Note 1 — Basis of Financial Statement Presentatio
n
Description of Business
Chase Corporation (the “Company,” “Chase,” “we,” or “us”), a global specialty chemicals company founded in 1946, is a leading manufacturer of protective materials for high-reliability applications across diverse market sectors. Our strategy is to maximize the performance of our core businesses and brands while seeking future opportunities through strategic acquisitions.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States of America generally accepted accounting principles (“U.S. GAAP”) 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. The year-end condensed balance sheet was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States of America. Chase Corporation filed audited consolidated financial statements which included all information and notes necessary for such a complete presentation, for the three years ended August 31, 2018 in conjunction with its 2018 Annual Report on Form 10-K.
Certain immaterial reclassifications have been made to the prior year amounts to conform to the current year’s presentation.
The results of operations for the interim period ended May 31, 2019 are not necessarily indicative of the results to be expected for any future period or the entire fiscal year. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended August 31, 2018 which are contained in the Company’s 2018 Annual Report on Form 10-K.
The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring items) that are, in the opinion of management, necessary for a fair statement of the Company’s financial position as of May 31, 2019, and the results of its operations, comprehensive income, changes in equity and cash flows for the interim periods ended May 31, 2019 and 2018.
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 U.K.-based operations are measured using the British pound as the functional currency. The financial position and results of operations of the Company’s operations based in France are measured using the euro as the functional currency. The financial position and results of the Company’s HumiSeal India Private Limited business are measured using the Indian rupee as the functional currency. The functional currency for all our other operations is the U.S. dollar. 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. Transaction gains and losses generated from the remeasurement of assets and liabilities denominated in currencies other than the functional currency of each applicable operation are included in other income (expense) on the condensed consolidated statements of operations, and were $135 and ($281) for the three- and nine-month periods ended May 31, 2019, respectively, and $546 and ($131) for the three- and nine-month periods ended May 31, 2018, respectively.
Other Business Developments
During the quarter ended May 31, 2019, Chase began moving the pulling and detection operations currently housed in its Granite Falls, NC location to its Hickory, NC facility. This is in line with the Company’s ongoing initiative to consolidate its manufacturing plants and streamline its existing processes. Currently, the pulling and detection operations are the only Chase-owned production operations in Granite Falls, NC, with the remaining portions of the building being either utilized for research and development or leased to a third party (see Note 8 to the condensed consolidated financial statements for additional information on this lease). The process of moving continued subsequent to the third quarter of fiscal 2019 and is anticipated to be completed during the first half of fiscal 2020. The Company recognized $193 in expense related to the move in the three-month period ended May 31, 2019. Future costs related to this move are currently anticipated to be approximately $1,000, and the Company plans to disclose these amounts separately on the condensed consolidated statement of operations in future periods.
On June 25, 2018, the Company announced to its employees the planned closing of its Pawtucket, RI manufacturing facility effective August 31, 2018. This is in line with the Company’s ongoing efforts to consolidate its manufacturing plants and streamline its existing processes. The manufacture of products previously produced in the Pawtucket, RI facility was moved to Company facilities in Oxford, MA and Lenoir, NC during a two-month transition period. The Company expensed $1,272 in the fourth quarter of fiscal 2018 related to the closure, including: (a) cash-related employee-related, logistics and uncapitalized facility improvement costs of $590; and (b) non-cash-related accelerated depreciation expense of $682. The Company recognized $260 in expenses related to this move in the three-month period ended November 30, 2018, with no additional expense recognized in the quarters ended February 28, 2019 and May 31, 2019.
Future costs related to this move are not anticipated to be significant to the condensed consolidated financial statements. During the quarter ended May 31, 2019, the Company reclassified all remaining fixed assets of the Pawtucket plant not transferred to the other locations to assets held for sale.
On April 20, 2018, Chase finalized an agreement with an unrelated party to sell all inventory, operational machinery and equipment and intangible assets of the Company’s structural composites rod business, as well as a license related to the production and sale of rod, for proceeds of $2,232, net of transaction costs and following certain working capital adjustments. This business, which was part of the structural composites product line within the Industrial Materials segment, had limited growth and profitability prospects as part of the Company, and was outside the areas Chase has identified for strategic emphasis. The resulting pre-tax gain on sale of $1,480 was recognized in the third quarter of fiscal 2018 as a gain on sale of businesses within the condensed consolidated statement of operations. Chase received $2,075, net of transaction costs, in the third quarter of fiscal 2018, with the remaining $157 received in the fourth quarter of fiscal 2018 as a result of a working capital true-up.
Chase will provide certain transitional manufacturing and administrative support to the purchaser for which the Company will receive additional consideration upon the performance of services. The purchaser also entered into a royalty agreement with the Company. The purchaser will make royalty payments to Chase based on future sales of certain structural composite material manufactured by the purchaser.
On December 29, 2017, Chase entered an agreement to acquire Stewart Superabsorbents, LLC (“SSA, LLC”), an advanced superabsorbent polymer (SAP) formulator and solutions provider, with operations located in Hickory and McLeansville, NC. The transaction closed on December 31, 2017. In the most recently completed fiscal year prior to the acquisition, SSA, LLC, and its recently-acquired Zappa-Tec business (collectively “Zappa Stewart”) had combined revenue in excess of $24,000. This acquisition proved to be immediately accretive to the Company’s earnings, after adjusting for nonrecurring costs associated with the transaction and financing cost. The business was acquired for a purchase price of $73,469, after final working capital adjustments and excluding acquisition-related costs. As part of this transaction, Chase acquired all assets of the business, and entered multiyear leases at both locations.
The Company expensed $393 of acquisition-related costs associated with this acquisition during the second quarter of fiscal 2018. The purchase was funded from a combination of Chase’s existing revolving credit facility
and available cash on hand.
Zappa Stewart’s protective materials technology complements Chase’s current specialty chemicals offerings. This acquisition is aligned with the Company’s core strategies and extends its reach into growing medical, environmental and consumer applications.
The Company finalized purchase accounting in the first quarter of fiscal 2019, without any adjustment to amounts recorded at August 31, 2018. Following the effective date of the acquisition the financial results of Zappa
Stewart’s operations have been included in the Company’s financial statements in the specialty chemical intermediates product line, contained within the Industrial Materials operating segment. See Note 14 to the condensed consolidated financial statements for additional information on the acquisition of Zappa Stewart.
Significant Accounting Policies
The Company’s significant accounting policies are detailed in Note 1
— “Summary of Significant Accounting Policies” within Item 8 of the Company’s Annual Report on Form 10-K for the year ended August 31, 2018. Significant changes to these accounting policies as a result of adopting ASC 606 “Revenue from Contracts with Customers” during the first quarter of fiscal 2019 are discussed within Note 2 — “Recent Accounting Standards” and Note 9 — “Revenue from Contracts with Customers” within this Current Quarterly Report on Form 10-Q.
Note 2 — Recent Accounting Standards
Recently Issued Accounting Pronouncements
In February 2016, the
Financial Accounting Standards Board ("FASB") issued ASU No. 2016-02, “Leases (Topic 842).” Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (a) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (b) a right-of-use asset, which represents the lessee’s right to use, or control the use of, a specified asset for the lease term. The ASU will be effective for the Company beginning September 1, 2019 (fiscal 2020).
In July 2018, the FASB issued ASU 2018-11, “Leases (Topic 842) Targeted Improvements.” The updated guidance provides an optional transition method, which allows for the application of the standard as of the adoption date with no restatement of prior period amounts. We plan to adopt the standard on September 1, 2019 under the optional transition method described above. We are completing the accumulation of existing lease data as well as assessing the impact that the new standard will have on our financial statements, which will consist primarily of a balance sheet gross-up of our operating leases to show equal and offsetting lease assets and lease liabilities. Due to the materiality of the underlying leases subject to the new guidance, we anticipate the adoption will have a material impact on the Company’s consolidated financial statements, however we are unable to quantify that effect until our analysis is complete.
In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” Under previously existing U.S. GAAP, the effects of changes in tax rates and laws on deferred tax balances are recorded as a component of income tax expense in the period in which the law was enacted. When deferred tax balances related to items originally recorded in accumulated other comprehensive income are adjusted, certain tax effects become stranded in accumulated other comprehensive income. The amendments in ASU 2018-02 allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The guidance is required for fiscal years beginning after December 15, 2018 (our fiscal year 2020), and interim periods within those fiscal years. Early adoption in any period is permitted. The Company is currently evaluating the effect that ASU No. 2018-02 will have on its financial statements and related disclosures and which methodology the Company will use in its adoption. See Note 18 to the condensed consolidated financial statements for additional information on the effects of the Tax Act on our financial position and result of operations, including provisional transitional adjustments that were recorded during fiscal 2018 related to the Tax Act, and complete and final adjustments during the quarter ended February 28, 2019 (the second quarter of fiscal 2019).
