Note 26—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 consist fully or partially of customer-owned materials. The Company also recognizes, to a lesser extent, revenue through royalties and commissions from licensed manufacturers and from providing custom manufacturing-related services. The Company’s revenue recognition policies require the Company to make significant judgments and estimates. In applying the Company’s revenue recognition policy, determinations must be made as to when control of products passes to the Company’s customers, which can be either at a point in time or over time based on contractual terms with customers. As described in more detail below, revenue is generally recognized at a point in time when control passes, upon either shipment to or receipt by the customer of the Company’s products, while revenue is generally recognized over time when control of the Company’s products transfers to customers during the manufacturing process.

The Company accounts for revenue from contracts with customers when there is approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is primarily derived from customer purchase orders, master sales agreements, and negotiated contracts, all of which represent contracts with customers.

The Company next identifies the performance obligations in the contract. A performance obligation is a promise to provide distinct goods or services. Performance obligations are the unit of account for purposes of applying the revenue standard and therefore determine when and how revenue is recognized. The Company determines the performance obligations at contract inception based on the goods or services that are promised in a contract with a customer. Typical performance obligations include our promise to manufacture and the fulfillment of orders of specialty chemical products including coatings, linings, adhesives, sealants, specialty tapes, polymers and laminates, as well as custom manufacturing-related services.

The transaction price in the contract is determined based on the consideration to which the Company will be entitled in exchange for transferring products and services to the customer, excluding amounts collected on behalf of third parties (for example, sales taxes). The transaction price is typically stated on the purchase order or in a negotiated agreement. Certain contracts may include variable consideration in the transaction price, such as rebates, pricing discounts, sales incentives, or other provisions that can decrease the transaction price. Estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based on reasonably available information (customer historical, current and forecasted data). In certain circumstances where a particular outcome is probable, the Company utilizes the most likely amount to which the Company expects to be entitled. The Company accounts for consideration payable to a customer as a reduction of the transaction price which reduces the amount of revenue recognized. Consideration payable to a customer includes cash amounts that the Company pays, or expects to pay, to a customer based on certain contract requirements.

Performance Obligation

The Company recognizes revenue as performance obligations are satisfied, which can be either over time or at a point in time, depending on when control of the Company’s products transfers to its customers.

Manufactured goods and, to a lesser extent, right of use of our intellectual property and custom manufacturing-related services are our performance obligations. Revenue related to our performance obligations is predominantly recognized at a point in time consistent with our shipping terms (upon shipment to or receipt by our customer).

For certain products we manufacture, which consist partially or fully of customer-owned material and which meet the criteria of having no alternative use whereby the Company has the right to payment without regard to title, we recognize revenue over time. In these circumstances, the Company makes significant judgments which include, but are not limited to, estimated costs to completion and costs incurred to date, and assesses risks related to changes in estimates of revenue and costs. In doing so, management must make assumptions regarding the work required to fulfill the performance obligations.

The selection of a method to measure progress toward completion of a contract requires judgment and is based on the nature of the products or services to be provided. We use the cost-to-cost method to measure the progress of our contracts with no-alternative-use products (given they consist partially or fully of customer-owned material) whereby the Company has the right to payment as we believe it is the best depiction of the transfer of value to the customer. Under the cost-to-cost method, the extent of progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the contract. Contract costs include labor, materials and subcontractors costs, as well as an allocation of indirect costs. Revenue, including estimated fees or profits, is recorded as costs are incurred. Specialty manufacturing runs for customers of products which are composed partially or fully of customer-owned material predominantly occur over relatively short periods of time (less than one month) and consist of a one-step process (such as coating or laminating), promptly followed by shipment to the end customer. Ongoing custom manufacturing-related services performed for customers are recognized in the period the services are rendered, and as such do not carry over from period to period. Royalty revenue, derived from right of use of our intellectual property, is recognized when the subsequent sale of the licensed intellectual property occurs.

Because performance obligations are typically satisfied within one month of receipt of a customer order, a change in cost estimates will not have a material impact on the percentage of completion noted at the prior quarter end. Our typical payment terms with customers are net 30 days, with consideration given to geographic and industry norms.

Contract Balances

The Company’s contract assets primarily relate to unbilled revenue for products currently in production at the Company’s facilities and which consist partially or fully of customer-owned material. Revenue is recognized in advance of billing to the customer in these specific circumstances, whereas billing is typically performed at the time of shipment to or receipt by the customer.

