CHASE CORP - Quarter Report: 2012 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 29, 2012

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) 819-4200

(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 suchfiles). 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 March 31, 2012 was 9,052,241.

 

 

Table of Contents

 

CHASE CORPORATION

INDEX TO FORM 10-Q

 

For the Quarter Ended February 29, 2012

 

Part I — FINANCIAL INFORMATION
Item 1 — Unaudited Financial Statements
	Consolidated Balance Sheets as of February 29, 2012 and August 31, 2011	3
	Consolidated Statements of Operations for the three and six months ended February 29, 2012 and February 28, 2011	4
	Consolidated Statement of Stockholders’ Equity for the six months ended February 29, 2012	5
	Consolidated Statements of Cash Flows for the six months ended February 29, 2012 and February 28, 2011	6
	Notes to Consolidated Financial Statements	7
Item 2 — Management’s Discussion and Analysis of Financial Condition and Results of Operations		16
Item 3 — Quantitative and Qualitative Disclosures About Market Risk		24
Item 4 — Controls and Procedures		24
Part II — OTHER INFORMATION
Item 1 — Legal Proceedings		25
Item 1A — Risk Factors		25
Item 5 — Other Information		25
Item 6 — Exhibits		26
SIGNATURES		27

 

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Part 1 — FINANCIAL INFORMATION

 

Item 1 — Unaudited Financial Statements

 

CHASE CORPORATION
CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

 

In thousands, except share and per share amounts

 

		February 29,			August 31,
		2012			2011
ASSETS
Current Assets:
Cash & cash equivalents		$	12,383		$	14,982
Accounts receivable, less allowance for doubtful accounts of $422 and $473		16,481			19,103
Inventories		21,985			20,841
Prepaid expenses and other current assets		1,880			1,502
Assets held for sale (Note 12)		—			1,004
Deferred income taxes		559			559
Total current assets		53,288			57,991
Property, plant and equipment, net		30,246			28,594
Other Assets:
Goodwill		17,992			18,060
Intangible assets, less accumulated amortization of $11,315 and $10,374		14,742			16,185
Cash surrender value of life insurance		7,047			6,915
Restricted investments		836			740
Deferred income taxes		330			332
Other assets		85			92
		$	124,566		$	128,909
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Accounts payable		$	7,842		$	7,276
Accrued payroll and other compensation		1,598			2,624
Accrued expenses		3,769			4,237
Accrued income taxes		273			1,387
Current portion of long-term debt		4,400			4,400
Total current liabilities		17,882			19,924
Long-term debt, less current portion		6,243			8,267
Deferred compensation		1,668			1,597
Accumulated pension obligation		6,199			6,713
Other liabilities		103			528
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; 9,050,873 shares at February 29, 2012 and 8,952,910 shares at August 31, 2011 issued and outstanding		905			895
Additional paid-in capital		11,633			10,678
Accumulated other comprehensive loss		(4,399		)	(3,666		)
Retained earnings		84,332			83,973
Total stockholders’ equity		92,471			91,880
Total liabilities and stockholders’ equity		$	124,566		$	128,909

 

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						Six Months Ended
		February 29, 2012			February 28, 2011			February 29, 2012			February 28, 2011
Revenues
Sales		$	28,836		$	25,652		$	60,490		$	56,490
Royalties and commissions		585			609			1,061			1,038
		29,421			26,261			61,551			57,528
Costs and Expenses
Cost of products and services sold		21,022			17,441			43,021			37,501
Selling, general and administrative expenses		6,513			6,594			13,505			13,182
Operating income		1,886			2,226			5,025			6,845
Interest expense		(36		)	(87		)	(72		)	(180		)
Other income (expense)		(8		)	8			469			124
Income before income taxes		1,842			2,147			5,422			6,789
Income taxes		645			727			1,898			2,444
Net income		$	1,197		$	1,420		$	3,524		$	4,345
Net income available to common shareholders, per common and common equivalent share
Basic		$	0.13		$	0.16		$	0.39		$	0.49
Diluted		$	0.13		$	0.16		$	0.39		$	0.48
Weighted average shares outstanding
Basic		8,758,063			8,718,893			8,756,030			8,705,145
Diluted		8,791,052			8,757,070			8,774,051			8,753,049
Cash dividends declared per share								$	0.35		$	0.35