Recently Adopted Accounting Pronouncements
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606).” The amended guidance establishes a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most of the existing revenue recognition guidance, including industry-specific guidance.
The amended guidance clarifies that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In applying the amended guidance, an entity will (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the contract’s performance obligations; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. ASC 606 was effective for the Company’s interim and annual reporting periods beginning September 1, 2018 (fiscal 2019), and could have been adopted using either a full retrospective or modified retrospective transition method.
The Company adopted the amended guidance and all related amendments using the modified retrospective approach on September 1, 2018. The Company recognized the cumulative effect of initially applying the new revenue standard to all open contracts requiring recognition over time that were not completed on the date of adoption as an adjustment to the opening balance of retained earnings.
At the adoption date, the cumulative impact of revenue that would have been recognized over time was $80. The related adoption impact to retained earnings was $22, net of tax. The impact to net sales and net income as a result of applying ASC 606 was an increase of $94 and $21, respectively, for the quarter ended May 31, 2019 and $189 and $52, respectively, for the nine months ended May 31, 2019. See Note 9 — “Revenue from Contracts with Customers” for further discussion of the effects of adoption.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230).” This ASU provides guidance on the presentation and classification of specific cash flow items to improve consistency within the statement of cash flows. The Company adopted ASU No. 2016-15 on September 1, 2018, and the adoption did not have a material effect on its financial statements and related disclosures.
In January 2017, the FASB issued ASU No. 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business.” The new guidance dictates that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, it should be treated as an acquisition or disposal of an asset. The Company adopted the ASU on September 1, 2018. The adoption had no material effect on the financial statements and related disclosures in the first nine months of fiscal 2019. The effect ASU No. 2017-01 will have on the financial statements and related disclosures of the Company in future periods will be dependent on the nature of potential future acquisitions and divestitures.
In March 2017, the FASB issued ASU No. 2017-07, “Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This ASU applies to all employers that offer to their employees defined benefit pension plans, other postretirement benefit plans, or other types of benefits accounted for under Topic 715, Compensation — Retirement Benefits. The ASU requires that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations, if one is presented. If a separate line item or items are used to present the other components of net benefit cost, that line item or items must be appropriately described. If a separate line item or items are not used, the line item or items used in the income statement to present the other components of net benefit cost must be disclosed. The ASU also allows only the service cost component to be eligible for capitalization when applicable (e.g., as a cost of internally manufactured inventory or a self-constructed asset). The Company adopted ASU No. 2017-07 on September 1, 2018, which resulted in the reclassification of $163 and $489, previously reported in selling, general and administrative expense, to other income (expense) for the three- and nine-month periods ended May 31, 2018 (prior year), respectively.
Further reclassifications will be required on the condensed consolidated statement of operations for the fourth quarter of fiscal 2018.
The adoption of ASU 2017-07 did not have any effect on the historically stated condensed consolidated balance sheets or condensed consolidated statement of cash flows.
In May 2017, the FASB issued ASU No. 2017-09, "Scope of Modification Accounting (Topic 718)." This ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. The Company adopted the ASU 2017-09 on September 1, 2018. The adoption had no material effect on the financial statements and related disclosures in the first nine months of fiscal 2019. The effect ASU No. 2017-09 will have on the financial statements and related disclosures of the Company in future periods will be dependent on the nature of potential future changes the Company may make to the terms or conditions of any share-based payment awards.
Note 3 — Inventory
Inventory consisted of the following as of May 31, 2019 and August 31, 2018:
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May 31, 2019
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August 31, 2018
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|
Raw materials
|
|
$
|
22,037
|
|
$
|
21,998
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|
|
Work in process
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|
|
8,575
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|
|
7,653
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|
|
|
Finished goods
|
|
|
15,118
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|
|
10,048
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Total Inventory
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$
|
45,730
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|
$
|
39,699
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|
|
Note 4 — Net Income Per Share
The Company has unvested share-based payment awards with a right to receive nonforfeitable dividends which are considered participating securities under ASC Topic 260, “Earnings Per Share.” The Company allocates earnings to participating securities and computes earnings per share using the two-class method. The determination of earnings per share under the two-class method is as follows:
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Three Months Ended May 31,
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Nine Months Ended May 31,
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2019
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2018
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2019
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2018
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Basic Earnings per Share
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|
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|
Net income
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$
|
8,541
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|
$
|
13,543
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|
|
$
|
22,637
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|
$
|
31,980
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|
|
Less: Allocated to participating securities
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|
|
68
|
|
|
128
|
|
|
|
177
|
|
|
304
|
|
|
Net income available to common shareholders
|
|
$
|
8,473
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|
$
|
13,415
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|
|
$
|
22,460
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|
$
|
31,676
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|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
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Basic weighted average shares outstanding
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|
9,337,436
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|
|
9,306,498
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|
|
|
9,333,098
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|
|
9,292,647
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|
Net income per share - Basic
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|
$
|
0.91
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|
$
|
1.44
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|
|
$
|
2.41
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|
$
|
3.41
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Diluted Earnings per Share
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|
|
|
|
|
|
|
|
|
Net income
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|
$
|
8,541
|
|
$
|
13,543
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|
|
$
|
22,637
|
|
$
|
31,980
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|
|
Less: Allocated to participating securities
|
|
|
68
|
|
|
128
|
|
|
|
177
|
|
|
304
|
|
|
Net income available to common shareholders
|
|
$
|
8,473
|
|
$
|
13,415
|
|
|
$
|
22,460
|
|
$
|
31,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
9,337,436
|
|
|
9,306,498
|
|
|
|
9,333,098
|
|
|
9,292,647
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|
|
Additional dilutive common stock equivalents
|
|
|
41,474
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|
|
66,685
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|
|
|
44,650
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|
|
69,723
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|
|
Diluted weighted average shares outstanding
|
|
|
9,378,910
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|
|
9,373,183
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|
|
|
9,377,748
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|
|
9,362,370
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|
|
Net income per share - Diluted
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|
$
|
0.90
|
|
$
|
1.43
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|
|
$
|
2.39
|
|
$
|
3.38
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|
For the three- and nine-month periods ended May 31, 2019, stock options to purchase 15,625 and 14,566 shares of common stock were outstanding but were not included in the calculation of diluted income per share because their inclusion would be anti-dilutive.
For each of the three- and nine-month periods ended May 31, 2018, stock options to purchase 6,416 shares of common stock were outstanding but were not included in the calculation of diluted income per share because their inclusion would be anti-dilutive. Included in the calculation of dilutive common stock equivalents are the unvested portion of restricted stock and stock options.
Note 5 — Stock-Based Compensation
In August 2017, the Board of Directors of the Company approved the fiscal year 2018 Long Term Incentive Plan (“2018 LTIP”) for the executive officers and other members of management. The 2018 LTIP is an equity-based plan with a grant date of September 1, 2017 and contains a performance and service-based restricted stock grant of 4,249 shares in the aggregate, subject to adjustment, with a vesting date of August 31, 2020. Based on the fiscal year 2018 financial results, 572 additional shares of restricted stock (total of 4,821 shares) were earned and granted subsequent to the end of fiscal year 2018 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.
In August 2018, the Board of Directors of the Company approved the fiscal year 2019 Long Term Incentive Plan (“2019 LTIP”) for the executive officers and other members of management. The 2019 LTIP is an equity-based plan with a grant date of September 1, 2018 and contains the following equity components:
Restricted Shares
— (a) a performance and service-based restricted stock grant of 3,541 shares in the aggregate, subject to adjustment based on fiscal 2019 results, with a vesting date of August 31, 2021. Compensation expense is recognized on a ratable basis over the vesting period based on quarterly probability assessments; and (b) a time-based restricted stock grant of 3,068 shares in the aggregate, with a vesting date of August 31, 2021. Compensation expense is recognized on a ratable basis over the vesting period.
Stock options
— options to purchase 8,603 shares of common stock in the aggregate with an exercise price of $123.95 per share. The options will vest in three equal annual installments beginning on August 31, 2019 and ending on August 31, 2021. Of the options granted, 3,927 options will expire on August 31, 2028, and 4,676 options will expire on September 1, 2028. Compensation expense is recognized over the period of the award consistent with the vesting terms.
In September 2018, restricted stock in the amount of 2,472 shares related to a first quarter of fiscal 2017 grant was forfeited in conjunction with the termination of employment of a non-executive member of management of the Company.
