Note 1 — Basis of Financial Statement Presentation
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. Through investments in facilities, systems and organizational consolidation we seek to improve performance and gain economies of scale.
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, 2019 in conjunction with its 2019 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 November 30, 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, 2019 which are contained in the Company’s 2019 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 November 30, 2019, and the results of its operations, comprehensive income, changes in equity and cash flows for the interim periods ended November 30, 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 ($501) and $52 for the three-month periods ended November 30, 2019 and 2018, respectively.
Other Business Developments
During the first quarter of fiscal 2020, third-party-led studies regarding the potential upgrading of the Company’s current worldwide ERP system were conducted. Chase is currently reviewing the data and recommendations provided by the study and may further utilize third-party engineering, IT and other professional services firms in the future for similar work, as well as work around our facilities rationalization and consolidation initiative. The Company recognized $150 in expense related to these services in the first quarter of fiscal 2020. Given the ongoing nature of the review, an estimate of future costs, including those that may be capitalized, cannot currently be determined.
During the third quarter of fiscal 2019, Chase began moving the pulling and detection operations 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. The process of moving has continued subsequent to the end of fiscal 2019 and is anticipated to be completed during the first half of fiscal 2020. The Company recognized $499 in expense related to the move in the three-month period ended November 30, 2019, having recognized $1,260 in expense during the second half of fiscal 2019. Future costs related to this move are currently anticipated to be approximately $200, 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 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. 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 fiscal 2019. Future costs related to this move are not anticipated to be significant to the condensed consolidated financial statements.
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, 2019. Significant changes to these accounting policies as a result of adopting ASU No. 2016-02, “Leases (Topic 842)” during the first quarter of fiscal 2020 are discussed within Note 2 — “Recent Accounting Standards” and Note 8 — “Leases” within this Current Quarterly Report on Form 10-Q.
Note 2 — Recent Accounting Standards
Recently Adopted Accounting Pronouncements
In February 2016, the 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. 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 adopted the standard on September 1, 2019 (start of fiscal 2020) under the optional transition method described above. Consequently, historical financial information was not updated, and the disclosures required under the new standard are not provided for dates and periods prior to September 1, 2019.
The new standard provides several optional practical expedients in transition. The Company has elected to apply the “package of practical expedients” which allow us to not reassess i) whether existing or expired arrangements contain a lease, ii) the lease classification of existing or expired leases, or iii) whether previous initial direct costs would qualify for capitalization under the new lease standard. In preparation for adoption of the standard, the Company enhanced its internal controls to enable the preparation of financial information including the assessment of the impact of the standard. The initial adoption of the ASU resulted in the recognition of additional lease liabilities of $9,644 ($2,071 short-term and $7,573 long-term) and right-of-use assets of $10,200 as of September 1, 2019 on the condensed consolidated balance sheet as it relates to the Company’s operating leases. The new standard did not have a material impact on the Company’s consolidated statement of operations or cash flows.
In February 2018, the FASB issued ASU 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220) - Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.” This ASU was issued to address a narrow-scope financial reporting issue that arose as a result of the enactment of the Tax Cuts and Jobs Act (“Tax Reform”) on December 22, 2017. The objective of ASU 2018-02 is to address the tax effects of items within accumulated other comprehensive income (referred to as “stranded tax effects”) that do not reflect the appropriate tax rate enacted in the Tax Reform. As a result, the ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate. The amount of the reclassification would be the difference between the historical corporate income tax rate of 35 percent and the current enacted corporate income tax rate of 21 percent. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, including adoption in an interim period. The amendments in this ASU may be applied retrospectively to each period in which the effect of the change in the U.S. Federal corporate income tax rate in the Tax Reform is recognized. Therefore, the Company has adopted ASU 2018-02 in the first quarter of the year ending August 31, 2020, and has elected to reclassify the income tax effects related to its pension funding of the Tax Reform from accumulated other comprehensive loss to retained earnings.
