NOTES TO CONDENSED CONSOLI
DATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The condensed consolidated balance sheet as of July 31, 2017, which has been derived from audited consolidated financial statements, and the unaudited condensed consolidated financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission for interim reporting. As permitted under those requirements, certain footnotes or other financial information that are normally required by generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted. The Company believes that the disclosures made are adequate to make the information not misleading and in the opinion of management reflect all adjustments, including those of a normal recurring nature, that are necessary for a fair presentation of financial position and results of operations for the interim periods presented.
Certain reclassifications of prior year amounts have been made to conform to current year presentation. These reclassifications had no impact on net income or total stockholders’ equity as previously reported.
The results of operations for the interim periods are not necessarily indicative of results of operations to be expected for the full year. The unaudited condensed consolidated financial statements included herein should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended July 31, 2017.
These condensed consolidated financial statements are prepared using certain estimates by management and include the accounts of KMG Chemicals, Inc. and its subsidiaries (collectively, the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.
The following table provides a brief description of recent Accounting Standard Updates (“ASU”) issued by the Financial Accounting Standards Board (“FASB”):
|
|
|
|
|
|
|
Standard
|
|
Description
|
|
Effective Date
|
|
Effect on the Financial Statements or Other Significant Matters
|
In August 2017, the FASB issued ASU 2017-12, Targeted Improvements to Accounting for Hedging Activities.
|
|
The new guidance improves the financial reporting of hedging relationships to better portray the economic results of an entity's risk management activities in its financial statements through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results.
|
|
August 1, 2019. Early adoption is permitted.
|
|
The Company is currently evaluating the impact of adoption on its financial statements and related disclosures, but does not expect adoption will have a material impact as the Company does not currently utilize hedge accounting for derivative instruments.
|
In January 2017, the FASB issued ASU 2017-04, Intangibles: Goodwill and Other: Simplifying the Test for Goodwill Impairment.
|
|
The new guidance simplifies subsequent measurement of goodwill by eliminating Step 2 from the goodwill impairment test.
|
|
August 1, 2020. Early adoption is permitted.
|
|
The Company adopted the new guidance as of August 1, 2017, as part of the FASB's simplification initiative. The adoption of the new guidance did not have an impact to the Company.
|
In June 2016, the FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments
|
|
The new guidance changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses.
|
|
August 1, 2020. Early adoption is permitted.
|
|
The Company does not expect adoption will have a material impact on its condensed consolidated financial statements and related disclosures.
|
7
|
|
|
|
|
|
|
In February 2016, the FASB issued ASU 2016-02, Leases.
|
|
The new guidance supersedes the lease guidance under FASB Accounting Standards Codification ("ASC") Topic 840, Leases, resulting in the creation of FASB ASC Topic 842, Leases. The guidance requires a lessee to recognize in the statement of financial position a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases.
|
|
August 1, 2019. Early adoption is permitted.
|
|
The Company is currently evaluating its population of leases, and is continuing to assess all potential impacts of the standard, but currently believes the most significant impact relates to its accounting for manufacturing and logistics equipment, and real estate operating leases. The Company anticipates recognition of additional assets and corresponding liabilities related to leases upon adoption, but cannot quantify these at this time. The Company plans to adopt the standard effective August 1, 2019.
|
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers. Since that date, the FASB has issued additional ASUs clarifying certain aspects of ASU 2014-09.
|
|
The new guidance requires entities to recognize revenue in a way that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The new guidance provides alternative methods of adoption. Subsequent guidance issued after May 2014 did not change the core principle of ASU 2014-09.
|
|
August 1, 2018.
|
|
The Company has substantially completed its assessment of significant revenue contracts and the guidance is not expected to have significant impacts on its condensed consolidated financial statements. The Company is still evaluating the required changes in disclosure for the footnotes to the condensed consolidated financial statements. The Company plans to adopt the revenue guidance effective August 1, 2018, and expects to utilize the modified retrospective method of adoption.
|
2. Acquisitions
On June 15, 2017, the Company completed the acquisition of Flowchem Holdings LLC (“Flowchem”). The consideration paid on the closing date was the purchase price of $495.0 million plus $11.4 million for cash acquired.
Based in Waller, Texas, Flowchem is
a global provider of drag-reducing agents, related support services and equipment to midstream crude oil and refined fuel pipeline operators. To finance the acquisition the Company entered into a new credit agreement providing for a seven year syndicated term loan of $550.0 million. See Note 11 for further discussion of the Company’s credit agreement. The Company expensed transaction and acquisition-related costs of approximately $0.5 million in the nine months ended April 30, 2018, which is included in selling, general and administrative expenses on the Company’s consolidated statement of income.
The Company has
accounted for the purchase using the acquisition method of accounting for business combinations. Accordingly, the purchase price has been allocated to the underlying assets and liabilities in proportion to their respective fair values
. The following table summarizes the acquired assets and assumed liabilities and the preliminary acquisition accounting for the fair value of the assets and liabilities recognized in the condensed consolidated balance sheet at April 30, 2018 (in thousands):
Cash
|
|
$
|
11,445
|
|
Accounts receivable
|
|
|
11,280
|
|
Inventory
|
|
|
9,310
|
|
Other assets
|
|
|
499
|
|
Property, plant and equipment, net
|
|
|
19,665
|
|
Intangible assets
|
|
|
|
|
Customer relationships
|
|
|
205,467
|
|
Trade names and trademark
|
|
|
32,353
|
|
Proprietary manufacturing process
|
|
|
39,323
|
|
Total assets
|
|
$
|
329,342
|
|
Current liabilities
|
|
|
3,132
|
|
Deferred tax liability
|
|
|
22,238
|
|
Net identifiable assets acquired
|
|
|
303,972
|
|
Goodwill
|
|
|
202,471
|
|
Fair value of net assets acquired
|
|
$
|
506,443
|
|
8
This purchase price allocation is preliminary and is pending the final accounting for the state and local tax liabilities, deferred taxes and goodwill acquired June 15,
2017, as the Company has not yet finalized the detailed valuation analyses as of April 30, 2018. The fair value of the accounts receivable acquired was $11.3 million, equivalent to the amount the Company expects to be collected. The $202.5 million of goodw
ill was assigned to the performance materials segment, and the Company expects $155.9 million of goodwill to be tax deductible. The goodwill is primarily attributable to the assembled workforce of Flowchem and the allocation of proceeds in excess of the fa
ir value of net identifiable assets acquired.