In February 2019, as part of their standard compensation for board service, non-employee members of the Board of Directors received a total grant of 4,599 shares of restricted stock ($469 grant date value) for service for the period from January 31, 2019 through January 31, 2020. The shares of restricted stock will vest at the conclusion of this service period. Compensation is recognized on a ratable basis over the twelve-month vesting period.
Note 6 — Segment Data and Foreign Operations
The Company is organized into two reportable operating segments, an Industrial Materials segment and a Construction Materials segment. The segments are distinguished by the nature of the products and how they are delivered to their respective markets.
The Industrial Materials segment includes specified products that are used in, or integrated into, another company’s product, with demand typically dependent upon general economic conditions. Industrial Materials products include insulating and conducting materials for wire and cable manufacturers, moisture protective coatings
and customized sealant and adhesive systems for electronics, laminated durable papers, laminates for the packaging and industrial laminate markets, custom manufacturing-related services, pulling and detection tapes used in the installation, measurement and location of fiber optic cables and water and natural gas lines, cover tapes essential to delivering semiconductor components via tape and reel packaging, composite materials and elements, polymeric microspheres, polyurethane dispersions and superabsorbent polymers. Beginning December 31, 2017, the Industrial Materials segment includes the acquired operations of Zappa Stewart, included in the Company’s specialty chemical intermediates product line. Following the April 20, 2018 sale of the structural composites rod business, future product sales of composite materials and elements are not anticipated to be significant to the condensed consolidated financial statements.
The Construction Materials segment is principally composed of project-oriented and infrastructure-related product offerings that are primarily sold and used as “Chase” branded products. Construction Materials products include protective coatings for pipeline applications, coating and lining systems for use in liquid storage and containment applications, adhesives and sealants used in architectural and building envelope waterproofing 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:
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Three Months Ended May 31,
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Nine Months Ended May 31,
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2019
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2018
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2019
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2018
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Revenue
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Industrial Materials
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$
|
59,713
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|
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$
|
65,389
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|
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$
|
177,138
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|
|
$
|
170,641
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Construction Materials
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|
12,399
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|
|
|
13,529
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|
|
|
34,108
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|
|
|
36,069
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Total
|
|
$
|
72,112
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|
|
$
|
78,918
|
|
|
$
|
211,246
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|
|
$
|
206,710
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Income before income taxes
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Industrial Materials
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$
|
14,438
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(a)
|
|
$
|
20,907
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(c)
|
|
$
|
41,510
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(d)
|
|
$
|
52,433
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(f)
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Construction Materials
|
|
|
4,817
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|
|
|
5,341
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|
|
|
11,667
|
|
|
|
11,959
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|
|
|
Total for reportable segments
|
|
|
19,255
|
|
|
|
26,248
|
|
|
|
53,177
|
|
|
|
64,392
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|
|
|
Corporate and common costs
|
|
|
(7,067)
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(b)
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|
|
(7,596)
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|
|
(22,249)
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(e)
|
|
|
(21,401)
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(g)
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Total
|
|
$
|
12,188
|
|
|
$
|
18,652
|
|
|
$
|
30,928
|
|
|
$
|
42,991
|
|
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|
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|
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|
Includes the following costs by segment:
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Industrial Materials
|
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|
Interest
|
|
$
|
72
|
|
|
$
|
311
|
|
|
$
|
365
|
|
|
$
|
699
|
|
|
|
Depreciation
|
|
|
766
|
|
|
|
816
|
|
|
|
2,425
|
|
|
|
2,521
|
|
|
|
Amortization
|
|
|
2,791
|
|
|
|
2,887
|
|
|
|
8,370
|
|
|
|
7,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction Materials
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
19
|
|
|
$
|
78
|
|
|
$
|
92
|
|
|
$
|
175
|
|
|
|
Depreciation
|
|
|
161
|
|
|
|
177
|
|
|
|
500
|
|
|
|
554
|
|
|
|
Amortization
|
|
|
323
|
|
|
|
330
|
|
|
|
969
|
|
|
|
985
|
|
|
|
|
(a)
|
|
Includes $193 in exit costs related to the movement of the pulling and detection business out of the Granite Falls, NC location and into the Hickory, NC location during the third quarter of fiscal 2019
|
|
|
(b)
|
|
Includes $11 of pension-related settlement costs due to the timing of lump-sum distributions
|
|
|
(c)
|
|
Includes $1,480 gain on sale of business related to the April 2018 sale of the structural composites rod business
|
|
|
(d)
|
|
Includes $260 of expense related to the closure and exit of our Pawtucket, RI location recognized in the first quarter of fiscal 2019, $193 in exit costs related to the movement of the pulling and detection business out of the Granite Falls, NC location and into the Hickory, NC location during the third quarter of fiscal 2019 and $2,410 of loss on impairment of goodwill related to the Company’s polyurethane dispersions business
|
|
|
(e)
|
|
Includes $484 of pension-related settlement costs due to the timing of lump-sum distributions
|
|
|
(f)
|
|
Includes $1,530 of expenses related to inventory step-up in fair value attributable to the December 2017 acquisition of Zappa Stewart, $1,085 gain on sale of license related to the structural composites product line recorded in the second quarter of fiscal 2018 and $1,480 gain on sale of business related to the April 2018 sale of the structural composites rod business
|
|
|
(g)
|
|
Includes $393 in acquisition-related expenses attributable to the December 2017 acquisition of Zappa Stewart
|
Total assets for the Company’s reportable segments as of May 31, 2019 and August 31, 2018 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
August 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
|
Industrial Materials
|
|
$
|
221,442
|
|
$
|
229,559
|
|
|
|
Construction Materials
|
|
|
32,853
|
|
|
36,757
|
|
|
|
Total for reportable segments
|
|
|
254,295
|
|
|
266,316
|
|
|
|
Corporate and common assets
|
|
|
45,207
|
|
|
50,153
|
|
|
|
Total
|
|
$
|
299,502
|
|
$
|
316,469
|
|
|
The Company’s products are sold worldwide. Revenue for the three- and nine-month periods ended May 31, 2019 and 2018 were attributed to operations located in the following countries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
Nine Months Ended May 31,
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
64,046
|
|
|
$
|
67,732
|
|
|
$
|
186,339
|
|
|
$
|
176,187
|
|
|
|
United Kingdom
|
|
|
4,502
|
|
|
|
6,353
|
|
|
|
12,946
|
|
|
|
16,142
|
|
|
|
All other foreign
(1)
|
|
|
3,564
|
|
|
|
4,833
|
|
|
|
11,961
|
|
|
|
14,381
|
|
|
|
Total
|
|
$
|
72,112
|
|
|
$
|
78,918
|
|
|
$
|
211,246
|
|
|
$
|
206,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
|
Comprises sales originated from our Paris, France location, royalty revenue attributable to our licensed manufacturer in Asia, and Chase foreign manufacturing operations.
|
As of May 31, 2019 and August 31, 2018, 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) and goodwill and intangible assets, less accumulated amortization, in the following countries:
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
August 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
Long-Lived Assets
|
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
25,641
|
|
$
|
28,770
|
|
|
|
Goodwill and Intangible assets, less accumulated amortization
|
|
|
132,049
|
|
|
143,539
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
2,702
|
|
|
2,911
|
|
|
|
Goodwill and Intangible assets, less accumulated amortization
|
|
|
4,734
|
|
|
5,239
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All other foreign
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
1,814
|
|
|
1,164
|
|
|
|
Goodwill and Intangible assets, less accumulated amortization
|
|
|
1,197
|
|
|
1,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
30,157
|
|
$
|
32,845
|
|
|
|
Goodwill and Intangible assets, less accumulated amortization
|
|
$
|
137,980
|
|
$
|
150,026
|
|
|
See Note 20 to the condensed consolidated financial statements for information on a change to the Company’s reportable operating segments subsequent to the third fiscal quarter of 2019.