Contract assets are included in prepaid expenses and other current assets on the Company’s consolidated balance sheets. The following table presents contract assets by reportable operating segment as of August 31, 2019 and September 1, 2018 (date of adoption):


	August 31,		September 1,
	2019		2018
Contract Assets
Adhesives, Sealants and Additives	$	42	$	15
Industrial Tapes		26		1
Corrosion Protection and Waterproofing		79		64
Total	$	147	$	80

The Company did not have any contract liabilities as of September 1, 2018 and August 31, 2019.

Impacts on Financial Statements

The cumulative effect of the changes made to the Company’s consolidated September 1, 2018 balance sheet for the adoption of ASC 606 was as follows:


	August 31,		Adjustments for		September 1,
	2018		Adoption of ASC 606		2018

Assets:
Contract assets	$	—	$	80	$	80
Inventory	$	39,699	$	(50)	$	39,649
Prepaid income taxes	$	4,100	$	(8)	$	4,092

Stockholders' equity:
Retained earnings	$	245,049	$	22	$	245,071

The cumulative effect of the changes made to the Company’s condensed consolidated August 31, 2019 balance sheet for the adoption of ASC 606 was as follows:


	August 31, 2019
	Balances Without		ASC 606		As
	Adoption of ASC 606		Adjustments		Reported

Assets:
Contract assets	$	—	$	147	$	147
Inventory	$	42,464	$	(110)	$	42,354
Prepaid income taxes	$	1,461	$	(10)	$	1,451

Stockholders' equity:
Retained earnings	$	270,233	$	27	$	270,260

The cumulative effect of the changes made to the Company’s condensed consolidated statement of operations for the adoption of ASC 606 for the year ended August 31, 2019 were as follows:


	Year Ended August 31, 2019
	Results Without		Effect of Change		As
	Adoption of ASC 606		Higher (Lower)		Reported

Revenue
Sales	$	276,772	$	67	$	276,839
Royalties and commissions		4,512		—		4,512
		281,284		67		281,351
Costs and Expenses
Cost of products and services sold		180,103		60		180,163
Selling, general and administrative expenses		52,728		—		52,728
Loss on impairment of goodwill		2,410		—		2,410
Operations optimization costs		986		—		986

Operating income		45,057		7		45,064

Interest expense		(519)		—		(519)
Other income (expense)		(992)		—		(992)

Income before income taxes		43,546		7		43,553

Income taxes		10,840		2		10,842

Net income	$	32,706	$	5	$	32,711


Net income available to common shareholders, per common and common equivalent share

Basic	$	3.48	$	—	$	3.48

Diluted	$	3.46	$	—	$	3.46

Weighted average shares outstanding
Basic		9,334,232		—		9,334,232
Diluted		9,379,207		—		9,379,207

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 year ended August 31, 2019 was as follows:


	Year August 31, 2019
	Adhesives, Sealants		Industrial		Corrosion Protection		Consolidated
	and Additives		Tapes		and Waterproofing		Revenue
Revenue
North America	$	70,320	$	117,955	$	37,463	$	225,738
Asia		19,430		7,126		6,524		33,080
Europe		14,773		2,637		2,455		19,865
All other foreign		273		2,127		268		2,668
Total Revenue	$	104,796	$	129,845	$	46,710	$	281,351

Practical Expedients and Policy Elections

Shipping and Handling Policy Election — the Company has made an accounting policy election to record shipping and handling activities occurring after control has passed to the customer to be treated as a fulfillment cost rather than as a distinct performance obligation. Shipping and handling expenses consist primarily of costs incurred to deliver products to customers and internal costs related to preparing products for shipment and are recorded within cost of products and services sold. Amounts billed to customers as shipping and handling are classified as revenue when services are performed.

Considering Existence of a Significant Financing Component — as a practical expedient, an entity need not adjust the promised amount of consideration for the effects of a significant financing component if the entity expects, at contract inception, that the period between when the entity transfers a promised good or service to the customer and when the customer pays for that good or service will be one year or less. Given the time between the Company transferring a promised good or service to the customer and the customer paying for that good or service is less than one year based on the terms of arrangements with customers, the Company does not adjust the promised amount of consideration for effects of a significant financing component.