Note 3 — Inventory
Inventory consisted of the following as of November 30, 2019 and August 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
August 31,
|
|
|
|
2019
|
|
2019
|
Raw materials
|
|
|
$
|
19,679
|
|
$
|
20,325
|
Work in process
|
|
|
|
7,547
|
|
|
8,748
|
Finished goods
|
|
|
|
11,793
|
|
|
13,281
|
Total Inventory
|
|
|
$
|
39,019
|
|
$
|
42,354
|
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:
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30,
|
|
|
|
2019
|
|
2018
|
|
|
|
|
|
|
|
|
|
Basic Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,362
|
|
$
|
8,823
|
|
Less: Allocated to participating securities
|
|
|
54
|
|
|
69
|
|
Net income available to common shareholders
|
|
$
|
7,308
|
|
$
|
8,754
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
9,352,148
|
|
|
9,329,570
|
|
Net income per share - Basic
|
|
$
|
0.78
|
|
$
|
0.94
|
|
|
|
|
|
|
|
|
|
Diluted Earnings per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
7,362
|
|
$
|
8,823
|
|
Less: Allocated to participating securities
|
|
|
54
|
|
|
69
|
|
Net income available to common shareholders
|
|
$
|
7,308
|
|
$
|
8,754
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares outstanding
|
|
|
9,352,148
|
|
|
9,329,570
|
|
Additional dilutive common stock equivalents
|
|
|
82,070
|
|
|
51,733
|
|
Diluted weighted average shares outstanding
|
|
|
9,434,218
|
|
|
9,381,303
|
|
Net income per share - Diluted
|
|
$
|
0.77
|
|
$
|
0.93
|
|
For the three-month periods ended November 30, 2019 and 2018, stock options to purchase 8,805 and 12,418 shares, respectively, 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 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 a performance and service-based restricted stock grant of 6,609 shares in the aggregate, subject to adjustment (as discussed below), with a vesting date of August 31, 2021.
During the fourth quarter of fiscal 2019, an additional grant of restricted stock was made related to the 2019 LTIP grant in conjunction with an amendment to the equity compensation program for a promoted employee. The additional grant contains the following restricted stock components: (a) a performance and service-based restricted stock grant of 211 shares in the aggregate, subject to adjustment based on fiscal 2019 results, with a vesting date of August 31, 2021, for which 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 132 shares in the aggregate, with a vesting date of August 31, 2021, for which compensation expense is recognized on a ratable basis over the vesting period.
In August 2019, restricted stock in the amount of 833 shares related to the 2019 LTIP grant was forfeited in conjunction with an amendment in the equity compensation agreement of an employee.
Based on the fiscal year 2019 financial results, 2,694 shares of restricted stock already granted was forfeited subsequent to the end of fiscal year 2019 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 2019, the Board of Directors of the Company approved the fiscal year 2020 Long Term Incentive Plan (“2020 LTIP”) for the executive officers and other members of management. The 2020 LTIP is an equity-based plan with a grant date of September 1, 2019 and contains the following equity components:
Restricted Shares — (a) a performance and service-based restricted stock grant of 3,697 shares in the aggregate, subject to adjustment based on fiscal 2020 results, with a vesting date of August 31, 2022. 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 3,689 shares in the aggregate, with a vesting date of August 31, 2022. Compensation expense is recognized on a ratable basis over the vesting period.
Stock options — options to purchase 13,418 shares of common stock in the aggregate with an exercise price of $100.22 per share. The options will vest in three equal annual installments beginning on August 31, 2020 and ending on August 31, 2022. Of the options granted, 6,218 options will expire on August 31, 2029, and 7,200 options will expire on September 1, 2029. Compensation expense is recognized over the period of the award consistent with the vesting terms.
In August 2019, the Board of Directors of the Company approved equity retention agreements with certain executive officers. The equity-based retention agreements have a grant date of September 1, 2019 and contain the following equity components: (a) time-based restricted stock grant of 15,945 shares in the aggregate, and having a vesting date of August 31, 2022; and (b) options to purchase 53,642 shares of common stock in the aggregate with an exercise price of $100.22 per share (the options will cliff vest on August 31, 2022 and will expire on August 31, 2029). Compensation expense for both the restricted stock and the stock option components of the equity retention agreements is recognized on a ratable basis over the vesting period.