Note 7 — Goodwill and Other Intangibles
The changes in the carrying value of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
Materials
|
|
Construction Materials
|
|
Consolidated
|
|
|
Balance at August 31, 2018
|
|
$
|
74,002
|
|
$
|
10,694
|
|
$
|
84,696
|
|
|
Loss on impairment of polyurethane dispersions business
|
|
|
(2,410)
|
|
|
—
|
|
|
(2,410)
|
|
|
Foreign currency translation adjustment
|
|
|
(152)
|
|
|
(6)
|
|
|
(158)
|
|
|
Balance at May 31, 2019
|
|
$
|
71,440
|
|
$
|
10,688
|
|
$
|
82,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company’s goodwill is allocated to each reporting unit based on the nature of the products manufactured by the respective business combinations that originally created the goodwill. The Company has identified a total of twelve reporting units within its two operating segments that are used to evaluate the possible impairment of goodwill. Goodwill impairment exists when the carrying value of goodwill exceeds its fair value. Assessments of possible impairment of goodwill are made when events or changes in circumstances indicate that the carrying value of the asset may not be recoverable through future operations. Additionally, testing for possible impairment of recorded goodwill and certain intangible asset balances is required annually. The amount and timing of any impairment charges based on these assessments require the estimation of future cash flows and the fair market value of the related assets based on management’s best estimates of certain key factors, including future selling prices and volumes; operating, raw material and energy costs; and various other projected operating and economic factors. When testing, fair values of the reporting units and the related implied fair values of their respective goodwill are established using discounted cash flows. The Company evaluates the possible impairment of goodwill annually during the fourth quarter, and whenever events or circumstances indicate the carrying value of goodwill may not be recoverable.
See Note 20 to the condensed consolidated financial statements for information on a change to the Company’s reportable operating segments subsequent to the third fiscal quarter of 2019.
In fiscal 2017, the Company early adopted ASU No. 2017-04 “Intangibles - Goodwill and Other Topics (Topic 350): Simplifying the Test for Goodwill Impairment.” We assess goodwill for impairment by comparing the fair value of the reporting unit to its carrying amount. If the fair value of a reporting unit is less than its carrying value, an impairment loss, limited to the amount of goodwill allocated to that reporting unit, is recorded.
During the three-month period ended February 28, 2019, the ordering patterns of our polyurethane dispersions reporting unit’s customers, especially those in the automotive industry, combined with a decrease in the reporting unit’s backlog of customer orders believed to be firm as of February 28, 2019, indicated an impairment in the carrying value of the reporting unit might have occurred. As such,
we performed an impairment test on our long-lived assets related to our polyurethane dispersions reporting unit, part of the Industrial Materials operating segment, in accordance with ASC Topic 350, “Intangibles — Goodwill and Other” and ASC Topic 360, “Disclosure — Impairment or Disposal of Long-Lived Assets.” As a result of impairment testing, which included first testing long-lived assets other than goodwill for impairment under applicable guidance, the Company recorded a charge of $2,410 to loss on impairment of goodwill within the condensed consolidated statement of operations during the quarter ended February 28, 2019.
Our polyurethane dispersions reporting unit’s fair value was determined based on the income approach (discounted cash flow method).
Intangible assets subject to amortization consisted of the following as of May 31, 2019 and August 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Gross Carrying
|
|
Accumulated
|
|
Net Carrying
|
|
|
|
|
Amortization Period
|
|
Value
|
|
Amortization
|
|
Value
|
|
|
May 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and agreements
|
|
14.6
|
years
|
$
|
1,760
|
|
$
|
1,690
|
|
$
|
70
|
|
|
Formulas and technology
|
|
7.8
|
years
|
|
10,198
|
|
|
7,667
|
|
|
2,531
|
|
|
Trade names
|
|
5.8
|
years
|
|
8,531
|
|
|
7,178
|
|
|
1,353
|
|
|
Customer lists and relationships
|
|
9.1
|
years
|
|
98,449
|
|
|
46,551
|
|
|
51,898
|
|
|
|
|
|
|
$
|
118,938
|
|
$
|
63,086
|
|
$
|
55,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and agreements
|
|
14.4
|
years
|
$
|
1,863
|
|
$
|
1,681
|
|
$
|
182
|
|
|
Formulas and technology
|
|
7.8
|
years
|
|
10,225
|
|
|
6,690
|
|
|
3,535
|
|
|
Trade names
|
|
5.8
|
years
|
|
8,554
|
|
|
6,866
|
|
|
1,688
|
|
|
Customer lists and relationships
|
|
9.1
|
years
|
|
98,727
|
|
|
38,802
|
|
|
59,925
|
|
|
|
|
|
|
$
|
119,369
|
|
$
|
54,039
|
|
$
|
65,330
|
|
Aggregate amortization expense related to intangible assets for the nine months ended May 31, 2019 and 2018 was $9,339 and $8,450 respectively. Estimated amortization expense for the remainder of fiscal year 2019 and for the next five years is as follows:
|
|
|
|
|
|
|
Years ending August 31,
|
|
|
|
|
|
2019 (remaining 3 months)
|
|
$
|
3,098
|
|
|
2020
|
|
|
11,571
|
|
|
2021
|
|
|
11,041
|
|
|
2022
|
|
|
10,028
|
|
|
2023
|
|
|
6,768
|
|
|
2024
|
|
|
5,659
|
|
Note 8 — Sale of Business
Sale of
Structural Composites Rod Business
On April 20, 2018, Chase finalized an agreement with an unrelated party to sell all inventory, operational machinery and equipment and intangible assets of the Company’s structural composites rod business, as well as a license related to the production and sale of rod, for proceeds of $2,232, net of transaction costs and following certain working capital adjustments. This business, which was part of the structural composites product line within the Industrial Materials segment, had limited growth and profitability prospects as part of the Company, and was outside the areas Chase has identified for strategic emphasis. The divestiture was accounted for under
ASC Topic 360, “Disclosure - Impairment or Disposal of Long-Lived Assets.”
In accordance with this accounting standard, the resulting pre-tax gain on sale of $1,480 was recognized in the third quarter of fiscal 2018
as a gain on sale of businesses within the condensed consolidated statement of operations. Chase received $2,075, net of transaction costs, in the third quarter of fiscal 2018, with the remaining $157 received in the fourth quarter of fiscal 2018 as a result of a working capital true-up.
Related to this transaction, the purchaser entered into a royalty agreement with the Company. The purchaser will make royalty payments to Chase based on future sales of certain structural composite material manufactured by the purchaser. Royalty revenue recognized in the nine-month period ended May 31, 2019 related to this agreement was not material.
The sale of the structural components rod business follows the Company’s
sale of the RodPack
®
wind blade components business in November 2015, and the licensing of certain composite technologies during the second quarter of fiscal 2018 (see Note 17). Subsequent to the third quarter of fiscal 2018, Chase has included the results of its remaining structural composites wind energy business (inclusive of the royalties and the custom manufacturing-related services noted below) within the specialty products product line.
Post-Sale Services Provided to the Buyer of the Structural Composites Rod Business and the Fiber Optic Cable Components Product Line
The structural composites rod business and the fiber optic cable components product line (sold in fiscal 2017), which both operated out of the Company’s Granite Falls, NC facility, were both sold to the same otherwise unrelated purchaser. Subsequent to the sales, Chase will provide certain transitional manufacturing and administrative support to the purchaser for which the Company will receive additional consideration upon the performance of services. In the three-and nine-month periods ended May 31, 2019, Chase charged the purchaser $381 and $1,764, respectively, for manufacturing services, which the Company recognized as revenue within the Industrial Materials segment, and $57 and $171, respectively, for selling and administrative services, which the Company recognized as an offset to selling, general and administrative expenses. In the three- and nine-month periods ended May 31, 2018, Chase charged the purchaser $497 and $1,184, respectively, for manufacturing services, and $71 and $191, respectively, for selling and administrative services. Further, the purchaser entered a multiyear lease for a portion of the manufacturing space at the Company’s Granite Falls, NC facility. Chase received $32, $97, $33 and $98 in rental income related to this lease during the three- and nine-month periods ended May 31, 2019 and 2018, respectively, which the Company recognized within other income (expense) on the condensed consolidated statements of operations.
Note 9 — Revenue from Contracts with Customers
The Company accounts for revenue in accordance with ASC 606, “Revenue from Contracts with Customers.” This revenue is generated from the manufacture of specialty chemical products including coatings, linings, adhesives, sealants, specialty tapes, polymers and laminates. Certain of these manufactured products can comprise fully or partially of customer-owned materials. The Company also recognizes, to a lesser extent, revenue through royalties and commissions from licensed manufacturers and from providing custom manufacturing-related services. The Company’s revenue recognition policies require the Company to make significant judgments and estimates. In applying the Company’s revenue recognition policy, determinations must be made as to when control of products passes to the Company’s customers, which can be either at a point in time or over time based on contractual terms with customers. As described in more detail below, revenue is generally recognized at a point in time when control passes, upon either shipment to or receipt by the customer of the Company’s products, while revenue is generally recognized over time when control of the Company’s products transfers to customers during the manufacturing process.
The Company accounts for revenue from contracts with customers when there is approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is primarily derived from customer purchase orders, master sales agreements, and negotiated contracts, all of which represent contracts with customers.