During the nine months ended April 30, 2018, measurement period adjustments were made to the preliminary purchase price allocation recorded in the consolidated financial statements for the fiscal year ended July 31, 2017. The acquired intangible assets, deferred tax liabilities and goodwill were adjusted as a result of additional analyses performed on the estimates used in the calculation of the fair value of the assets acquired and liabilities assumed. The measurement period adjustments to the amortizable intangible assets resulted in an immaterial reduction in the amortization expense recognized in the Company’s condensed consolidated statements of income for the three months ended October 31, 2017, and a reduction in the estimated amortization expense going forward. The Company further recorded measurement period adjustments in the third quarter of fiscal year 2018 to the acquired deferred tax assets and liabilities as a result of further analyses performed over Flowchem’s tax attributes as of the date of the business combination, which reduced the recognized goodwill.
|
|
|
|
|
|
Measurement
|
|
|
|
|
|
|
|
April 30, 2018
|
|
|
Period Adjustment
|
|
|
July 31, 2017
|
|
Customer relationships
|
|
$
|
205,467
|
|
|
$
|
(9,415
|
)
|
|
$
|
214,882
|
|
Trade names and trademarks
|
|
|
32,353
|
|
|
|
3,402
|
|
|
|
28,951
|
|
Proprietary manufacturing process
|
|
|
39,323
|
|
|
|
78
|
|
|
|
39,245
|
|
Deferred tax liability
|
|
|
22,238
|
|
|
|
(2,808
|
)
|
|
|
25,046
|
|
Goodwill
|
|
|
202,471
|
|
|
|
3,125
|
|
|
|
199,346
|
|
On February 1, 2017, the Company completed the acquisition of the assets of Sealweld Corporation (“Sealweld”), a privately held corporation organized under the laws of the Province of Alberta, Canada, for CAD$22.3 million in cash (or approximately US$17.2 million, at an exchange rate of 0.77 CAD$ to US$ at February 1, 2017), which included CAD$5.5 million (or approximately US$4.2 million, at an exchange rate of 0.77 CAD$ to US$ at February 1, 2017) for estimated working capital. Sealweld is based in Calgary, Alberta, Canada, with additional facilities in the United States and the United Arab Emirates. Sealweld is a global supplier of high-performance products and services for industrial valve and actuator maintenance, including lubricants, sealants, cleaners, valve fittings, tools and equipment. Additionally, Sealweld provides routine and emergency valve maintenance services and technician training for many of the world’s largest pipeline operators.
The Company completed the acquisition by borrowing $17.0 million on the revolving loan under its revolving credit facility. See Note 11 for further discussion of the Company’s revolving credit facility. Sealweld is included in the performance materials segment. The Company expensed transaction and acquisition-related costs of approximately $0.1 million in the nine months ended April 30, 2018, which is included in selling, general and administrative expenses on the Company’s condensed consolidated statement of income.
The following table summarizes the acquired assets and assumed liabilities and the final acquisition accounting for the fair value of the assets and liabilities recognized in the condensed consolidated balance sheet at April 30, 2018 (in thousands):
Cash
|
|
$
|
69
|
|
Accounts receivable
|
|
|
2,937
|
|
Inventory
|
|
|
2,350
|
|
Other assets
|
|
|
38
|
|
Property, plant and equipment, net
|
|
|
4,192
|
|
Intangible assets
|
|
|
—
|
|
Trade name/trademark
|
|
|
2,185
|
|
Non-compete agreements
|
|
|
2,254
|
|
Customer relationships
|
|
|
2,348
|
|
Total assets acquired
|
|
$
|
16,373
|
|
Current liabilities
|
|
|
1,272
|
|
Deferred taxes
|
|
|
681
|
|
Net identifiable assets acquired
|
|
|
14,420
|
|
Goodwill
|
|
|
2,771
|
|
Fair value of net assets acquired
|
|
$
|
17,191
|
|
9
This purchase price allocation is
final. The fair value of the accounts receivable acquired was $2.9 million, equivalent to the contractual amount acquired. The Company collected substantially all acquired accounts receivable. During the fiscal quarter ended January 31, 2018, the Company r
ecorded a measurement period adjustment of $0.1 million to the acquired current liabilities as a result of the identification of certain tax liabilities existing at the date of the acquisition. As a result of the measurement period adjustment, the Company
increased goodwill from $2.7 million to $2.8 million. The goodwill was assigned to the performance materials segment, and the Company expects $0.1 million of goodwill to be tax deductible. The goodwill is primarily attributable to the assembled workforce o
f Sealweld.
3. Cash, Cash Equivalents and Restricted Cash
The Company’s restricted cash includes cash balances which are legally or contractually restricted to use. The Company did not have any restricted cash balances requiring reconciliation to amounts used on the unaudited condensed consolidated statements of cash flows, as proceeds that were placed in escrow in connection with the sale of the animal health business in fiscal year 2013 were released from escrow in February 2017.
4. Earnings Per Share
Basic earnings per share have been computed by dividing net income by the weighted average shares outstanding. Diluted earnings per share have been computed by dividing net income by the weighted average shares outstanding plus potentially dilutive common shares. There were approximately 399,701 and 374,903 dilutive shares related to stock-based awards for the three and nine months ended April 30, 2018, respectively. There were approximately 415,661 and 352,755 dilutive shares related to stock-based awards for the three and nine months ended April 30, 2017, respectively.
Outstanding stock-based awards are not included in the computation of diluted earnings per share under the treasury stock method if the effect of including them would be antidilutive. There were 3,600 and 4,920 potentially dilutive securities that were not included in the computation of diluted earnings per share for the three and nine months ended April 30, 2018, respectively. There were 415 and 3,858 potentially dilutive securities that were not included for the three and nine months ended April 30, 2017, respectively.