Note 6 — Segment Data and Foreign Operations
The Company is organized into three reportable operating segments: Adhesives, Sealants and Additives; Industrial Tapes; and Corrosion Protection and Waterproofing. The segments are distinguished by the nature of the products manufactured and how they are delivered to their respective markets. In the fourth quarter of our fiscal year 2019, we reorganized from two into three reportable operating segments; prior year quarter amounts have been recast to reflect this change.
The Adhesives, Sealants and Additives segment offers innovative and specialized product offerings consisting of both end-use products and intermediates that are used in, or integrated into, another company’s product. Demand for the segment’s product offerings is typically dependent upon general economic conditions. The Adhesives, Sealants and Additives segment leverages the core specialty chemical competencies of the Company, and serves diverse markets and applications. The segment sells predominantly into the transportation, appliances, medical, general industrial and environmental market verticals. The segment’s products include moisture protective coatings and customized sealant and adhesive systems for electronics, polymeric microspheres, polyurethane dispersions and superabsorbent polymers.
The Industrial Tapes segment features legacy wire and cable materials, specialty tapes and other laminated and coated products. The segment derives its competitive advantage through its proven chemistries, diverse specialty offerings and the reliability its supply chain offers to end customers. These products are generally used in the assembly of other manufacturers’ products, with demand typically dependent upon general economic conditions. The Industrial Tapes segment sells mostly to established markets, with some exposure to growth opportunities through further development of existing products. Markets served include cable manufacturing, utilities and telecommunications, and electronics packaging. The segment’s offerings include insulating and conducting materials for wire and cable manufacturers, laminated durable papers, laminates for the packaging and industrial laminate markets, custom manufacturing 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, and composite materials and elements.
The Corrosion Protection and Waterproofing segment is principally composed of project-oriented product offerings that are primarily sold and used as “Chase” branded products. End markets include new and existing infrastructure projects on oil, gas, water and wastewater pipelines, highways and bridge decks, water and wastewater containment systems, and commercial buildings. The segment’s products include protective coatings for pipeline applications, coating and lining systems for waterproofing and liquid storage applications, adhesives and sealants used in architectural and building envelope waterproofing applications, high-performance polymeric asphalt additives, and expansion joint systems for waterproofing applications in transportation and architectural markets. With sales generally dependent on outdoor project work, the segment experiences highly seasonal sales patterns.
The following tables summarize information about the Company’s reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30,
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
Adhesives, Sealants and Additives
|
|
$
|
25,822
|
|
|
$
|
26,698
|
|
|
|
Industrial Tapes
|
|
|
30,124
|
|
|
|
33,462
|
|
|
|
Corrosion Protection and Waterproofing
|
|
|
10,856
|
|
|
|
12,343
|
|
|
|
Total
|
|
$
|
66,802
|
|
|
$
|
72,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
|
|
|
|
|
|
|
|
Adhesives, Sealants and Additives
|
|
$
|
7,482
|
|
|
$
|
8,265
|
|
|
|
Industrial Tapes
|
|
|
6,637
|
(a)
|
|
|
6,538
|
(c)
|
|
|
Corrosion Protection and Waterproofing
|
|
|
3,964
|
|
|
|
4,466
|
|
|
|
Total for reportable segments
|
|
|
18,083
|
|
|
|
19,269
|
|
|
|
Corporate and common costs
|
|
|
(8,012)
|
(b)
|
|
|
(7,461)
|
(d)
|
|
|
Total
|
|
$
|
10,071
|
|
|
$
|