The Company next identifies the performance obligations in the contract. A performance obligation is a promise to provide distinct goods or services. Performance obligations are the unit of account for purposes of applying the revenue standard and therefore determine when and how revenue is recognized. The Company determines the performance obligations at contract inception based on the goods or services that are promised in a contract with a customer. Typical performance obligations include our promise to manufacture and the fulfillment of orders of specialty chemical products including coatings, linings, adhesives, sealants, specialty tapes, polymers and laminates, as well as custom manufacturing-related services.
The transaction price in the contract is determined based on the consideration to which the Company will be entitled in exchange for transferring products and services to the customer, excluding amounts collected on behalf of third parties (for example, sales taxes). The transaction price is typically stated on the purchase order or in a negotiated agreement. Certain contracts may include variable consideration in the transaction price, such as rebates, pricing discounts, sales incentives, or other provisions that can decrease the transaction price. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on reasonably available information (customer historical, current and forecasted data). In certain circumstances where a particular outcome is probable, the Company utilizes the most likely amount to which the Company expects to be entitled. The Company accounts for consideration payable to a customer as a reduction of the transaction price which reduces the amount of
revenue recognized. Consideration payable to a customer includes cash amounts that the Company pays, or expects to pay, to a customer based on certain contract requirements.
The Company recognizes revenue as performance obligations are satisfied, which can be either over time or at a point in time, depending on when control of the Company’s products transfers to its customers.
For certain products, where the Company’s product consists partially or fully of customer-owned materials, revenue is recognized over time, and the Company makes significant judgments which include, but are not limited to, estimated costs to completion and costs incurred to date, and assesses risks related to changes in estimates of revenue and costs. In doing so, management must make assumptions regarding the work required to fulfill the performance obligations.
The selection of the method to measure progress towards completion requires judgment and is based on the nature of the products to be provided. The Company generally uses the cost-to-cost measure of progress for contracts because it best depicts the transfer of control to the customer which occurs as costs are incurred on contracts. Under the cost-to-cost measure of progress, the extent of progress towards completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenue is recorded proportionally as costs are incurred.
Performance Obligation
Manufactured goods and, to a lesser extent, right of use of our intellectual property and custom manufacturing-related services are our performance obligations. Revenue related to our performance obligations is predominantly recognized at a point in time consistent with our shipping terms (upon shipment to or receipt by our customer). For certain products we manufacture, which consist partially or fully of customer-owned material and which meet the criteria of having no alternative use whereby the Company has the right to payment without regard to title, we recognize revenue over time.
The selection of a method to measure progress toward completion of a contract requires judgment and is based on the nature of the products or services to be provided. We use the cost-to-cost method to measure the progress of our contracts with no-alternative-use products (given they comprise partially or fully of customer-owned material) whereby the Company has the right to payment as we believe it is the best depiction of the transferring of value to the customer. Under the cost-to-cost method, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the contract. Contract costs include labor, materials and subcontractors costs, as well as an allocation of indirect costs. Revenue, including estimated fees or profits, is recorded as costs are incurred. Specialty manufacturing runs for customers of products which are composed partially or fully of customer-owned material predominantly occur over relatively short periods of time (less than one month) and consist of a one-step process (such as coating or laminating), promptly followed by shipment to the end customer. On-going custom manufacturing-related services performed for customers are recognized in the period the services are rendered, and as such do not carry over from period to period. Royalty revenue, derived from right of use of our intellectual property,
is recognized when the subsequent sale of the licensed intellectual property occurs.
Because performance obligations are typically satisfied within one month of receipt of a customer order, a change in cost estimates will not have a material impact on the percentage of completion noted at the prior quarter end. Our typical payment terms with customers are net 30 days, with consideration given to geographic and industry norms.
Contract Balances
The Company’s contract assets primarily relate to unbilled revenue for products currently in production, at the Company’s facilities and which comprise partially or fully of customer-owned material. Revenue is recognized in advance of billing to the customer in these specific circumstances, whereas billing is typically performed at the time of shipment to or receipt by the customer.
Contract assets are included in prepaid expenses and other current assets on the Company’s condensed consolidated balance sheets. The following table presents contract assets by reportable operating segment as of May 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
May 31,
|
|
September 1,
|
|
|
|
2019
|
|
2018
|
|
Contract Assets
|
|
|
|
|
|
|
|
Industrial Materials
|
|
$
|
143
|
|
$
|
16
|
|
Construction Materials
|
|
|
126
|
|
|
64
|
|
Total
|
|
$
|
269
|
|
$
|
80
|
The Company did not have any contract liabilities as of September 1, 2018 and May 31, 2019.
Impacts on Financial Statements
The cumulative effect of the changes made to the Company’s condensed consolidated September 1, 2018 balance sheet for the adoption of ASC 606 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
Adjustments for
|
|
|
September 1,
|
|
|
|
2018
|
|
Adoption of ASC 606
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
—
|
|
$
|
80
|
|
|
$
|
80
|
|
Inventory
|
|
$
|
39,699
|
|
$
|
(50)
|
|
|
$
|
39,649
|
|
Prepaid income taxes
|
|
$
|
4,100
|
|
$
|
(8)
|
|
|
$
|
4,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
245,049
|
|
$
|
22
|
|
|
$
|
245,071
|
The cumulative effect of the changes made to the Company’s condensed consolidated May 31, 2019 balance sheet for the adoption of ASC 606 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2019
|
|
|
|
Balances Without
|
|
ASC 606
|
|
|
As
|
|
|
|
Adoption of ASC 606
|
|
Adjustments
|
|
|
Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
Contract assets
|
|
$
|
—
|
|
$
|
269
|
|
|
$
|
269
|
|
Inventory
|
|
$
|
45,899
|
|
$
|
(169)
|
|
|
$
|
45,730
|
|
Prepaid income taxes
|
|
$
|
2,028
|
|
$
|
(26)
|
|
|
$
|
2,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
|
|
|
|
|
|
|
|
Retained earnings
|
|
$
|
260,112
|
|
$
|
74
|
|
|
$
|
260,186
|
The cumulative effect of the changes made to the Company’s condensed consolidated statement of operations for the adoption of ASC 606 for the three and nine months ended May 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2019
|
|
|
Nine Months Ended May 31, 2019
|
|
|
|
Results Without
|
|
Effect of Change
|
|
|
As
|
|
|
Results Without
|
|
Effect of Change
|
|
|
As
|
|
|
|
Adoption of ASC 606
|
|
Higher (Lower)
|
|
|
Reported
|
|
|
Adoption of ASC 606
|
|
Higher (Lower)
|
|
|
Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
70,789
|
|
$
|
94
|
|
|
$
|
70,883
|
|
|
$
|
207,500
|
|
$
|
189
|
|
|
$
|
207,689
|
|
Royalties and commissions
|
|
|
1,229
|
|
|
—
|
|
|
|
1,229
|
|
|
|
3,557
|
|
|
—
|
|
|
|
3,557
|
|
|
|
|
72,018
|
|
|
94
|
|
|
|
72,112
|
|
|
|
211,057
|
|
|
189
|
|
|
|
211,246
|
|
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of products and services sold
|
|
|
46,341
|
|
|
65
|
|
|
|
46,406
|
|
|
|
136,075
|
|
|
119
|
|
|
|
136,194
|
|
Selling, general and administrative expenses
|
|
|
13,251
|
|
|
—
|
|
|
|
13,251
|
|
|
|
39,699
|
|
|
—
|
|
|
|
39,699
|
|
Loss on impairment of goodwill
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
|
|
2,410
|
|
|
—
|
|
|
|
2,410
|
|
Exit costs related to facilities
|
|
|
193
|
|
|
—
|
|
|
|
193
|
|
|
|
453
|
|
|
—
|
|
|
|
453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
12,233
|
|
|
29
|
|
|
|
12,262
|
|
|
|
32,420
|
|
|
70
|
|
|
|
32,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(91)
|
|
|
—
|
|
|
|
(91)
|
|
|
|
(457)
|
|
|
—
|
|
|
|
(457)
|
|
Other income (expense)
|
|
|
17
|
|
|
—
|
|
|
|
17
|
|
|
|
(1,105)
|
|
|
—
|
|
|
|
(1,105)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