 

See accompanying notes to the consolidated financial statements

 

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CHASE CORPORATION
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

SIX MONTHS ENDED FEBRUARY 29, 2012

(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, 2011		8,952,910		$	895		$	10,678		$	(3,666	)	$	83,973		$	91,880
Restricted stock grants, net of forfeitures		96,767		10			(10		)							—
Amortization of restricted stock grants							672									672
Amortization of stock option grants							278									278
Common stock issuance		1,196		—			15									15
Cash dividend paid, $0.35 per share													(3,165		)	(3,165		)
Pension amortization, net of tax of $61										114						114			$	114
Foreign currency translation adjustment										(883		)				(883		)	(883		)
Net unrealized gain on restricted investments, net of tax of $19										36						36			36
Net income													3,524			3,524			3,524
Comprehensive income																—			$	2,791
Balance at February 29, 2012		9,050,873		$	905		$	11,633		$	(4,399	)	$	84,332		$	92,471

 

See accompanying notes to the consolidated financial statements

 

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CHASE CORPORATION

CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

In thousands

 

		Six Months Ended
		February 29, 2012			February 28, 2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net income		$	3,524		$	4,345
Adjustments to reconcile net income to net cash provided by operating activities
Loss on disposal/sale of fixed assets		30			—
Depreciation		1,393			1,225
Amortization		1,137			1,147
Provision for losses on accounts receivable		(44		)	(78		)
Stock based compensation		965			772
Realized loss (gain) on restricted investments		(8		)	(13		)
Decrease (increase) in cash surrender value life insurance		(30		)	—
Excess tax benefit from stock based compensation		—			(17		)
Increase (decrease) from changes in assets and liabilities
Accounts receivable		2,508			1,681
Inventories		(1,228		)	(4,352		)
Prepaid expenses & other assets		(397		)	(60		)
Accounts payable		651			3
Accrued expenses		(2,744		)	(1,726		)
Accrued income taxes		(1,122		)	(2,317		)
Deferred compensation		71			142
Net cash provided by operating activities		4,706			752
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property, plant and equipment		(2,707		)	(1,348		)
Contingent purchase price for acquisition		(155		)	—
Net proceeds from sale of fixed assets		1,032			—
Additional proceeds from sale of discontinued operations		—			1,478
Net withdrawals (contributions) from restricted investments		(33		)	(30		)
Payments for cash surrender value life insurance		(92		)	(91		)
Net cash (used in) provided by investing activities		(1,955		)	9
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on long-term debt		9,115			910
Payments of principal on debt		(11,138		)	(3,610		)
Dividend paid		(3,165		)	(3,131		)
Payments of statutory minimum taxes on stock options and restricted stock		—			(13		)
Excess tax benefit from stock based compensation		—			17
Net cash used in financing activities		(5,188		)	(5,827		)
DECREASE IN CASH		(2,437		)	(5,066		)
Effect of foreign exchange rates on cash		(162		)	272
CASH, BEGINNING OF PERIOD		14,982			17,340
CASH, END OF PERIOD		$	12,383		$	12,546
Non-cash Investing and Financing Activities
Common stock received for payment of stock option exercises		$	—		$	373
Property, plant & equipment additions included in accounts payable		$	470		$	114
Gain on termination of Evanston sale leaseback transaction (Note 11)		$	425		$	—

 

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 disclosures 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, 2011 in conjunction with its 2011 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 statement of the Company’s financial position as of February 29, 2012, the results of operations and cash flows for the interim periods ended February 29, 2012 and February 28, 2011, and changes in stockholders’ equity for the interim period ended February 29, 2012.

 

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 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.

 

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 29, 2012 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, 2011, which are contained in the Company’s 2011 Annual Report on Form 10-K.