On October 23, 2017, the Company completed an underwritten public offering of 3,450,000 shares of its common stock, including 450,000 shares issued pursuant to the underwriters’ exercise of their option to purchase additional shares, at a public offering price of $54 per share, resulting in estimated net proceeds of approximately $175.7 million after deducting underwriting commissions and estimated offering expenses.
5. Inventories, net
Inventories, net are summarized in the following table (in thousands):
|
|
April 30,
|
|
|
July 31,
|
|
|
|
2018
|
|
|
2017
|
|
Raw materials
|
|
$
|
12,802
|
|
|
$
|
9,124
|
|
Work in process
|
|
|
3,531
|
|
|
|
3,763
|
|
Supplies
|
|
|
922
|
|
|
|
884
|
|
Finished products
|
|
|
37,478
|
|
|
|
33,341
|
|
Less: reserve for inventory obsolescence
|
|
|
(646
|
)
|
|
|
(630
|
)
|
Inventories, net
|
|
$
|
54,087
|
|
|
$
|
46,482
|
|
10
6
. Property, Plant and Equipment
Property, plant and equipment and related accumulated depreciation and amortization are summarized as follows (in thousands):
|
|
April 30,
|
|
|
July 31,
|
|
|
|
2018
|
|
|
2017
|
|
Land
|
|
$
|
16,792
|
|
|
$
|
12,632
|
|
Buildings and improvements
|
|
|
53,699
|
|
|
|
50,973
|
|
Equipment
|
|
|
116,672
|
|
|
|
106,379
|
|
Leasehold improvements
|
|
|
2,777
|
|
|
|
2,755
|
|
|
|
|
189,940
|
|
|
|
172,739
|
|
Less: accumulated depreciation and amortization
|
|
|
(88,827
|
)
|
|
|
(76,974
|
)
|
|
|
|
101,113
|
|
|
|
95,765
|
|
Construction-in-progress
|
|
|
13,527
|
|
|
|
9,670
|
|
Property, plant and equipment, net
(1)
|
|
$
|
114,640
|
|
|
$
|
105,435
|
|
(1)
|
In fiscal year 2016, the Company classified one of its Milan production facilities as assets held for sale, and reclassified $4.3 million into other current assets. In April 2018, the Company reclassified these assets to held and used, and accordingly recognized depreciation expense of $0.1 million. The Company plans to use the facility for storage.
|
7. Stock-Based Compensation
The Company has stock-based incentive plans which are described in more detail in the consolidated financial statements in the Company’s Annual Report on Form 10-K for fiscal year 2017. The Company recognized stock-based compensation costs of approximately $2.1 million and $1.2 million for the three months ended April 30, 2018 and 2017, respectively, and $5.7 million and $4.3 million for the nine months ended April 30, 2018 and 2017, respectively. The Company also recognized the related tax benefits of $0.6 million and $0.4 million for the three months ended April 30, 2018 and 2017, respectively, and $1.5 million and $1.5 million for the nine months ended April 30, 2018 and 2017, respectively. Stock‑based compensation costs are recorded under selling, general and administrative expenses in the condensed consolidated statements of income.
As of April 30, 2018, the unrecognized compensation costs related to stock-based awards was approximately $9.6 million, which is expected to be recognized over a weighted-average period of 1.7 years.
Performance-Based Stock Awards
There were 467,438 and 373,698 non-vested performance-based restricted stock unit (“RSU”) awards outstanding at April 30, 2018 and August 1, 2017, respectively, which reflected the number of RSUs granted under outstanding awards that were expected to vest as of such dates. There were no performance-based RSU awards that vested during the nine months ended April 30, 2018. As of April 30, 2018, the non-vested performance-based RSU awards consisted of Series 1, Series 3 and Series 4 awards granted to certain executives and employees in fiscal years 2018, 2017 and 2016 as summarized below reflecting the target number of RSUs under the awards. Upon vesting, each RSU is converted to one share of common stock.
11
|
|
|
|
Target
|
|
|
|
|
|
|
|
|
Expected
|
|
|
Shares
|
|
|
|
Series
|
|
Award
|
|
|
Grant Date
|
|
|
Measurement
|
|
Percentage
of
|
|
|
Expected
|
|
Date of Grant
|
|
Award
|
|
Shares
|
|
|
Fair Value
|
|
|
Period
Ending
|
|
Vesting
(1)
|
|
|
to Vest
|
|
Fiscal Year 2018 Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/5/2017
|
|
Series 4, Tranche 1
|
|
|
27,541
|
|
|
$
|
54.09
|
|
|
7/31/2020
|
|
|
|
|
|
|
|
|
|
|
Forfeitures
(2)
|
|
|
(2,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
25,250
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
25,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/5/2017
|
|
Series 4, Tranche 2
|
|
|
27,542
|
|
|
$
|
54.09
|
|
|
7/31/2020
|
|
|
|
|
|
|
|
|
|
|
Forfeitures
(2)
|
|
|
(2,291
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
25,251
|
|
|
|
|
|
|
|
|
|
172
|
%
|
|
|
43,431
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/5/2017
|
|
Series 3
|
|
|
14,000
|
|
|
$
|
54.09
|
|
|
7/31/2018
|
|
|
100
|
%
|
|
|
14,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2/5/2018
|
|
Series 1
|
|
|
7,287
|
|
|
$
|
60.22
|
|
|
7/31/2020
|
|
|
|
|
|
|
|
|
4/5/2018
|
|
Series 1
|
|
|
100
|
|
|
$
|
60.93
|
|
|
7/31/2020
|
|
|
|
|
|
|
|
|
|
|
Forfeitures
(2)
|
|
|
(50
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
7,337
|
|
|
|
|
|
|
|
|
|
172
|
%
|
|
|
12,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2017 Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12/8/2016
|
|
Series 1
|
|
|
10,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeitures
(2)
|
|
|
(838
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
9,693
|
|
|
$
|
34.95
|
|
|
7/31/2019
|
|
|
184
|
%
|
|
|
17,871
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/28/2017
|
|
Series 4, Tranche 1
|
|
|
4,545
|
|
|
$
|
52.55
|
|
|
7/31/2019
|
|
|
|
|
|
|
|
|
10/21/2016
|
|
Series 4, Tranche 1
|
|
|
44,337
|
|
|
$
|
29.11
|
|
|
7/31/2019
|
|
|
|
|
|
|
|
|
|
|
Forfeitures
(2)
|
|
|
(8,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
40,440
|
|
|
|
|
|
|
|
|
|
100
|
%
|
|
|
40,440
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4/28/2017
|
|
Series 4, Tranche 2
|
|
|
4,546
|
|
|
$
|
52.55
|
|
|
7/31/2019
|
|
|
|
|
|
|
|
|
10/21/2016
|
|
Series 4, Tranche 2
|
|
|
44,337
|
|
|
$
|
29.11
|
|
|
7/31/2019
|
|
|
|
|
|
|
|
|
|
|
Forfeitures
(2)
|
|
|
(8,442
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
40,441
|
|
|
|
|
|
|
|