12,159
|
|
|
29
|
|
|
|
12,188
|
|
|
|
30,858
|
|
|
70
|
|
|
|
30,928
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
|
3,639
|
|
|
8
|
|
|
|
3,647
|
|
|
|
8,273
|
|
|
18
|
|
|
|
8,291
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
8,520
|
|
$
|
21
|
|
|
$
|
8,541
|
|
|
$
|
22,585
|
|
$
|
52
|
|
|
$
|
22,637
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income available to common shareholders, per common and common equivalent share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.91
|
|
$
|
—
|
|
|
$
|
0.91
|
|
|
$
|
2.40
|
|
$
|
0.01
|
|
|
$
|
2.41
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
$
|
0.90
|
|
$
|
—
|
|
|
$
|
0.90
|
|
|
$
|
2.39
|
|
$
|
—
|
|
|
$
|
2.39
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
9,337,436
|
|
|
—
|
|
|
|
9,337,436
|
|
|
|
9,333,098
|
|
|
—
|
|
|
|
9,333,098
|
|
Diluted
|
|
|
9,378,910
|
|
|
—
|
|
|
|
9,378,910
|
|
|
|
9,377,748
|
|
|
—
|
|
|
|
9,377,748
|
Disaggregated Revenue
The Company disaggregates
revenue from customers by geographic region, as it believes this disclosure best depicts how the nature, amount, timing and uncertainty of the Company's revenue and cash flows are affected by economic factors. Disaggregated revenue by geographical region for the three and nine months ended May 31, 2019 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31, 2019
|
|
|
Nine Months Ended May 31, 2019
|
|
|
|
Industrial
|
|
Construction
|
|
|
Consolidated
|
|
|
Industrial
|
|
Construction
|
|
|
Consolidated
|
|
|
|
Materials
|
|
Materials
|
|
|
Revenue
|
|
|
Materials
|
|
Materials
|
|
|
Revenue
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
49,129
|
|
$
|
9,764
|
|
|
$
|
58,893
|
|
|
$
|
143,221
|
|
$
|
26,968
|
|
|
$
|
170,189
|
|
Asia
|
|
|
6,200
|
|
|
1,851
|
|
|
|
8,051
|
|
|
|
20,025
|
|
|
5,123
|
|
|
|
25,148
|
|
Europe
|
|
|
4,083
|
|
|
644
|
|
|
|
4,727
|
|
|
|
12,179
|
|
|
1,794
|
|
|
|
13,973
|
|
All other foreign
|
|
|
301
|
|
|
140
|
|
|
|
441
|
|
|
|
1,713
|
|
|
223
|
|
|
|
1,936
|
|
Total Revenue
|
|
$
|
59,713
|
|
$
|
12,399
|
|
|
$
|
72,112
|
|
|
$
|
177,138
|
|
$
|
34,108
|
|
|
$
|
211,246
|
Practical Expedients and Policy Elections
Shipping and Handling Policy Election
—
the Company has made an accounting policy election to record shipping and handling activities occurring after control has passed to the customer to be treated as a fulfillment cost rather than as a distinct performance obligation. Shipping and handling expenses consist primarily of costs incurred to deliver products to customers and internal costs related to preparing products for shipment and are recorded within cost of products and services sold. Amounts billed to customers as shipping and handling are classified as revenue when services are performed.
Considering Existence of a Significant Financing Component
—
as a practical expedient, an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to the customer and when the customer pays for that good or service will be one year or less.
Given the time between the Company transferring a promised good or service to the customer and the customer paying for that good or service is less than one year based on the terms of arrangements with customers, the Company does not adjust the promised amount of consideration for effects of a significant financing component.
Note 10 — Commitments and Contingencies
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, results of operations or cash flows, litigation is inherently unpredictable. Therefore, judgments could be rendered, or settlements agreed to that could adversely affect the Company’s operating results or cash flows in a particular period. The Company routinely assesses all 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 we assess the likelihood of loss as probable.
Note 11 — Pensions and Other Postretirement Benefits
The components of net periodic benefit cost for the three and nine months ended May 31, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
Nine Months Ended May 31,
|
|
|
|
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
67
|
|
$
|
71
|
|
|
$
|
213
|
|
$
|
213
|
|
|
|
Interest cost
|
|
|
172
|
|
|
157
|
|
|
|
528
|
|
|
471
|
|
|
|
Expected return on plan assets
|
|
|
(104)
|
|
|
(116)
|
|
|
|
(325)
|
|
|
(348)
|
|
|
|
Amortization of prior service cost
|
|
|
1
|
|
|
1
|
|
|
|
3
|
|
|
3
|
|
|
|
Amortization of accumulated loss
|
|
|
112
|
|
|
121
|
|
|
|
349
|
|
|
363
|
|
|
|
Settlement and curtailment loss
|
|
|
11
|
|
|
—
|
|
|
|
484
|
|
|
—
|
|
|
|
Net periodic benefit cost
|
|
$
|
259
|
|
$
|
234
|
|
|
$
|
1,252
|
|
$
|
702
|
|
|
When funding is required, the Company’s policy is to contribute amounts that are deductible for federal income tax purposes. The Company has made contributions of $393 and $1,177 in the three and nine months ended May 31, 2019 to fund its obligations under its pension plans, and plans to make the necessary contributions over the remainder of fiscal 2019 to ensure the qualified plans continue to be adequately funded given the current market conditions. The Company made contributions of $872 and $1,682 in the three and nine months ended May 31, 2018.
In fiscal 2019, the Company adopted ASU No. 2017-07, “Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.” This resulted in the reclassification of $489 previously reported in selling, general and administrative expense to other income (expense) for the nine-month period ended May 31, 2018 (prior year).
Note 12 — 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 (exit price) in an orderly transaction between market participants at the measurement date. The Company uses a three-tier fair value hierarchy, which classifies the inputs used in measuring fair values. These tiers are: Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions.
The Company utilizes the best available information in measuring fair value. Financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The financial assets classified as Level 1 and Level 2 as of May 31, 2019 and August 31, 2018 represent investments that are restricted for use in nonqualified retirement savings plans for certain key employees and directors.
The following table sets forth the Company’s financial assets that were accounted for at fair value on a recurring basis as of May 31, 2019 and August 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement category
|
|
|
|
|
|
|
|
|
|
Quoted prices
|
|
Significant other
|
|
Significant
|
|
|
|
|
Fair value
|
|
|
|
|
in active markets
|
|
observable inputs
|
|
unobservable inputs
|
|
|
|
|
measurement date
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted investments
|
|
May 31, 2019
|
|
$
|
1,160
|
|
$
|
998
|
|
162
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted investments
|
|
August 31, 2018
|
|
$
|
1,090
|
|
$
|
961
|
|
129
|
|
—
|
|
The following table presents the fair value of the Company’s long-term debt (including any current portion of long-term debt) as of May 31, 2019 and August 31, 2018, which is recorded at its carrying value:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value measurement category
|
|
|
|
|
|
|
|
|
|
Quoted prices
|
|
Significant other
|
|
Significant
|
|
|
|
|
Fair value
|
|
|
|
|
in active markets
|
|
observable inputs
|
|
unobservable inputs
|
|
|
|
|
measurement date
|
|
Total
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
May 31, 2019
|
|
$
|
—
|
|
$
|
—
|
|
—
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
August 31, 2018
|
|
$
|
25,000
|
|
$
|
—
|
|
25,000
|
|
—
|
|
The long-term debt had no outstanding balance as of May 31, 2019. The carrying value of the long-term debt approximates its fair value, as the interest rate is set based on the movement of the underlying market rates. See Note 16 to the condensed consolidated financial statements for additional information on long-term debt.
Note 13 — Accumulated Other Comprehensive Income
The changes in accumulated other comprehensive income (loss), net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Funded
|
|
Foreign Currency
|
|
|
|
|
|
|
|
Restricted
|
|
Status of
|
|
Translation
|
|
|
|
|
|
|
|
Investments
|
|
Pension Plans
|
|
Adjustment
|
|
Total
|
|
|
Balance at August 31, 2017
|
|
$
|
121
|
|
$
|
(6,181)
|
|
$
|
(7,409)
|
|
$
|
(13,469)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive gains (losses) before reclassifications (1)
|
|
|
55
|
|
|
—
|
|
|
1,473
|
|
|
1,528
|
|
|
Reclassifications to net income of previously deferred (gains) losses (2)
|
|
|
(68)
|
|
|
277
|
|
|
—
|
|
|
209
|
|
|
Other comprehensive income (loss)
|
|
|
(13)
|
|
|
277
|
|
|
1,473
|
|
|
1,737
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2018
|
|
$
|
108
|
|
$
|
(5,904)
|
|
$
|
(5,936)
|
|
$
|
(11,732)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2018
|
|
$
|
126
|
|
$
|
(5,796)
|
|
$
|
(6,666)
|
|
$
|
(12,336)
|
|
|
Other comprehensive gains (losses) before reclassifications (3)
|
|
|
(12)
|
|
|
—
|
|
|
(956)
|
|
|
(968)
|
|
|
Reclassifications to net income of previously deferred (gains) losses (4)
|
|
|
(1)
|
|
|
618
|
|
|
—
|
|
|
617
|
|
|
Other comprehensive income (loss)
|
|
|
(13)
|
|
|
618
|
|
|
(956)
|
|
|
(351)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at May 31, 2019
|
|
$
|
113
|
|
$
|
(5,178)
|
|
$
|
(7,622)
|
|
$
|
(12,687)
|
|
|
|
(1)
|
|
Net of tax benefit of $19, $0 and $0, respectively.