11,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Includes the following costs by segment:
|
|
|
|
|
|
|
|
|
|
|
Adhesives, Sealants and Additives
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
21
|
|
|
$
|
79
|
|
|
|
Depreciation
|
|
|
314
|
|
|
|
383
|
|
|
|
Amortization
|
|
|
2,337
|
|
|
|
2,340
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial Tapes
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
25
|
|
|
$
|
84
|
|
|
|
Depreciation
|
|
|
401
|
|
|
|
456
|
|
|
|
Amortization
|
|
|
450
|
|
|
|
450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corrosion Protection and Waterproofing
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
9
|
|
|
$
|
41
|
|
|
|
Depreciation
|
|
|
154
|
|
|
|
175
|
|
|
|
Amortization
|
|
|
127
|
|
|
|
323
|
|
|
|
|
(a)
|
|
Includes $499 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 first quarter of fiscal 2020
|
|
(b)
|
|
Includes $150 of expense related to exploratory IT work performed to assess potential future upgrades to our companywide ERP system
|
|
(c)
|
|
Includes $260 of expense related to the closure and exit of our Pawtucket, RI location recognized in the first quarter of fiscal 2019
|
|
(d)
|
|
Includes $200 of pension-related settlement costs due to the timing of lump-sum distributions
|
Total assets for the Company’s reportable segments as of November 30, 2019 and August 31, 2019 were:
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
August 31,
|
|
|
|
|
2019
|
|
2019
|
|
|
Total Assets
|
|
|
|
|
|
|
|
|
Adhesives, Sealants and Additives
|
|
$
|
144,015
|
|
$
|
135,583
|
|
|
Industrial Tapes
|
|
|
70,327
|
|
|
77,085
|
|
|
Corrosion Protection and Waterproofing
|
|
|
31,221
|
|
|
32,478
|
|
|
Total for reportable segments
|
|
|
245,563
|
|
|
245,146
|
|
|
Corporate and common assets
|
|
|
80,478
|
|
|
62,822
|
|
|
Total
|
|
$
|
326,041
|
|
$
|
307,968
|
|
|
The Company’s products are sold worldwide. Revenue for the three-month periods ended November 30, 2019 and 2018 were attributed to operations located in the following countries:
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30,
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
58,361
|
|
|
$
|
64,351
|
|
|
|
United Kingdom
|
|
|
4,631
|
|
|
|
4,016
|
|
|
|
All other foreign (1)
|
|
|
3,810
|
|
|
|
4,136
|
|
|
|
Total
|
|
$
|
66,802
|
|
|
$
|
72,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(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 November 30, 2019 and August 31, 2019 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:
|
|
|
|
|
|
|
|
|
|
|
November 30,
|
|
August 31,
|
|
|
|
|
2019
|
|
2019
|
|
|
Long-Lived Assets
|
|
|
|
|
|
|
|
|
United States
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
24,660
|
|
$
|
24,993
|
|
|
Goodwill and Intangible assets, less accumulated amortization
|
|
|
126,261
|
|
|
129,057
|
|
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
2,539
|
|
|
2,493
|
|
|
Goodwill and Intangible assets, less accumulated amortization
|
|
|
4,594
|
|
|
4,446
|
|
|
|
|
|
|
|
|
|
|
|
All other foreign
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
|
911
|
|
|
1,840
|
|
|
Goodwill and Intangible assets, less accumulated amortization
|
|
|
1,186
|
|
|
1,187
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
28,110
|
|
$
|
29,326
|
|
|
Goodwill and Intangible assets, less accumulated amortization
|
|
$
|
132,041
|
|
$
|
134,690
|
|
|
Note 7 — Goodwill and Other Intangibles
The changes in the carrying value of goodwill were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adhesives, Sealants and Additives
|
|
Industrial Tapes
|
|
Corrosion Protection and Waterproofing
|
|
Consolidated
|
|
Balance at August 31, 2019
|
|
$
|
50,090
|
|
$
|
21,215
|
|
$
|
10,681
|
|
$
|
81,986
|
|
Foreign currency translation adjustment
|
|
|
196
|
|
|
—
|
|
|
12
|
|
|
208
|
|
Balance at November 30, 2019
|
|
$
|
50,286
|
|
$
|
21,215
|
|
$
|
10,693
|
|
$
|
82,194
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 three reporting units within its three 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.
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.