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Note 2 — Recent Accounting Policies

 

Recently Issued Accounting Pronouncements

 

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 December 15, 2011 and will be adopted by the Company in the quarter ended May 31, 2012.  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.

 

In September 2011, the FASB issued ASU No. 2011-08, “Intangibles - Goodwill and Other (ASC Topic 350) - Testing Goodwill for Impairment,” (“ASU 2011-08”) which gives companies the option to first perform a qualitative assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount before performing the two-step test mandated prior to this update.  ASU 2011-08 also provides companies with a revised list of examples of events and circumstances to consider, in their totality, to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount.  If a company concludes that this is the case, it must perform the two-step test. Otherwise, a company may skip the two-step test.  Companies are not required to perform the qualitative assessment and may instead proceed directly to the first step of the two-part test.  ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.  The adoption of ASU 2011-08 will not have an impact on the Company’s consolidated financial position, results of operations or cash flows.

 

In December 2011, the FASB issued ASU No. 2011-12, “Comprehensive Income (ASC Topic 220): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05”, (“ASU 2011-12”) which defers the specific requirement to present items that are reclassified from accumulated other comprehensive income to net income separately with their respective components of net income and other comprehensive income.  The amendments in ASU 2011-12 are effective for public entities for fiscal years, and interim periods within those years, beginning after December 15, 2011 and will be adopted by the Company in the quarter ended May 31, 2012.  The adoption of ASU 2011-12 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.

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Note 3 — Inventories

 

Inventories consist of the following as of February 29, 2012 and August 31, 2011:

 

		February 29, 2012			August 31, 2011
Raw materials		$	10,424		$	10,206
Finished and in process		11,561			10,635
Total inventories		$	21,985		$	20,841

 

Note 4 — Net Income Per Share

 

The determination of earnings per share under the two-class method is as follows: 

 

		Three Months Ended						Six Months Ended
		February 29, 2012			February 28, 2011			February 29, 2012			February 28, 2011
Basic Earnings per Share
Net income		$	1,197		$	1,420		$	3,524		$	4,345
Less: Allocated to participating securities		38			37			111			112
Net income available to common shareholders		$	1,159		$	1,383		$	3,413		$	4,233
Basic weighted average shares outstanding		8,758,063			8,718,893			8,756,030			8,705,145
Net income per share - Basic		$	0.13		$	0.16		$	0.39		$	0.49
Diluted Earnings per Share
Net income		$	1,197		$	1,420		$	3,524		$	4,345
Less: Allocated to participating securities		38			36			111			112
Net income available to common shareholders		$	1,159		$	1,384		$	3,413		$	4,233
Basic weighted average shares outstanding		8,758,063			8,718,893			8,756,030			8,705,145
Additional dilutive common stock equivalents		32,989			38,177			18,021			47,904
Diluted weighted average shares outstanding		8,791,052			8,757,070			8,774,051			8,753,049
Net income per share - Diluted		$	0.13		$	0.16		$	0.39		$	0.48

 

For the three and six months ended February 29, 2012 and February 28, 2011, stock options to purchase 258,451 and 250,000 shares of common stock were outstanding, respectively, 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 2010, the Board of Directors of Chase Corporation approved the fiscal year 2011 Long Term Incentive Plan (“2011 LTIP”) for the executive officers.  The 2011 LTIP is an equity based plan with a grant date of September 1, 2010 and contains 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.  Based on the fiscal year 2011 financial results, 32,835 additional shares of restricted stock (total of 65,670 shares) were earned and granted subsequent to the end of fiscal year 2011 in accordance with the performance measurement criteria.  No further performance-based measurements apply to this award.  Compensation expense is being recognized on a ratable basis over the vesting period.