|
|
|
(2)
|
|
Net of tax expense of $24, tax benefit of $89 and $0, respectively.
|
|
|
(3)
|
|
Net of tax expense of $4, $0 and $0, respectively.
|
|
|
(4)
|
|
Net of tax expense of $1, tax benefit of $218 and $0, respectively.
|
The following table summarizes the reclassifications from accumulated other comprehensive income (loss) to the unaudited condensed consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive
|
|
|
|
|
|
|
|
|
|
Income (Loss) into Income
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
Nine Months Ended May 31,
|
|
Location of Gain (Loss) Reclassified from Accumulated
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
2019
|
|
2018
|
|
Other Comprehensive Income (Loss) into Income
|
|
|
Gains on Restricted Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized loss (gain) on sale of restricted investments
|
|
|
|
|
$
|
(6)
|
|
$
|
(1)
|
|
|
$
|
(2)
|
|
$
|
(92)
|
|
Selling, general and administrative expenses
|
|
|
Tax expense (benefit)
|
|
|
|
|
|
2
|
|
|
—
|
|
|
|
1
|
|
|
24
|
|
|
|
|
Gain net of tax
|
|
|
|
|
$
|
(4)
|
|
$
|
(1)
|
|
|
$
|
(1)
|
|
$
|
(68)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on Funded Pension Plan adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior pension service costs and unrecognized losses
|
|
|
|
|
$
|
114
|
|
$
|
122
|
|
|
$
|
352
|
|
$
|
366
|
|
Other income (expense)
|
|
|
Settlement and curtailment loss
|
|
|
|
|
|
11
|
|
|
—
|
|
|
|
484
|
|
|
—
|
|
Other income (expense)
|
|
|
Tax expense (benefit)
|
|
|
|
|
|
(34)
|
|
|
(30)
|
|
|
|
(218)
|
|
|
(89)
|
|
|
|
|
Loss net of tax
|
|
|
|
|
$
|
91
|
|
$
|
92
|
|
|
$
|
618
|
|
$
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loss reclassified for the period
|
|
|
|
|
$
|
87
|
|
$
|
91
|
|
|
$
|
617
|
|
$
|
209
|
|
|
|
Note 14 — Acquisitions
Acquisition of Zappa Stewart
On December 31, 2017, the Company acquired Zappa Stewart, an advanced superabsorbent polymer (SAP) formulator and solutions provider, with operations located in Hickory and McLeansville, NC. The business was acquired for a purchase price of $73,469, after final working capital adjustments and excluding acquisition-related costs. Chase acquired all equity of the business and entered multiyear leases at both locations. The purchase was funded by a combination of a $65,000 draw on Chase’s existing revolving credit facility and available cash on hand. Zappa Stewart’s protective materials technology is complementary to Chase’s current specialty chemicals offerings. This acquisition is in line with Chase’s core strategies and extends its reach into growing medical, environmental and consumer applications.
Since the effective date for this acquisition, December 31, 2017, the financial results of the acquired business have been included in the Company’s financial statements within the Industrial Materials operating segment, in the specialty chemical intermediates product line. The acquisition was accounted for as a business combination under ASC Topic 805, “Business Combinations.” In accordance with this accounting standard, the Company expensed $393 of acquisition-related costs during the second quarter of 2018 to acquisition-related costs.
The Company finalized purchase accounting in the three-month period ended November 30, 2018, with no adjustments made to the preliminary amounts recorded at August 31, 2018. The purchase price has been allocated to the acquired tangible and identifiable intangible assets assumed, based on their fair values as of the date of the acquisition:
|
|
|
|
|
|
Assets and Liabilities
|
|
Amount
|
|
Accounts receivable
|
|
$
|
3,670
|
|
Inventory
|
|
|
6,796
|
|
Prepaid expenses and other current assets
|
|
|
12
|
|
Property, plant & equipment
|
|
|
1,872
|
|
Goodwill
|
|
|
34,138
|
|
Intangible assets
|
|
|
30,240
|
|
Deferred tax liability
|
|
|
(2,626)
|
|
Accounts payable and accrued liabilities
|
|
|
(633)
|
|
Total purchase price
|
|
$
|
73,469
|
|
|
|
|
|
The excess of the purchase price over the net tangible and intangible assets acquired resulted in goodwill of $34,138 that is largely attributable to the synergies and economies of scale from combining the operations, technologies and research and development capabilities of Zappa Stewart and Chase, particularly as it pertains to the expansion of the Company's product and service offerings, the established workforce and marketing efforts. A portion of this goodwill, $23,990, is deductible for income tax purposes.
All assets, including goodwill, acquired as part of the Zappa Stewart acquisition are included in the Industrial Materials operating segment. Identifiable intangible assets purchased with this transaction are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Intangible Asset
|
|
Amount
|
|
Useful Life
|
|
Customer relationships
|
|
$
|
28,500
|
|
7.9
|
years
|
|
Technology
|
|
|
900
|
|
7
|
years
|
|
Trade names
|
|
|
840
|
|
4
|
years
|
|
Total intangible assets
|
|
$
|
30,240
|
|
|
|
Note 15 — Exit Costs Related to Facilities
Granite Falls, NC
During the quarter ended May 31, 2019, Chase began moving the pulling and detection operations currently housed in its Granite Falls, NC location to its Hickory, NC facility. This is in line with the Company’s ongoing initiative to consolidate its manufacturing plants and streamline its existing processes. Currently, the pulling and detection operations are the only Chase-owned production operations in Granite Falls, NC, with the remaining portions of the building being either utilized for research and development or leased to a third party (see Note 8 to the condensed consolidated financial statements for additional information on this lease). The process of moving has continued subsequent to the third quarter of fiscal 2019 and is anticipated to be completed during the first half of fiscal 2020. The Company recognized $193 in expense related to the move in the three-month period ended May 31, 2019. Future costs related to this move are currently anticipated to be approximately $1,000, and the Company plans to disclose these amounts separately on the condensed consolidated statement of operations in future periods.
Pawtucket, RI
On June 25, 2018, the Company announced to its employees the planned closing of its Pawtucket, RI manufacturing facility effective August 31, 2018. This is in line with the Company’s ongoing efforts to consolidate its manufacturing plants and streamline its existing processes. The manufacture of products previously produced in the Pawtucket, RI facility was substantially moved to Company facilities in Oxford, MA and Lenoir, NC during a two-month transition period. In the fourth quarter of fiscal 2018, the Company expensed $1,272 related to the closure, including: (a) cash-related employee-related, logistics and uncapitalized facilities improvement costs of $590; and (b) non-cash-related accelerated depreciation expense of $682.
The Company also recognized $260 in expense related to the move in the three-month period ended November 30, 2018, with no additional expense recognized in the quarters ended February 28, 2019 and May 31, 2019. Future costs related to this move are not anticipated to be significant to the condensed consolidated financial statements.
Note 16 — Long-Term Debt
On December 15, 2016, the Company entered an Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America, acting as administrative agent, and with participation from Citizens Bank and JPMorgan Chase Bank (collectively with Bank of America, the “Lenders”). The Credit Agreement is initially an all-revolving credit facility with a borrowing capacity of $150,000, which can be increased by an additional $50,000 at the request of the Company and the individual or collective option of any of the Lenders. The Credit Agreement contains customary affirmative and negative covenants that, among other things, restrict our ability to incur additional indebtedness and require lender approval for acquisitions by the Company and its subsidiaries over a certain size. It also requires us to maintain certain financial ratios on a consolidated basis, including a consolidated net leverage ratio (as defined in the facility) of no more than 3.25 to 1.00, and a consolidated fixed charge coverage ratio (as defined in the facility) of at least 1.25 to 1.00. We were in compliance with our debt covenants as of May 31, 2019. The Credit Agreement is guaranteed by all of Chase’s direct and indirect domestic subsidiaries, which collectively had a carrying value of $233,376 at May 31, 2019. The Credit Agreement was entered both to refinance our previously existing term loan and revolving line of credit, and to provide for additional liquidity to finance potential acquisitions, working capital, capital expenditures, and for other general corporate purposes.