Intangible assets subject to amortization consisted of the following as of November 30, 2019 and August 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
Gross Carrying
|
|
Accumulated
|
|
Net Carrying
|
|
|
|
Amortization Period
|
|
Value
|
|
Amortization
|
|
Value
|
|
November 30, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and agreements
|
|
14.6
|
years
|
$
|
1,760
|
|
$
|
1,696
|
|
$
|
64
|
|
Formulas and technology
|
|
7.8
|
years
|
|
10,217
|
|
|
8,309
|
|
|
1,908
|
|
Trade names
|
|
5.8
|
years
|
|
8,548
|
|
|
7,418
|
|
|
1,130
|
|
Customer lists and relationships
|
|
9.1
|
years
|
|
98,623
|
|
|
51,878
|
|
|
46,745
|
|
|
|
|
|
$
|
119,148
|
|
$
|
69,301
|
|
$
|
49,847
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and agreements
|
|
14.6
|
years
|
$
|
1,760
|
|
$
|
1,693
|
|
$
|
67
|
|
Formulas and technology
|
|
7.8
|
years
|
|
10,164
|
|
|
7,969
|
|
|
2,195
|
|
Trade names
|
|
5.8
|
years
|
|
8,503
|
|
|
7,261
|
|
|
1,242
|
|
Customer lists and relationships
|
|
9.1
|
years
|
|
98,139
|
|
|
48,939
|
|
|
49,200
|
|
|
|
|
|
$
|
118,566
|
|
$
|
65,862
|
|
$
|
52,704
|
|
Aggregate amortization expense related to intangible assets for the three months ended November 30, 2019 and 2018 was $2,914 and $3,113 respectively. Estimated amortization expense for the remainder of fiscal year 2020 and for the next five years is as follows:
|
|
|
|
|
Years ending August 31,
|
|
|
|
|
2020 (remaining 9 months)
|
|
$
|
8,667
|
|
2021
|
|
|
11,051
|
|
2022
|
|
|
10,031
|
|
2023
|
|
|
6,768
|
|
2024
|
|
|
5,659
|
|
2025
|
|
|
5,552
|
|
Note 8 — Leases
Effective September 1, 2019 (the start of fiscal 2020), the Company adopted ASU 2016-02, Leases (Topic 842), using the modified retrospective approach and utilizing the effective date as its date of initial application. As a result, prior periods are presented in accordance with the previous guidance in ASC 840, Leases (“ASC 840”). The Company has elected to apply the ‘package of practical expedients’ which allow us to not reassess i) whether existing or expired arrangements contain a lease, ii) the lease classification of existing or expired leases, or iii) whether previous initial direct costs would qualify for capitalization under the new lease standard.
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on the unique facts and circumstances present in the arrangement. Leases with a term greater than one year are recognized on the balance sheet as right-of-use (ROU) assets and short-term and long-term lease liabilities, as applicable. The Company does not have any financing leases that are material.
Operating lease liabilities and their corresponding right-of-use assets are initially recorded based on the present value of lease payments over the expected remaining lease term. The interest rate implicit in lease contracts is typically not readily determinable. As a result, the Company utilizes its incremental borrowing rate to discount lease payments, which reflects the fixed rate at which the Company believes it could borrow on a collateralized basis the amount of the lease payments in the same currency, for a similar term, in a similar economic environment.
The Company has elected not to recognize leases with an original term of one year or less on the balance sheet. The Company typically only includes an initial lease term in its assessment of a lease arrangement. Options to renew a lease are not included in the Company’s assessment unless there is reasonable certainty that the Company will renew.
|
|
|
|
|
|
November 30, 2019
|
Assets
|
|
|
|
Operating lease right-of-use asset
|
|
$
|
9,776
|
|
|
|
|
Liabilities
|
|
|
|
Current (accrued expense)
|
|
$
|
2,075
|
Operating lease long-term liabilities
|
|
|
7,144
|
Total lease liability
|
|
$
|
9,219
|
|
|
|
|
Lease cost
The components of lease costs for the three months ended November 30, 2019 are as follows:
|
|
|
|
|
|
Three Months Ended
|
|
|
November 30, 2019
|
|
|
|
|
Operating lease cost (a)
|
|
$
|
931
|
|
(a)
|
|
Includes short-term leases and variable lease costs (e.g. common area maintenance), which are immaterial.