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

In August 2011, the Board of Directors of the Company approved the fiscal year 2012 Long Term Incentive Plan (“2012 LTIP”) for the executive officers.  The 2012 LTIP is an equity based plan with a grant date of September 1, 2011 and containing the following components:

 

Restricted Shares — (a) performance and service based restricted stock grant of 33,798 shares in the aggregate, subject to adjustment, with a vesting date of August 31, 2014.  Compensation expense is being recognized on a ratable basis over the vesting period based on quarterly probability assessments; (b) time-based restricted stock grant of 16,899 shares in the aggregate, and a vesting date of August 31, 2014.  Compensation expense is being recognized on a ratable basis over the vesting period.

 

Stock options — options to purchase 59,493 shares of common stock in the aggregate with an exercise price of $12.77 per share.  The options will vest in three equal annual allotments beginning on August 31, 2012 and ending on August 31, 2014. The options will expire on August 31, 2021.  Compensation expense is being recognized over the period of the award on an annual basis consistent with the vesting terms.

 

In August 2011, the Board of Directors of the Company approved a plan for issuing a time-based restricted stock grant of 5,037 shares in the aggregate to certain non-executive officer employees, with an issue date of August 31, 2011 and a vesting date of August 31, 2014.  Compensation expense is being recognized on a ratable basis over the vesting period.

 

In August 2011, the Board of Directors of the Company authorized a grant of stock options to certain non-executive officer employees to purchase 20,883 shares of common stock in the aggregate with an exercise price of $12.77 per share.  The options will vest in three equal annual allotments beginning on August 31, 2012 and ending on August 31, 2014. The options will expire on August 31, 2021.  Compensation expense is being recognized over the period of the award on an annual basis consistent with the vesting terms.

 

In December 2011, restricted stock in the amount of 1,887 shares related to the April 2011 grant was forfeited in conjunction with the termination of employment of a non-executive officer of the Company.

 

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 2012, non-employee members of the Board received a total grant of 10,085 shares of restricted stock for service for the period from January 31, 2012 through January 31, 2013.  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 Data & Foreign Operations

 

The Company is organized into two operating segments, an Industrial Materials segment and a Construction Materials segment.  The basis for this segmentation is distinguished by the nature of the products and how they are delivered to their respective markets.  The Industrial Materials segment reflects specified products that are used in or integrated into another company’s product with demand dependent upon general economic conditions.  Industrial Materials products include insulating and conducting materials for wire and cable manufacturers, moisture protective coatings for electronics and printing services, laminated durable papers, and flexible composites and laminates for the aerospace, packaging and industrial laminate markets.  The Construction Materials segment reflects construction project

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

oriented product offerings which are primarily sold and used as “Chase” branded products in final form.  Construction Materials products include protective coatings for pipeline applications, coating and lining systems for use in liquid storage and containment applications, high performance polymeric asphalt additives, and expansion and control joint systems for use in the transportation and architectural markets.

 

The following tables summarize information about the Company’s reportable segments:

 

		Three Months Ended						Six Months Ended
		February 29, 2012			February 28, 2011			February 29, 2012			February 28, 2011
Revenues from external customers
Industrial Materials		$	18,487		$	17,532		$	37,973		$	35,702
Construction Materials		10,934			8,729			23,578			21,826
Total		$	29,421		$	26,261		$	61,551		$	57,528
Income before income taxes
Industrial Materials		$	3,320		$	3,709		$	6,964		$	7,535
Construction Materials		(273		)	(441		)	123			1,381
Total for reportable segments		3,047			3,268			7,087			8,916
Corporate and Common Costs		(1,205		)	(1,121		)	(1,665		)(a)	(2,127		)
Total		$	1,842		$	2,147		$	5,422		$	6,789

 

(a)          Includes gain of $425 on termination of Evanston sale leaseback transaction (see Note 11 for further information).

 

The Company’s products are sold world-wide.  For the quarters ended February 29, 2012 and February 28, 2011, sales from its operations located in the United Kingdom accounted for 16% and 14% of total Company revenues, respectively.  In the fiscal year to date period, sales from its operations located in the United Kingdom accounted for 16% of total Company revenues compared to 13% in the same period in fiscal 2011.  No other foreign geographic area accounted for more than 10% of consolidated revenues for the three and six month periods ended February 29, 2012 and February 28, 2011.