|
|
184
|
%
|
|
|
74,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2016 Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3/10/2016
|
|
Series 1
|
|
|
14,625
|
|
|
$
|
21.89
|
|
|
10/31/2018
|
|
|
|
|
|
|
|
|
1/29/2016
|
|
Series 1
|
|
|
57,163
|
|
|
$
|
21.80
|
|
|
10/31/2018
|
|
|
|
|
|
|
|
|
|
|
Forfeitures
(2)
|
|
|
(13,733
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
58,055
|
|
|
|
|
|
|
|
|
|
196
|
%
|
|
|
114,030
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1/19/2016
|
|
Series 3
|
|
|
82,938
|
|
|
$
|
20.89
|
|
|
7/31/2020
|
|
|
151
|
%
|
|
|
125,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
The percentage vesting for performance-based RSU awards is currently estimated at 172%, 184% and 196% of the target award for Series 1 awards granted in fiscal years 2018, 2017 and 2016, respectively, 100% and 151% of the target award for Series 3 awards granted in fiscal years 2018 and 2016, respectively, 100% and 172% of the target award for the first and second tranches, respectively, of the Series 4 awards granted in fiscal year 2018, and 100% and 184% of the target award for the first and second tranches, respectively, of the Series 4 awards granted in fiscal year 2017.
|
(2)
|
Forfeitures include Series 1 and Series 4 awards that were granted to certain employees in fiscal years 2018, 2017 and 2016 but that were forfeited at the termination of their employment.
|
Series 1: For the fiscal year 2018, 2017 and 2016 awards, vesting is subject to performance requirements composed of certain objectives including average annual return on invested capital and annual compound growth rate in the Company’s diluted earnings per share. These objectives are assessed quarterly using the Company’s budget, actual results and long-term projections. For each of the Series 1 awards, the expected percentage of vesting is evaluated through April 30, 2018, and reflects the percentage of RSUs projected to vest for the respective awards at the end of their measurement periods. For the fiscal year 2018, 2017 and 2016 awards, the awards may vest at a maximum of 200% of the target award on achievement of maximum performance objectives.
12
Series 3:
In fiscal year 2018, Mr. Fraser was awarded (i) a performance-based Series 3 award for 10,000
RSUs having a performance requirement related to debt payments during the fiscal year, and (ii) a performance-based Series 3 award for 4,000 RSUs having certain organizational objectives as a performance requirement, and in each case such awards vest and
are measured over a one year period beginning August 1 and ending July 31. These awards are expected to vest at 100% of the target award.
In fiscal year 2016, Mr. Fraser was awarded a performance-based Series 3 award for 82,938 RSUs (at target) having perf
ormance requirements related to cumulative revenue and total stockholder return. The measurement period for the fiscal year 2016 award begins on November 1, 2015 and one-third (1/3) of the award vests at each of July 31, 2018, 2019 and 2020. The award may
vest at a maximum of 200% of the target award on achievement of maximum performance objectives. This award is expected to vest at 151% of the target award.
Series 4: For the fiscal year 2018 and 2017 awards, each award includes two tranches, with each tranche representing 50% of the target award. For the first tranche, vesting is subject to the achievement of an adjusted earnings before interest, taxes and depreciation and amortization (“EBITDA”) metric. For the second tranche, vesting is subject to performance requirements for average annual return on invested capital and annual compound growth rate in the Company’s diluted earnings per share. These objectives are assessed quarterly using the Company’s budget, actual results and long-term projections. For each of the Series 4 awards, the expected percentage vesting is evaluated through April 30, 2018, and reflects the percentage of RSUs projected to vest at the end of the measurement period. For the fiscal year 2018 and 2017 awards, the second tranche may vest at a maximum of 200% of the target award on achievement of maximum performance objectives.
The weighted-average per share grant-date fair value of the target award RSUs for performance-based awards outstanding was $31.27 and $25.49 at April 30, 2018 and August 1, 2017, respectively.
The weighted-average per share grant-date fair value of the target award RSUs for performance-based awards granted during the nine months ended April 30, 2018 and 2017 was $54.68 and $31.55, respectively. There were 76,470 performance-based RSU awards granted during the nine months ended April 30, 2018.
The weighted-average per share grant-date fair value of performance-based awards forfeited during the nine months ended April 30, 2018 and 2017 was $37.49 and $22.97, respectively.
Time-Based Stock Awards
A summary of activity for time-based stock awards for the nine months ended April 30, 2018 is presented below:
|
|
Shares
|
|
|
Weighted-Average Grant-Date
Fair Value
|
|
Non-vested on August 1, 2017
|
|
|
173,603
|
|
|
$
|
24.37
|
|
Granted
(1)
|
|
|
30,640
|
|
|
|
59.90
|
|
Vested
(2)
|
|
|
(17,807
|
)
|
|
|
40.36
|
|
Forfeited
|
|
|
(1,371
|
)
|
|
|
27.73
|
|
Non-vested on April 30, 2018
|
|
|
185,065
|
|
|
|
28.69
|
|
(1)
|
Includes 6,235 shares granted to non-employee directors for service during the nine months ended April 30, 2018. Includes 24,405 time-based RSU awards granted to certain employees and executives.
|
(2)
|
Includes 6,235 shares granted to non-employee directors for service for the nine months ended April 30, 2018. The shares vest on the date of grant, and the Company recognizes compensation expense on such date. Includes 11,572 time-based RSU awards granted to certain employees and executives, and the Company recognizes compensation expense related to the awards over the respective service periods in accordance with GAAP. Upon vesting, each RSU was converted to one share of common stock.
|
The total fair value of time-based stock awards vested during the nine months ended April 30, 2018 and 2017 was approximately $0.7 million and $0.6 million, respectively.