The applicable interest rate for the revolver portion of the Credit Agreement (the “Revolving Facility”) and any Term Loan (defined below) is based on the effective London Interbank Offered Rate (LIBOR) plus an additional amount in the range of 1.00% to 1.75%, depending on the consolidated net leverage ratio of Chase and its subsidiaries. At May 31, 2019,
there was no outstanding principal balance, and therefore, no applicable interest rate. The Credit Agreement has a five-year term with interest payments due at the end of the applicable LIBOR period (but in no event less frequently than
the three-month anniversary of the commencement of such LIBOR period) and principal payment due at the expiration of the agreement, December 15, 2021. In addition, the Company may elect a base rate option for all or a portion of the Revolving Facility, in which case interest payments shall be due with respect to such portion of the Revolving Facility on the last business day of each quarter.
Subject to certain conditions set forth in the Credit Agreement, the Company may elect to convert all or a portion of the outstanding Revolving Facility into a term loan (each, a “Term Loan”), which shall be payable quarterly in equal installments sufficient to amortize the original principal amount of such Term Loan on a seven year amortization schedule; provided, however, that the final principal repayment installment shall be repaid on December 15, 2021 and in any event shall be in an amount equal to the aggregate principal amount of all Term Loans outstanding on such date. Prepayment is allowed by the Credit Agreement at any time during the term of the agreement, subject to customary notice requirements.
In December 2017 (the prior fiscal year), the Company utilized $65,000 of the Credit Agreement to finance the majority of the acquisition cost of Zappa Stewart. See Note 14 to the condensed consolidated financial statements for additional information on this acquisition. The Company paid down $40,000 of the outstanding balance in fiscal 2018, and made additional principal payments of $10,000, $9,000 and $6,000 in the first, second and third quarters of fiscal 2019, respectively, resulting in an outstanding balance of $0 at May 31, 2019.
Note 17 — Sale of License
In November 2017, the Company entered a license agreement with an unrelated party to sell a license, including intellectual property and certain construction in process assets, with a net book value of $26 and all related to the manufacturing of certain structural composite materials. In the second fiscal quarter of 2018, the transaction was finalized for gross consideration of $1,111 comprising cash proceeds of $1,000 and $111 in foreign tax consideration paid by the buyer on Chase’s behalf. This transaction resulted in a gain of $1,085, which was recorded in the Company’s condensed consolidated statement of operations as a gain on sale of license during the fiscal quarter ended February 28, 2018.
In relation to this license agreement, the purchaser also entered into a royalty agreement with the Company. The purchaser will make royalty payments to Chase under certain conditions based on the volume of future sales of certain structural composite materials manufactured by the purchaser. Revenue recognized related to this royalty agreement in fiscal 2019 and 2018 was not material.
Note 18 — Income Taxes
For the three months ended May 31, 2019 and 2018, the Company recorded income taxes of $3,647 and $5,109 on income before income taxes of $12,188 and $18,
652
, respectively.
For the nine months ended May 31, 2019 and 2018, the Company recorded income taxes of $8,291 and $11,011 on income before income taxes of $30,928 and $42,
991
, respectively. The effective tax rate for the three months ended May 31, 2019 and 2018 was 29.9% and 27.4%, respectively. The effective tax rate for the nine months ended May 31, 2019 and 2018 was 26.8% and 25.6%, respectively.
On December 22, 2017, President Trump signed into law the Tax Act. The Tax Act impacted the U.S. statutory Federal tax rate that the Company will be subject to going forward, reducing it from 35% to 21%. As the Company has an August 31 fiscal year-end, the lower corporate income tax rate was phased in during fiscal 2018 (the year of initial adoption), resulting in the Company applying the U.S. statutory Federal rate of 21% for our fiscal year ending August 31, 2019 and a blended rate of 25.7% for our fiscal year ended August 31, 2018.
To transition to the reduced U.S. corporate tax rate, we were required to make an adjustment to our net U.S. deferred tax assets. During fiscal 2018, predominantly in the three months ended February 28, 2018 (the second fiscal quarter of 2018), the Company recorded initial provisional adjustments to the U.S. deferred tax assets and liabilities and uncertain tax positions resulting in a net discrete tax expense of $681
recorded to the condensed consolidated statement of operations. This net discrete tax expense recorded in fiscal 2018 is the result of the following: (a) a $379 tax benefit resulting from the remeasurement and reclassification of our existing deferred tax liability related to unrepatriated foreign earnings to accrued income tax balance (discussed in more detail below); (b) a $917 tax expense for the remeasurement of the remaining net U.S. deferred tax assets in recognition of the new lower Federal rate; and (c) a $143 tax expense recorded as the result of remeasuring the Federal benefit on our uncertain tax positions. During fiscal 2019, no additional transitional adjustments were made related to the adoption of the Tax Act in the quarters ended November 30, 2018 and May 31, 2019, and only immaterial adjustments were made in the quarter ended February 28, 2019.
The Tax Act includes a transition tax or “toll charge,” which is a one-time tax charge on unrepatriated foreign earnings. The calculation of accumulated foreign earnings requires an analysis of each foreign entity’s financial results going back to 1986. During fiscal 2018, the Company recorded a provisional transition tax adjustment associated with its accumulated unrepatriated foreign earnings reducing long-term deferred tax liabilities by $2,298 and increasing short and long-term accrued income taxes by $153 and $1,766, respectively (the short-term payable representing eight percent of the total amount due, the amount payable within the first year as per the Tax Act). The difference between the decrease in the deferred tax liabilities for unrepatriated foreign earnings and the increase in accrued income taxes, $379, was recorded as a discrete tax benefit in fiscal 2018.
Under the guidance set forth in the SEC's Staff Accounting Bulletin No. 118 (“SAB 118”), the Company may record provisional amounts for the impact of the Tax Act. For the second quarter of fiscal 2018, the Company made a provisional and reasonable estimate of the effects of the Tax Act on its existing deferred tax balances, including a provisional adjustment for the toll charge, and made provisional adjustments to these initially recorded amounts in the third and fourth quarters of fiscal 2018. The Company made complete and final adjustments during the quarter ended February 28, 2019 (the second quarter of fiscal 2019), which were not material in nature.
During the quarter ended November 30, 2018 (the first quarter of fiscal 2019), the Company began recognizing an additional component of total Federal tax expense, the tax on Global Intangible Low-Taxed Income (“GILTI”) provision of the Tax Act, which became applicable to the Company in fiscal 2019. The Company elected to account for GILTI as a period cost, and therefore included GILTI expense in the effective tax rate calculation. This provision did not have a material effect on the effective tax rate for the quarter or nine-month period ended May 31, 2019.
The Company concluded that the Base Erosion and Anti Abuse Tax (“BEAT”) provision of the Tax Act, which also became applicable to the Company in fiscal 2019, had no effect on our effective tax rate for the current quarter or year-to-date period. Additionally, the Company is deferring the application of Foreign-Derived Intangible Income (“FDII”)
for the current period, in anticipation of further guidance and the establishment of industry standards by the U.S. Treasury Department and trade associations.
Note 19 — 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, if applicable, 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.
Assets held for sale as of May 31, 2019 and August 31, 2018 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2019
|
|
August 31, 2018
|
|
|
Pawtucket, RI - Property, plant and equipment
|
$
|
915
|
|
$
|
—
|
|
|
Randolph, MA - Property
|
|
14
|
|
|
14
|
|
|
Total
|
$
|
929
|
|
$
|
14
|
|
See Note 15 to the condensed consolidated financial statements for additional information on the Pawtucket, RI location assets held for sale as of May 31, 2019.
Note 20 — Subsequent Events
Subsequent to the quarter ended May 31, 2019, the Company reorganized into three reportable operating segments, with an Adhesives Sealants and Additives segment and an Industrial Tapes segment (each comprising portions of the former Industrial Materials segment) and a Corrosion Protection and Waterproofing segment (formerly known as the Construction Materials segment). These segments are distinguished by the nature of their products and how they are delivered to their respective markets. This change follows several recent acquisitions, all originally included in the Industrial Materials segment, changes in senior management and the establishment of our Chief Executive Officer as our chief operating decision maker, a role which he had previously jointly held with the Executive Chairman.
We are required to report segment information in the same way that we internally organize our business for assessing performance and making decisions regarding allocation of resources. Operating results of each segment are regularly reviewed by our chief operating decision maker to make decisions about resources to be allocated to the segments and assess their performance. The Company plans to disclose required information under its new three reportable operating segment structure beginning with our Annual Report on Form 10-K for the fiscal year ending August 31, 2019.