 

		February 29, 2012			August 31, 2011
Total assets
Industrial Materials		$	49,934		$	49,306	(a)
Construction Materials		51,863			54,329
Total for reportable segments		101,797			103,635
Corporate and Common Assets		22,769			25,274
Total		$	124,566		$	128,909

 

(a)          Includes assets held for sale of $1,004 from our Webster, MA property

 

As of February 29, 2012 and August 31, 2011, 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 $4,315 and $2,796, respectively, located in the United Kingdom.  These balances exclude goodwill and intangibles of $12,266 and $13,267, as of February 29, 2012 and August 31, 2011, respectively.

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

Note 7 — Goodwill and Other Intangibles

 

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

 

		Construction Materials			Industrial Materials			Consolidated
Balance at August 31, 2011		$	10,661		$	7,399		$	18,060
Acquisition of Capital Services - additional earnout		87			—			87
Acquisition of Paper Tyger - additional earnout		—			68			68
FX translation adjustment		(8		)	(215		)	(223		)
Balance at February 29, 2012		$	10,740		$	7,252		$	17,992

 

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 as of February 29, 2012 and August 31, 2011:

 

		Weighted-Average		Gross Carrying			Accumulated			Net Carrying
		Amortization Period		Value			Amortization			Value
February 29, 2012
Patents and agreements		12.7 years		$	2,244		$	2,200		$	44
Formulas		9.8 years		3,566			1,502			2,064
Trade names		4.7 years		1,388			795			593
Customer lists and relationships		10.4 years		18,859			6,818			12,041
				$	26,057		$	11,315		$	14,742
August 31, 2011
Patents and agreements		12.7 years		$	2,243		$	2,175		$	68
Formulas		9.7 years		3,589			1,318			2,271
Trade names		4.7 years		1,413			693			720
Customer lists and relationships		10.4 years		19,314			6,188			13,126
				$	26,559		$	10,374		$	16,185

 

Aggregate amortization expense related to intangible assets for the six months ended February 29, 2012 and February 28, 2011 was $1,137 and $1,147, respectively.  Estimated amortization expense for the remainder of fiscal year 2012 and for future periods is as follows:

 

Years ending August 31,
2012 (remaining six months)		$	1,180
2013		2,256
2014		2,199
2015		2,001
2016		1,939
2017 and beyond		5,167
		$	14,742

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

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 February 2012, 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 owned by 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 six months ended February 29, 2012 and February 28, 2011 are as follows:

 

		Three Months Ended						Six Months Ended
		February 29, 2012			February 28, 2011			February 29, 2012			February 28, 2011
Service cost		$	120		$	132		$	241		$	263
Interest cost		130			107			260			215
Expected return on plan assets		(131		)	(110		)	(262		)	(220		)
Amortization of prior service cost		19			18			37			37
Amortization of unrecognized loss		69			60			138			120
Net periodic benefit cost		$	207		$	207		$	414		$	415

 

When funding is required, the Company’s policy is to contribute amounts that are deductible for federal income tax purposes.  As of February 29, 2012, the Company has made contributions of $750 in the current fiscal year to fund its obligations under its pension plan, and plans to make the necessary contributions over the remainder of fiscal 2012 to ensure the qualified plan continues to be adequately funded given the current market conditions.

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

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 quoted prices for similar instruments in active markets or 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 February 29, 2012 and August 31, 2011 represent investments which are restricted for use in a nonqualified retirement savings plan for certain key employees and directors.