13
8. Intangible Assets
Intangible assets are summarized as follows (in thousands):
|
|
Number
of Years
|
|
|
April 30, 2018
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Currency
|
|
|
|
|
|
|
|
Amortization
|
|
|
Original
|
|
|
Accumulated
|
|
|
Translation
|
|
|
Carrying
|
|
|
|
Period
|
|
|
Cost
|
|
|
Amortization
|
|
|
Adjustment
|
|
|
Amount
|
|
Intangible assets subject to amortization (range of
useful life):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic chemicals-value of product qualifications
(5-15 years)
|
|
|
14.1
|
|
|
$
|
14,100
|
|
|
$
|
(6,135
|
)
|
|
$
|
(636
|
)
|
|
$
|
7,329
|
|
Performance materials-customer relationships
(15-20 years)
|
|
|
19.7
|
|
|
|
218,106
|
|
|
|
(11,245
|
)
|
|
|
14
|
|
|
|
206,875
|
|
Performance materials-proprietary manufacturing process
(15 years)
|
|
|
15.0
|
|
|
|
39,323
|
|
|
|
(2,294
|
)
|
|
|
—
|
|
|
|
37,029
|
|
Electronic chemicals-other (1-15 years)
|
|
|
7.4
|
|
|
|
2,649
|
|
|
|
(1,966
|
)
|
|
|
(84
|
)
|
|
|
599
|
|
Performance materials-other (5-15 years)
|
|
|
6.2
|
|
|
|
3,160
|
|
|
|
(698
|
)
|
|
|
15
|
|
|
|
2,477
|
|
Total intangible assets subject to amortization
|
|
|
18.5
|
|
|
$
|
277,338
|
|
|
$
|
(22,338
|
)
|
|
$
|
(691
|
)
|
|
$
|
254,309
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance materials-penta product registrations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,765
|
|
Performance materials-related trade name and trademark
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,436
|
|
Performance materials-proprietary manufacturing process
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,808
|
|
Total intangible assets not subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,009
|
|
Total intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
303,318
|
|
|
|
Number
of Years
|
|
|
July 31, 2017
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Foreign
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Currency
|
|
|
|
|
|
|
|
Amortization
|
|
|
Original
|
|
|
Accumulated
|
|
|
Translation
|
|
|
Carrying
|
|
|
|
Period
|
|
|
Cost
|
|
|
Amortization
|
|
|
Adjustment
|
|
|
Amount
|
|
Intangible assets subject to amortization (range of
useful life):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic chemicals-value of product qualifications
(5-15 years)
|
|
|
14.1
|
|
|
$
|
14,100
|
|
|
$
|
(5,479
|
)
|
|
$
|
(841
|
)
|
|
$
|
7,780
|
|
Performance materials-customer relationships
(15-20 years)
|
|
|
19.7
|
|
|
|
227,521
|
|
|
|
(3,244
|
)
|
|
|
54
|
|
|
|
224,331
|
|
Performance materials-proprietary manufacturing process
(15 years)
|
|
|
15.0
|
|
|
|
39,245
|
|
|
|
(322
|
)
|
|
|
—
|
|
|
|
38,923
|
|
Electronic chemicals-other (1-15 years)
|
|
|
7.4
|
|
|
|
2,649
|
|
|
|
(1,740
|
)
|
|
|
(114
|
)
|
|
|
795
|
|
Performance materials-other (5-15 years)
|
|
|
6.2
|
|
|
|
3,160
|
|
|
|
(289
|
)
|
|
|
54
|
|
|
|
2,925
|
|
Total intangible assets subject to amortization
|
|
|
13.6
|
|
|
$
|
286,675
|
|
|
$
|
(11,074
|
)
|
|
$
|
(847
|
)
|
|
$
|
274,754
|
|
Intangible assets not subject to amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance materials-penta product registrations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,765
|
|
Performance materials-related trade name and trademark
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34,074
|
|
Performance materials-proprietary manufacturing process
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,808
|
|
Total intangible assets not subject to amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,647
|
|
Total intangible assets, net
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
320,401
|
|
Intangible assets subject to amortization are amortized over their estimated useful lives. Amortization expense was approximately $3.9 million and $0.6 million for the three months ended April 30, 2018 and 2017, respectively, and $11.3 million and $1.7 million for the nine months ended April 30, 2018 and 2017, respectively.
14
9. Dividends
Dividends of approximately $0.5 million ($0.03 per share) and $0.4 million ($0.03 per share) were declared and paid in the third quarter of fiscal years 2018 and 2017, respectively. Dividends of approximately $1.3 million ($0.09 per share) and $1.1 million ($0.09 per share) were declared and paid in the first nine months of fiscal years 2018 and 2017, respectively. A dividend of $0.03 per share was approved by the Company’s board of directors on June 4, 2018 to be paid on June 22, 2018 to shareholders of record on June 15, 2018.
10. Segment Information
The Company has two reportable segments — electronic chemicals and performance materials. In the fiscal quarter ended April 30, 2017, the Company’s management, including the chief executive officer, who is the chief operating decision maker, determined that the Company’s operations should be reported as the electronic chemicals segment and the performance materials segment. The performance materials segment includes the Company’s pipeline performance business platform and wood treating chemicals business platform. The Flowchem and Sealweld businesses acquired in the second half of fiscal year 2017 are included in the performance materials segment.