|
Maturity of lease liability
The maturity of the Company's lease liabilities at November 30, 2019 were as follows:
|
|
|
|
|
|
Future Operating
|
Year ending August 31,
|
|
Lease Payments
|
2020 (remaining 9 months)
|
|
$
|
1,838
|
2021
|
|
|
1,923
|
2022
|
|
|
1,279
|
2023
|
|
|
1,124
|
2024
|
|
|
1,138
|
2025 and thereafter
|
|
|
2,830
|
Less: Interest
|
|
|
(913)
|
Present value of lease liabilities
|
|
$
|
9,219
|
The weighted average remaining lease term and discount rates are as follows:
|
|
|
|
|
|
|
November 30, 2019
|
|
Lease Term and Discount Rate
|
|
|
|
|
Weighted average remaining lease term (years)
|
|
|
|
|
Operating leases
|
|
|
5.9
|
|
Weighted average discount rate (percentage)
|
|
|
|
|
Operating leases
|
|
|
3.1
|
%
|
Other Information
Supplemental cash flow information related to leases is as follows:
|
|
|
|
|
|
Three Months Ended
|
|
|
November 30, 2019
|
|
|
|
|
Operating cash outflows from operating leases
|
|
$
|
607
|
Total cash paid for amounts included in the measurement of lease liabilities
|
|
$
|
607
|
Minimum lease payments under operating leases prior to adoption of ASU 2016-02 were as follows:
|
|
|
|
|
|
|
Future Operating
|
|
Year ending August 31,
|
|
Lease Payments
|
|
2020
|
|
$
|
2,468
|
|
2021
|
|
|
2,059
|
|
2022
|
|
|
1,371
|
|
2023
|
|
|
1,187
|
|
2024
|
|
|
1,200
|
|
2025 and thereafter
|
|
|
2,608
|
|
Total future minimum lease payments
|
|
$
|
10,893
|
|
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 incorporate 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. 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 analyzes several factors, including but not limited to, the nature of the products being sold and contractual terms and conditions in contracts with customers to help the Company make such judgments about revenue recognition.
Contract Balances
The Company’s contract assets primarily relate to unbilled revenue for products currently in production at the Company’s facilities and which incorporate 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 November 30, 2019 and August 31, 2019:
|
|
|
|
|
|
|
|
|
November 30,
|
|
August 31,
|
|
|
2019
|
|
2019
|
Contract Assets
|
|
|
|
|
|
|
Adhesives, Sealants and Additives
|
|
$
|
19
|
|
$
|
42
|
Industrial Tapes
|
|
|
102
|
|
|
26
|
Corrosion Protection and Waterproofing
|
|
|
123
|
|
|
79
|
Total
|
|
$
|
244
|
|
$
|
147
|
The Company did not have any contract liabilities as of November 30, 2019 and August 31, 2019.
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 months ended November 30, 2019 and 2018 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, 2019
|
|
|
Adhesives, Sealants
|
|
Industrial
|
|
|
Corrosion Protection
|
|
|
Consolidated
|
|
|
and Additives
|
|
Tapes
|
|
|
and Waterproofing
|
|
|
Revenue
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
17,706
|
|
$
|
27,013
|
|
|
$
|
8,756
|
|
|
$
|
53,475
|
Asia
|
|
|
4,443
|
|
|
1,691
|
|
|
|
1,090
|
|
|
|
7,224
|
Europe
|
|
|
3,579
|
|
|
741
|
|
|
|
951
|
|
|
|
5,271
|
All other foreign
|
|
|
94
|
|
|
679
|
|
|
|
59
|
|
|
|
832
|
Total Revenue
|
|
$
|
25,822
|
|
$
|
30,124
|
|
|
$
|
10,856
|
|
|
$
|
66,802
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30, 2018
|
|
|
Adhesives, Sealants
|
|
Industrial
|
|
|
Corrosion Protection
|
|
|
Consolidated
|
|
|
and Additives
|
|
Tapes
|
|
|
and Waterproofing
|
|
|
Revenue
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America
|
|
$
|
18,547
|
|
$
|
30,092
|
|
|
$
|
9,685
|
|
|
$
|
58,324
|
Asia
|
|
|
5,232
|
|
|
2,017
|
|
|
|
1,896
|
|
|
|
9,145
|
Europe
|
|
|
2,778
|
|
|
803
|
|
|
|
713
|
|
|
|
4,294
|
All other foreign