 

The following tables set forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of February 29, 2012 and August 31, 2011:

 

							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		February 29, 2012		$	836		$	836		$	—		$	—
Restricted investments		August 31, 2011		$	740		$	740		$	—		$	—

 

Note 11 — Sale Leaseback Transaction

 

In June 2009, the Company entered into a sale leaseback transaction pursuant to the sale of its real property (land and building) located in Evanston, IL.  As part of this transaction, the Company agreed to provide financing to the purchaser, whereby the interest due on the financing is equal to the rental payments over the life of the lease.  The Company had been accounting for this sale leaseback transaction under the deposit method due to its continued involvement in the form of providing this permanent financing to the buyer.  The Company has provided this recourse financing to the buyer whereby the only recourse it has is to take back control and ownership of the leased asset.  Under the deposit method, the Company reported the property on its balance sheet and recorded depreciation expense as a period cost in its statement of operations.  As of August 31, 2011, the property remained on its consolidated balance sheet in its original caption of property, plant, and equipment.

 

Deposits received in the form of cash from the buyer, totaling $425, were being reported as a deposit on the contract and were previously included on the balance sheet in other non-current liabilities.  The remainder of the $4,250 sales price ($3,825) was due at various dates over the term of the 49 month lease, of which $3,400 was due at the end of the lease term in July 2013.  In the quarter ending November 30, 2011, the purchaser notified the Company that it would be unable to make any additional payments under the terms of the purchase agreement and seller financing arrangement.  As a result, the Company

 

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CHASE CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

In thousands, except share and per share amounts

 

took back control and ownership of the leased asset and recognized the $425 in deposit payments as income in the quarter ended November 30, 2011.

 

Note 12 —Assets Held for Sale

 

The Company periodically reviews long-lived assets against its plans to retain or ultimately dispose of these assets.  If the Company decides to dispose of an asset and commits to a plan to actively market and sell the asset, it will be moved to assets held for sale.  The Company analyzes market conditions each reporting period and records additional impairments due to declines in market values of like assets.  The fair value of the asset is determined by observable inputs such as appraisals and prices of comparable assets in active markets for assets like the Company’s.  Gains are not recognized until the assets are sold.

 

In December 2011, the Company finalized the sale of its Webster property for net proceeds of $1,006. This transaction resulted in a gain of $15 which was recorded in the Company’s fiscal quarter ending February 29, 2012.

 

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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 unaudited 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, 2011.

 

Overview

 

We continue to face challenges with unfavorable product mix coupled with rising material costs as increased sales in the first six months of fiscal 2012 generated lower operating income than the prior year period.  Revenue for the Industrial Materials segment increased over the prior year primarily due to the wire and cable product line as a result of greater demand in the power cable and communication cable markets.  The increased revenues in fiscal 2012 were partially offset by (a) decreased sales of our electronic coatings products, primarily due to decreased export sales into Asia, and (b) decreased sales in our aerospace and transportation product markets.  During the remainder of the fiscal year, we will continue our product and global business development efforts for all of our product lines in order to seize new business opportunities.  Additional pressure on profit margins can be expected with increasing raw material and energy costs.

 

Revenues for the Construction Materials segment increased over the prior year primarily due to sales of our pipeline products resulting from strong demand for pipeline tape products produced at our UK facility.  Additionally, increased demand from our key private label customers also contributed to the overall revenue increase in this segment.  Despite the increased revenues, the Construction Materials segment was impacted by the typical seasonality of this business that limits construction sales in the winter months and favors products with traditionally lower margins.  In general, overall profit margins are lower than in our Industrial Materials segment.  For the remainder of fiscal 2012, we will continue to focus on maximizing production efficiencies, while closely monitoring our raw material costs and key customers’ requirements.

 

During the past quarter, we completed the relocation of our HumiSeal Europe Ltd. manufacturing operations and European headquarters from Camberley, UK to a more modern facility in Winnersh, UK. Over the remainder of fiscal 2012, we will continue with our strategic plans to improve and enhance our facilities and equipment.  We believe these plans are critical to the long-term growth of the Company.  This will include the on-going renovations of our facility in Oxford, MA as we prepare for the move of our Randolph, MA operations to this facility by December 2012.  Additionally, investments in efficiency improvements, long-term consolidation, R&D, technology and marketing will allow us to improve the business in future years.