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
|
|
April 30,
|
|
|
April 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(Amounts in thousands)
|
|
|
(Amounts in thousands)
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic chemicals
|
|
$
|
74,669
|
|
|
$
|
68,141
|
|
|
$
|
222,401
|
|
|
$
|
204,829
|
|
Performance materials
|
|
|
43,978
|
|
|
|
13,475
|
|
|
|
120,761
|
|
|
|
32,353
|
|
Other activities
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total consolidated net sales
|
|
$
|
118,647
|
|
|
$
|
81,616
|
|
|
$
|
343,162
|
|
|
$
|
237,182
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic chemicals
|
|
$
|
2,864
|
|
|
$
|
2,857
|
|
|
$
|
8,418
|
|
|
$
|
8,502
|
|
Performance materials
|
|
|
4,250
|
|
|
|
549
|
|
|
|
12,418
|
|
|
|
1,121
|
|
Other activities
|
|
|
550
|
|
|
|
411
|
|
|
|
1,523
|
|
|
|
1,241
|
|
Total consolidated depreciation and amortization
|
|
$
|
7,664
|
|
|
$
|
3,817
|
|
|
$
|
22,359
|
|
|
$
|
10,864
|
|
Operating income
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electronic chemicals
|
|
$
|
10,889
|
|
|
$
|
8,509
|
|
|
$
|
34,877
|
|
|
$
|
26,153
|
|
Performance materials
|
|
|
16,041
|
|
|
|
4,224
|
|
|
|
40,435
|
|
|
|
10,927
|
|
Other activities
|
|
|
(2,977
|
)
|
|
|
(3,366
|
)
|
|
|
(9,549
|
)
|
|
|
(9,993
|
)
|
Total consolidated operating income
|
|
|
23,953
|
|
|
|
9,367
|
|
|
|
65,763
|
|
|
|
27,087
|
|
Total other (expense) income, net
|
|
|
(3,265
|
)
|
|
|
(157
|
)
|
|
|
(19,440
|
)
|
|
|
(562
|
)
|
Income before income taxes
|
|
$
|
20,688
|
|
|
$
|
9,210
|
|
|
$
|
46,323
|
|
|
$
|
26,525
|
|
(1)
|
Segment income from operations includes allocated corporate overhead expenses, but excludes restructuring and realignment charges, which are included in other activities.
|
11. Long-Term Debt
The Company’s debt as of April 30, 2018 and July 31, 2017 consisted of the following:
|
|
April 30,
|
|
|
July 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
(Amounts in thousands)
|
|
Senior secured debt:
|
|
|
|
|
|
|
|
|
Term loan, maturing on June 15, 2024, variable interest rates based on LIBOR plus 2.75%, at April 30, 2018
|
|
$
|
330,000
|
|
|
$
|
540,000
|
|
Total debt
|
|
|
330,000
|
|
|
|
540,000
|
|
Current maturities of long-term debt
|
|
|
—
|
|
|
|
(3,167
|
)
|
Unamortized debt issuance costs and original issue discount
|
|
|
(6,450
|
)
|
|
|
(13,731
|
)
|
Long-term debt, net of current maturities
|
|
$
|
323,550
|
|
|
$
|
523,102
|
|
15
On June 15, 2017
, the Company entered into a credit agreement (as amended, the “Credit Agreement”) with KeyBank National Association, as agent, KeyBanc Capital Markets, Inc., HSBC Securities (USA) Inc., and JPMorgan Chase Bank, N.A., as joint lead arrangers and joint book
runners, the lenders named therein, and ING Capital LLC, as documentation agent. The Credit Agreement provides for a seven year syndicated senior secured term loan of $550.0 million (the “Term Loan”) and a five year senior secured revolving credit facility
of $50.0 million (the “Revolving Loan”).
On December 19, 2017, the Company entered into an amendment to the Credit Agreement to reduce the interest rate margins applicable to borrowings under the Term Loan and the Revolving Loan
.
During the nine months ended April 30, 2018, the Company made principal payments totaling $210 million on the Term Loan, including $175.7 million paid using the net proceeds from the public offering of the Company’s common stock that closed on October 23, 2017. In conjunction with the amendment to the Credit Agreement and principal payments on the Term Loan, the Company recorded an accelerated amortization of deferred financing costs and original issue discount of $6.4 million as a loss on extinguishment of debt in the Company’s condensed consolidated statements of income. At April 30, 2018, the Company had $330.0 million outstanding under the Term Loan, with up to $46.8 million of additional borrowing capacity under the Revolving Loan after giving effect to a reduction of $3.2 million for outstanding letters of credit.
The Term Loan bears interest at a varying rate of LIBOR plus a margin based on net funded debt to adjusted EBITDA, as calculated in accordance with the Credit Agreement:
Term Loan - Ratio of Net Funded Debt to Adjusted EBITDA
|
|
Margin
|
|
Greater than 2.5 to 1.0
|
|
|
2.75
|
%
|
Less than or equal to 2.5 to 1.0
|
|
|
2.50
|
%
|
The Revolving Loan bears interest at a varying rate of LIBOR plus a margin based on net funded debt to adjusted EBITDA, as calculated in accordance with the Credit Agreement:
Revolving Loan - Ratio of Net Funded Debt to Adjusted EBITDA
|
|
Margin
|
|
Greater than 4.25 to 1.0
|
|
|
2.75
|
%
|
Greater than 3.75 to 1.0, but less than or equal to 4.25 to 1.0
|
|
|
2.50
|
%
|
Less than 3.75 to 1.0
|
|
|
2.25
|
%
|
As of April 30, 2018, the Term Loan bore interest at 4.651% and the Revolving Loan bore interest at 4.151%. There were no outstanding borrowings under the Revolving Loan as of April 30, 2018. The Company also incurs an unused commitment fee of 0.375% on the unused amount of commitments under the Revolving Loan.
Loans under the Credit Agreement are secured by the Company’s assets, including stock in subsidiaries, inventory, accounts receivable, equipment, intangible assets, and real property. The Credit Agreement has restrictive covenants, including a covenant that the Company must maintain a consolidated net leverage ratio between 6.5 to 1.0 through the fiscal quarter ended April 30, 2018, which ratio is reduced each year thereafter by an amount set forth in the Credit Agreement, until the twelve months ended April 30, 2022, following which the Company must maintain a consolidated net leverage ratio below 4.0 to 1.0. As of April 30, 2018, the Company was in compliance with all covenants of the Credit Agreement.
12. Fair Value Measurements
Fair Value Hierarchy
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. There are three approaches for measuring the fair value of assets and liabilities: the market approach, the income approach and the cost approach, each of which includes multiple valuation techniques.