|
|
|
141
|
|
|
550
|
|
|
|
49
|
|
|
|
740
|
Total Revenue
|
|
$
|
26,698
|
|
$
|
33,462
|
|
|
$
|
12,343
|
|
|
$
|
72,503
|
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 months ended November 30, 2019 and 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended November 30,
|
|
|
|
|
|
2019
|
|
2018
|
|
|
|
Components of net periodic benefit cost
|
|
|
|
|
|
|
|
|
|
Service cost
|
|
$
|
73
|
|
$
|
73
|
|
|
|
Interest cost
|
|
|
113
|
|
|
178
|
|
|
|
Expected return on plan assets
|
|
|
(98)
|
|
|
(112)
|
|
|
|
Amortization of prior service cost
|
|
|
1
|
|
|
1
|
|
|
|
Amortization of accumulated loss
|
|
|
174
|
|
|
118
|
|
|
|
Curtailment and settlement loss
|
|
|
—
|
|
|
200
|
|
|
|
Net periodic benefit cost
|
|
$
|
263
|
|
$
|
458
|
|
|
|
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 $392 in the three months ended November 30, 2019 to fund its obligations under its pension plans, and plans to make the necessary contributions over the remainder of fiscal 2020 to ensure the qualified plans continue to be adequately funded given the current market conditions. The Company made contributions of $389 in the three months ended November 30, 2018.
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 November 30, 2019 and August 31, 2019 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 November 30, 2019 and August 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
November 30, 2019
|
|
$
|
1,365
|
|
$
|
1,187
|
|
$
|
178
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted investments
|
|
August 31, 2019
|
|
$
|
1,260
|
|
$
|
1,091
|
|
$
|
169
|
|
$
|
—
|
|
The following table presents the fair value of the Company’s long-term debt (including any current portion of long-term debt) as of November 30, 2019 and August 31, 2019, 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
|
|
November 30, 2019
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt
|
|
August 31, 2019
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
$
|
—
|
|
The long-term debt had no outstanding balance as of November 30, 2019 and August 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, 2018
|
|
$
|
126
|
|
$
|
(5,796)
|
|
$
|
(6,666)
|
|
$
|
(12,336)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive gains (losses) before reclassifications (1)
|
|
|
(34)
|
|
|
—
|
|
|
(606)
|
|
|
(640)
|
|
Reclassifications to net income of previously deferred (gains) losses (2)
|
|
|
13
|
|
|
236
|
|
|
—
|
|
|
249
|
|
Other comprehensive income (loss)
|
|
|
(21)
|
|
|
236
|
|
|
(606)
|
|
|
(391)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2018
|
|
$
|
105
|
|
$
|
(5,560)
|
|
$
|
(7,272)
|
|
$
|
(12,727)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at August 31, 2019
|
|
$
|
154
|
|
$
|
(6,271)
|
|
$
|
(8,207)
|
|
$
|
(14,324)
|
|
Other comprehensive gains (losses) before reclassifications (3)
|
|
|
45
|
|
|
—
|
|
|
1,537
|
|
|
1,582
|
|
Reclassifications to net income of previously deferred (gains) losses (4)
|
|
|
(4)
|
|
|
131
|
|
|
—
|
|
|
127
|
|
Other comprehensive income (loss)
|
|
|
41
|
|
|
131
|
|
|
1,537
|
|
|
1,709
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adoption of ASU 2018-02 (5)
|
|
|
—
|
|
|
(1,388)
|
|
|
—
|
|
|
(1,388)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2019
|
|
$
|
195
|
|
$
|
(7,528)
|
|
$
|
(6,670)
|
|
$
|
(14,003)
|
|
|
(1)
|
|
Net of tax expense of $11, $0 and $0, respectively.
|
|
(2)
|
|
Net of tax benefit of $4, $83 and $0, respectively.
|
|
(3)
|
|
Net of tax benefit of $15, $0 and $0, respectively.
|
|
(4)
|
|
Net of tax expense of $1, tax benefit of $44 and $0, respectively.