 

We have two reportable segments as summarized below:

 

Segment		Product Lines		Manufacturing Focus and Products
Industrial Materials		· Wire & Cable · Electronic Coatings · Custom Products		Protective coatings and tape products including insulating and conducting materials for wire and cable manufacturers, moisture protective coatings for electronics and printing services, laminated durable papers, and flexible composites and laminates for the aerospace, packaging and industrial laminate markets.
Construction Materials		· Pipeline · Construction Products · Private Label		Protective coatings and tape products including coating and lining systems for use in liquid storage and containment applications, protective coatings for pipeline and general construction applications, high performance polymeric asphalt additives, and expansion and control joint systems for use in the transportation and architectural markets.

 

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Results of Operations

 

Revenues and Operating Profit by Segment are as follows (Dollars in Thousands):

 

		Three Months Ended February 29, 2012			% of Total Revenues		Three Months Ended February 28, 2011			% of Total Revenues		Six Months Ended February 29, 2012			% of Total Revenues		Six Months Ended February 28, 2011			% of Total Revenues
Revenues from external customers
Industrial Materials		$	18,487		63	%	$	17,532		67	%	$	37,973		62	%	$	35,702		62	%
Construction Materials		10,934			37	%	8,729			33	%	23,578			38	%	21,826			38	%
Total		$	29,421				$	26,261				$	61,551				$	57,528

 

		Three Months Ended February 29, 2012			% of Segment Revenues		Three Months Ended February 28, 2011			% of Segment Revenues		Six Months Ended February 29, 2012			% of Segment Revenues		Six Months Ended February 28, 2011			% of Segment Revenues
Income before income taxes
Industrial Materials		$	3,320		18	%	$	3,709		21	%	$	6,964		18	%	$	7,535		21	%
Construction Materials		(273		)	-2	%	(441		)	-5	%	123			1	%	1,381			6	%
Total for reportable segments		3,047			10	%	3,268			12	%	7,087			12	%	8,916			15	%
Corporate and Common Costs		(1,205		)			(1,121		)			(1,665		)(a)			(2,127		)
Total		$	1,842		6	%	$	2,147		8	%	$	5,422		9	%	$	6,789		12	%

 

(a)       Includes gain of $425 on termination of Evanston sale leaseback transaction.  See note 11 to the Consolidated Financial Statements for further information.

 

Total Revenues

 

Total revenues increased $3,160,000 or 12% to $29,421,000 for the quarter ended February 29, 2012 compared to $26,261,000 in the same quarter of the prior year.  Total revenues increased $4,023,000 or 7% to $61,551,000 in the fiscal year to date period compared to $57,528,000 in the same period in fiscal 2011.

 

Revenues in our Industrial Materials segment increased $955,000 and $2,271,000, in the current quarter and year to date periods, respectively.  The increase in revenues from our Industrial Materials segment in the current quarter and year to date periods was primarily due to increased sales of $1,792,000 and $3,489,000, respectively, from our wire & cable product line as we continue to benefit from strong demand in the power cable and communication cable markets.  This was partially offset by decreased sales of our electronic coatings products in the current quarter and year to date periods of $644,000 and $799,000, respectively.  Sales in the aerospace and transportation market declined $430,000 and $475,000 in the current quarter and year to date period, respectively.

 

Revenues from our Construction Materials segment increased $2,205,000 and $1,752,000 in the current quarter and year to date periods, respectively, compared to the prior year periods.  The increase in sales from our Construction Materials segment compared to the prior year periods is primarily due to the following for the current quarter and year to date periods, respectively: (a) increased sales of $1,414,000 and $2,578,000 from our pipeline products as we had continued strong demand for pipeline products produced at our UK facility; and (b) increased sales of $298,000 and $1,006,000 from our private label products due to increased demand from some of our key customers.  We also experienced increased sales of $422,000 and $70,000 in the current quarter from our coating and lining systems (CIM Industries) and highway construction products, respectively.  Despite positive results for the current quarter, both our coating and lining systems and highway construction products reflect decreased sales of $918,000 and $915,000, respectively, through the first six months of fiscal 2012 compared to the prior year.

 

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