The fair value accounting standards do not prescribe which valuation technique should be used when measuring fair value and do not prioritize among the techniques. These standards establish a fair value hierarchy that prioritizes the inputs used in applying the various valuation techniques. Inputs broadly refer to the assumptions that market participants use to make pricing decisions, including assumptions about risk. Level 1 inputs are given the highest priority in the fair value hierarchy while Level 3 inputs are given the lowest priority. The three levels of the fair value hierarchy are as follows:
|
•
|
Level 1 – Observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in active markets as of the reporting date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
|
16
|
•
|
Level 2 – Observable market-based inputs or unobservable inputs that are corroborated by market data. These are inputs other than quoted prices in active markets included in Level 1
, which are either directly or indirectly observable as of the reporting date.
|
|
•
|
Level 3 – Unobservable inputs for which there is little, if any, market activity for the asset or liability being measured. These inputs reflect management’s best estimates of the assumptions market participants would use in determining fair value. The level 3 measurements consist of instruments using standard pricing models and other valuation methods that utilize unobservable pricing inputs that are significant to the overall fair value.
|
Valuation techniques that maximize the use of observable inputs are favored. Assets and liabilities are classified in their entirety based on the lowest priority level of input that is significant to the fair value measurement. The assessment of the significance of a particular input to the fair value measurement requires judgment and may affect the placement of assets and liabilities within the levels of the fair value hierarchy.
Significant uses of fair value measurements include:
|
•
|
impairment assessments of long-lived assets;
|
|
•
|
impairment assessments of goodwill;
|
|
•
|
recorded value of derivative instruments; and
|
|
•
|
assets acquired and liabilities assumed in business combinations.
|
Fair Values – Recurring
The derivative instrument transactions occurred on August 14, 2017, and as of April 30, 2018 are included within Level 2 other assets, net in the Company’s condensed consolidated balance sheet.
The following tables present the fair value hierarchy table for assets and liabilities measured at fair value, on a recurring basis (in thousands):
|
|
Fair Value Measurements
at April 30, 2018, Using:
|
|
|
|
|
|
Description
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
–
interest rate swaps
|
|
$
|
—
|
|
|
$
|
5,238
|
|
|
$
|
—
|
|
|
$
|
5,238
|
|
Total
|
|
$
|
—
|
|
|
$
|
5,238
|
|
|
$
|
—
|
|
|
$
|
5,238
|
|
Derivative assets consist of interest rate swaps entered into to mitigate the risk relating to possible adverse changes in interest rates for the Company’s floating rate borrowings. The fair value of the interest rate swaps is estimated as the net present value of projected cash flows based upon forward interest rates at the balance sheet date. The models used to value the interest rate swaps are based primarily on readily observable market data, such as LIBOR forward rates, for all substantial terms of the interest rate swap contracts and the credit risk of the counterparties. As such, these derivative instruments are included in Level 2 inputs. See Note 13,
Derivative Financial Instruments
.
Fair Values – Non-Recurring
In addition to the financial assets and liabilities included in the above table, certain nonfinancial assets and liabilities are to be measured at fair value on a nonrecurring basis in accordance with applicable GAAP. In general, nonfinancial assets including goodwill, other intangible assets and property and equipment are measured at fair value when there is an indication of impairment and are recorded at fair value only when an impairment is recognized. As of April 30, 2018, the Company had not recorded any impairment related to such assets and had no other material nonfinancial assets or liabilities requiring adjustments or write-downs to their current fair value.
As allowed by applicable FASB guidance, the Company has elected not to apply the fair value option for financial assets and liabilities to any of its currently eligible financial assets or liabilities. As of April 30, 2018 and July 31, 2017, the Company’s material financial assets and liabilities not carried at fair value included cash and cash equivalents, accounts receivable, accounts payable and accrued expenses. These financial instruments are recorded at their carrying values which are deemed to approximate fair value, generally due to their short periods to maturity
.
17
13. Derivative Financial Instruments
The Company held certain derivative instruments that were accounted for pursuant to ASC 815,
Derivatives and Hedging
(ASC 815).
The Company entered into certain interest rate swaps with notional amounts totaling $243.0 million, to limit its exposure to variability of the one-month LIBOR floating interest rate on a significant portion of the outstanding balance of its Term Loans. See Note 11,
Long-Term
Debt
. The interest rate swap agreements are in place with two U.S.-based counterparties, with expected termination dates of June 15, 2024.
Every derivative instrument is required to be recorded on the balance sheet as either an asset or a liability measured at its fair value. If the derivative does not qualify as a hedge or is not designated as a hedge, changes in fair value of these non-hedge derivatives are recognized in earnings in derivative fair value income or loss.
None of the derivative instruments are used for trading purposes. The effects of the derivative instruments on the condensed consolidated financial statements were as follows as of or for each of the period presented below (amounts presented exclude any income tax effects):
The combined fair value of derivatives not designated as hedging instruments included in the accompanying condensed consolidated balance sheet as of April 30, 2018 is summarized below (in thousands).
|
|
|
|
Fair Value as of
|
|
Description
|
|
Location
|
|
April 30, 2018
|
|
Derivative instruments – interest rate swaps
|
|
Other assets, net
|
|
$
|
5,238
|
|
The effects of derivatives not designated as hedging instruments on the condensed consolidated statements of income for the three and nine months ended April 30, 2018 are summarized below (in thousands).
