operations were $5,512 and $1,905, respectively.  Adjustments have been made for the estimated amortization of intangibles, estimated interest expense in connection with debt financing of the acquisition, and the income tax impact of the pro forma adjustments at the statutory rate of 38%. The following pro forma information is not necessarily indicative of the results that would have been achieved if the acquisitions had been effective on September 1, 2008.

 

		Three Months Ended February 28,						Six Months Ended February 28,
		2010			2009			2010			2009
Revenues		$	32,113		$	28,073		$	64,950		$	65,473
Net income		1,695			1,131			4,214			3,802
Net income available to common shareholders, per common and common equivalent share
Basic		$	0.19		$	0.13		$	0.47		$	0.44
Diluted		$	0.19		$	0.13		$	0.47		$	0.43

 

Note 9 — Commitments and Contingencies

 

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 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 February 2010, 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 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.

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

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 10 — Debt

 

The Company borrowed $10,000 from Bank of America in September 2009 in order to fund its acquisition of C.I.M.  This borrowing involved an unsecured, three year term note (“Term Note”) with interest and principal payments due monthly.  Interest is calculated at the applicable London Interbank Offered Rate (“LIBOR”) plus a margin of 1.75% per annum, with interest payments due on the last day of each month.  At February 28, 2010, the applicable interest rate was 1.98% per annum.  In addition to monthly interest payments, Chase Corporation is repaying the principal in equal installments of $167 per month, beginning on September 30, 2009, and on the last day of each month thereafter, ending on August 31, 2012 (the “Repayment Period”).  In any event, on the last day of the Repayment Period, Chase will repay the remaining principal balance plus any interest then due.

 

The Term Note is subject to certain covenants which require the Company to maintain certain financial ratios, which include (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.  The Company was in compliance with these debt covenants as of February 28, 2010.   Prepayment of the Term Note is allowed at any time during the term of the loan.

 

As part of the C.I.M. acquisition in September 2009, the Company delivered $3,000 in non-negotiable promissory notes (the “Notes”) payable to five C.I.M. shareholders, who were the holders of all of the issued and outstanding shares of capital stock of C.I.M. as of the acquisition date.   The principal of the Notes will be paid in three consecutive annual installments of $1,000 each, with the initial payment due on September 4, 2010.  Interest on the unpaid principal balance of the Notes will accrue at a rate per annum equal to the applicable Federal rate, and will be paid annually with each principal payment.  At February 28, 2010, the applicable interest rate was 0.72% per annum.

 

The Company borrowed $7,000 from RBS Citizens in December 2009 in order to fund its acquisition of the ServiWrap product line.  The loan from RBS Citizens (the “Term Loan”) is an unsecured, three year term note with interest and principal payments due monthly.  Interest is calculated at the applicable LIBOR rate plus a margin of 1.90% per annum, with interest payments due on the last day of each month.  In addition to monthly interest payments, the Company is repaying the principal in equal installments of $117 each, beginning on January 15, 2010, and on the 15th day of each month thereafter, ending on December 15, 2012, on which date the Company will repay the remaining principal balance plus any interest then due.  The Term Loan is subject to the same debt covenants as the Company’s other term debt.  Prepayment of the Term Loan is allowed at any time.  At February 28, 2010, the applicable interest rate was 2.13% per annum.

 

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