|
|
(5)
|
|
See Note 2 for further information related to the adoption of ASU 2018-02.
|
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 November 30,
|
|
|
Location of Gain (Loss) Reclassified from Accumulated
|
|
|
|
|
|
2019
|
|
2018
|
|
|
Other Comprehensive Income (Loss) into Income
|
|
Gains on Restricted Investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized loss (gain) on sale of restricted investments
|
|
|
|
$
|
(5)
|
|
$
|
17
|
|
|
Selling, general and administrative expenses
|
|
Tax expense (benefit)
|
|
|
|
|
1
|
|
|
(4)
|
|
|
|
|
Gain net of tax
|
|
|
|
$
|
(4)
|
|
$
|
13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss on Funded Pension Plan adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of prior pension service costs and unrecognized losses
|
|
|
|
$
|
175
|
|
$
|
119
|
|
|
Other income (expense)
|
|
Settlement and curtailment loss
|
|
|
|
|
—
|
|
|
200
|
|
|
Other income (expense)
|
|
Tax expense (benefit)
|
|
|
|
|
(44)
|
|
|
(83)
|
|
|
|
|
Loss net of tax
|
|
|
|
$
|
131
|
|
$
|
236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net loss reclassified for the period
|
|
|
|
$
|
127
|
|
$
|
249
|
|
|
|
|
Note 14 — 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 November 30, 2019 and August 31, 2019 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
November 30, 2019
|
|
August 31, 2019
|
|
Pawtucket, RI - Property, plant and equipment
|
$
|
1,050
|
|
$
|
1,050
|
|
Randolph, MA - Property
|
|
14
|
|
|
14
|
|
Total
|
$
|
1,064
|
|
$
|
1,064
|
|
See Note 15 to the condensed consolidated financial statements for additional information on the Pawtucket, RI location assets held as of November 30, 2019.
Note 15 — Operations Optimization Costs
IT Studies Related to the Upgrade of the Company’s Worldwide ERP System
During the first quarter of fiscal 2020, third-party-led studies regarding the potential upgrading of the Company’s current worldwide ERP system were conducted. Chase is currently reviewing the data and recommendations provided by the study and may further utilize third-party engineering, IT and other professional services firms in the future for similar work, as well as work around our facilities rationalization and consolidation initiative. The Company recognized $150 in expense related to these services in the first quarter of fiscal 2020. Given the ongoing nature of the review, an estimate of future costs, including those that may be capitalized, cannot currently be determined.
Relocation of Pulling and Detection Manufacturing to Hickory, NC
During the third quarter of fiscal 2019, Chase began moving the pulling and detection operations 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. The process of moving has continued subsequent to the end of fiscal 2019 and is anticipated to be completed during the first half of fiscal 2020. The Company recognized $499 in expense related to the move in the three-month period ended November 30, 2019, having recognized $1,260 in expense during the second half of fiscal 2019. Future costs related to this move are currently anticipated to be approximately $200, and the Company plans to disclose these amounts separately on the condensed consolidated statement of operations in future periods.
Closure of Pawtucket, RI Facility
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. 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 fiscal 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 into 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 November 30, 2019. The Credit Agreement is guaranteed by all of Chase’s direct and indirect domestic subsidiaries, which collectively had a carrying value of $242,578 at November 30, 2019. The Company entered into the Credit Agreement 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 November 30, 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 (fiscal 2018), the Company utilized $65,000 of the Credit Agreement to finance the majority of the acquisition cost of Zappa Stewart. 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 August 31, 2019 and November 30, 2019.
Note 17 — Income Taxes
For the three months ended November 30, 2019 and 2018, the Company recorded income taxes of $2,709 and $2,985 on income before income taxes of $10,071 and $11,808, respectively. The effective tax rate for the three months ended November 30, 2019 and 2018 was 26.9% and 25.3%, respectively.
On December 22, 2017, President Trump signed into law the Tax Cuts and Jobs Act (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%. The Company applied this U.S. statutory Federal rate of 21% for both the quarters ended November 30, 2019 and 2018.
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 quarters ended November 30, 2019 and 2018.
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 first quarters of fiscal year 2020 and 2019. 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.