|
|
|
|
Three Months Ended
|
|
|
Nine Months Ended
|
|
Description
|
|
Location
|
|
April 30, 2018
|
|
|
April 30, 2018
|
|
Derivative instruments – interest rate swaps
|
|
Derivative fair value gain
|
|
$
|
1,365
|
|
|
$
|
5,238
|
|
14. Income Taxes
Income tax expense for the interim periods was computed using an estimated annual effective income tax rate applied to year-to-date income before income tax expense. In determining the estimated annual effective income tax rate, the Company analyzes various factors, including forecasts of projected annual earnings and the ability to use tax credits and net operating loss carry forwards. The overall effective income tax rate for the three and nine months ended April 30, 2018 was 24.4% and (1.1)%, respectively. For the three and nine months April 30, 2017, the overall effective income tax rate was 34.1% and 31.1%, respectively. The decrease in the effective tax rate from the prior fiscal year was due to one-time tax benefits reflecting the impact of the remeasurement of net deferred tax liabilities resulting from the Tax Cuts and Jobs Act of 2017 described below, and stock-based compensation tax benefits realized as a result of the adoption of ASU 2016-09 in the second quarter of fiscal year 2017.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act of 2017 (the “Tax Act”). The Tax Act significantly revises the future ongoing U.S. corporate income tax by, among other things, lowering the U.S. corporate income tax rate from 35% to 21%, changing how foreign earnings are subject to U.S. tax by implementing a territorial tax system, and eliminating certain deductions, including the domestic manufacturing deduction. The Tax Act also enhances and extends through 2026 the option to claim accelerated depreciation deductions on qualified property. As the Company has a July 31 fiscal year-end, the lower corporate income tax rate will be phased in, resulting in an estimated U.S. statutory federal rate of approximately 27% for our fiscal year ending July 31, 2018, and 21% for subsequent fiscal years. Under GAAP, the Company is required to recognize the effects of changes in tax laws and tax rates on deferred tax assets and liabilities in the period in which the new legislation is enacted.
For the fiscal quarter ended April 30, 2018, the Company recorded a net tax benefit of approximately $11.0 million from the new legislation. The tax benefit mainly reflects the impact of the remeasurement of net deferred tax liabilities resulting from the permanent reduction in the U.S. statutory corporate tax rate from 35% to 21%.
There are also certain transitional impacts of the Tax Act. As part of the transition to the new territorial tax system, the Tax Act imposes a one-time repatriation tax on deemed repatriation of historical earnings of foreign subsidiaries. However, the Company does not believe the transitional tax is material.
18
The changes included in the Tax Act are broad and complex and the Compan
y does not have all the necessary information to analyze all income tax effects of the Tax Act. The above income tax benefit amount is a provisional amount based on a reasonable estimate of the impact of the reduction in corporate tax rate on our current a
nd deferred tax liabilities. Changes in the estimate of our deferred tax asset and liability activity during fiscal year 2018 could impact our remeasurement of net deferred tax liabilities. In addition, there is uncertainty about the interpretation of the
Tax Act and the Internal Revenue Service guidance on the Tax Act. The Company’s estimation of the one-time repatriation tax may differ from the provision amount as a result of the uncertainty from the interpretation of the Tax Act and changes in the estima
te of historical earnings of foreign corporations. The Company will continue to evaluate the Tax Act and adjust the provisional amounts as additional information becomes available. The ultimate impact of the Tax Act may differ from the provisional amounts
due to changes in the Company’s interpretations and assumptions, as well as additional guidance on the interpretation of the Tax Act.
In the fiscal quarter ended April 30, 2018, the Company released a net valuation allowance of $0.2 million related to the Company’s business in Singapore on the basis of management’s assessment of its deferred tax assets that are more likely than not to be realized. The achievement of three years of cumulative pre-tax income in Singapore was the primary positive evidence leading to the decision to release the valuation allowance.
15. Litigation and Other Contingencies
The Company is subject to contingencies, including litigation relating to environmental laws and regulations, commercial disputes and other matters. Certain of these contingencies are discussed below. The ultimate resolution of these contingencies is subject to significant uncertainty, and should the Company fail to prevail in any of them or should several of them be resolved against the Company in the same reporting period, these matters could, individually or in the aggregate, be material to the condensed consolidated financial statements. The ultimate outcome of these matters, however, cannot be determined at this time, nor can the amount of any potential loss or range of loss be reasonably estimated, and as a result except where indicated no amounts have been recorded in the Company’s condensed consolidated financial statements.
The Company records legal costs associated with loss contingencies as expenses in the period in which they are incurred.
The EPA has listed the Star Lake Canal Superfund Site near Beaumont, Texas on the National Priorities List. The Company’s subsidiary, KMG-Bernuth, was notified in October 2014 that the EPA considered it to have potential liability under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, also known as “CERCLA,” in connection with this site by virtue of its relationship with certain alleged predecessor companies, including Idacon, Inc. (f/k/a Sonford Chemical Company). The EPA has estimated that the remediation will cost approximately $22.0 million. The Company and approximately seven other parties entered into an agreement with the EPA in September 2016 to complete a remedial design phase of the remediation of the site. The remediation work will be performed under a separate future agreement. Although the Company has not conceded liability, the Company established a liability of $1.3 million in the third quarter of fiscal year 2015 in connection with this matter. As of April 30, 2018, the liability remaining was $1.0 million.
The Company is subject to federal, state, local and foreign laws and regulations and potential liabilities relating to the protection of the environment and human health and safety including, among other things, the cleanup of contaminated sites, the treatment, storage and disposal of wastes, the emission of substances into the air or waterways, and various health and safety matters. The Company expects to incur substantial costs for ongoing compliance with such laws and regulations. The Company may also face governmental or third-party claims, or otherwise incur costs, relating to cleanup of, or for injuries resulting from, contamination at sites associated with past and present operations. The Company accrues for environmental liabilities when a determination can be made that they are probable and reasonably estimable.
16. Restructuring and Realignment Events
In April 2017, the Company began implementation of a plan of restructuring of its electronic chemicals segment in Asia. As a result, the Company incurred approximately $0.1 million of employee related severance costs during the nine months ended April 30, 2018.
As part of the Company’s global restructuring of its electronic chemicals operations, the Company closed one of its facilities in Milan, Italy in December 2015, and shifted some production to facilities in France and the United Kingdom. Accelerated depreciation with respect to the closed facilities has been completed.
19
At April 30, 2018, the accrued liability associated with restructuring and other related charges consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Decommissioning
|
|
|
|
|
|
|
|
and
Environmental
|
|
|
Total
|
|
Accrued liability at August 1, 2017
|
|
$
|
77
|
|
|
$
|
77
|
|
Payments
|
|
|
(36
|
)
|
|
|
(36
|
)
|
Adjustments
|
|
|
(41
|
)
|
|
|
(41
|
)
|
Accrued liability at April 30, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
20