10-Q 1 wdfc-20131130x10q.htm 10-Q 64205bbc0259424

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

 

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended November 30, 2013

 

 

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to             

Commission File Number: 000-06936

WD-40 COMPANY

(Exact name of registrant as specified in its charter)

 

 

 

 

Delaware

 

95-1797918

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

 

1061 Cudahy Place, San Diego, California

 

92110

(Address of principal executive offices)

 

(Zip code)

 

Registrant’s telephone number, including area code: (619) 275-1400

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

 

Yes      No  

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes       No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer          Accelerated filer    Non-accelerated filer         Smaller reporting company  

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes      No  

 

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of January 2, 2014 was 15,246,308.

1

 


 

WD-40 COMPANY

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended November 30, 2013

 

TABLE OF CONTENTS

 

 

 

 

 

 

PART I — FINANCIAL INFORMATION 

 

 

 

Page

Item 1.

Financial Statements

 

Condensed Consolidated Balance Sheets

 

Condensed Consolidated Statements of Operations

 

Condensed Consolidated Statements of Comprehensive Income

 

Condensed Consolidated Statement of Shareholders’ Equity

 

Condensed Consolidated Statements of Cash Flows

 

Notes to Condensed Consolidated Financial Statements

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

20 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

33 

Item 4.

Controls and Procedures

33 

 

 

PART II —  OTHER INFORMATION 

 

 

 

 

Item 1.

Legal Proceedings

34 

Item 1A.

Risk Factors

34 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

34 

Item 6.

Exhibits

36 

 

2

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PART 1 - FINANCIAL INFORMATION

 

 

 

 

 

 

Item 1. Financial Statements

 

 

 

 

 

 

WD-40 COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited and in thousands, except share and per share amounts)

 

 

 

 

 

 

 

November 30,

 

August 31,

 

2013

 

2013

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

51,419 

 

$

53,434 

Short-term investments

 

40,724 

 

 

37,516 

Trade accounts receivable, less allowance for doubtful

 

 

 

 

 

accounts of $735 and $540 at November 30, 2013

 

 

 

 

 

and August 31, 2013, respectively

 

56,477 

 

 

56,878 

Inventories

 

33,790 

 

 

32,433 

Current deferred tax assets, net

 

5,681 

 

 

5,672 

Other current assets

 

6,245 

 

 

6,210 

Total current assets

 

194,336 

 

 

192,143 

Property and equipment, net

 

9,088 

 

 

8,535 

Goodwill

 

95,438 

 

 

95,236 

Other intangible assets, net

 

23,841 

 

 

24,292 

Other assets

 

2,907 

 

 

2,858 

Total assets

$

325,610 

 

$

323,064 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

18,523 

 

$

19,693 

Accrued liabilities

 

15,919 

 

 

16,562 

Revolving credit facility

 

63,000 

 

 

63,000 

Accrued payroll and related expenses

 

12,192 

 

 

17,244 

Income taxes payable

 

2,770 

 

 

1,146 

Total current liabilities

 

112,404 

 

 

117,645 

Long-term deferred tax liabilities, net

 

24,661 

 

 

24,011 

Deferred and other long-term liabilities

 

1,943 

 

 

1,901 

Total liabilities

 

139,008 

 

 

143,557 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

Common stock ― authorized 36,000,000 shares, $0.001 par value;

 

 

 

 

 

19,459,734 and 19,392,979 shares issued at November 30, 2013 and

 

 

 

 

 

August 31, 2013, respectively; and 15,274,308 and 15,285,536 shares

 

 

 

 

 

outstanding at November 30, 2013 and August 31, 2013, respectively

 

19 

 

 

19 

Additional paid-in capital

 

134,275 

 

 

133,239 

Retained earnings

 

220,758 

 

 

214,034 

Accumulated other comprehensive loss

 

(444)

 

 

(5,043)

Common stock held in treasury, at cost ― 4,185,426 and 4,107,443

 

 

 

 

 

shares at November 30, 2013 and August 31, 2013, respectively

 

(168,006)

 

 

(162,742)

Total shareholders' equity

 

186,602 

 

 

179,507 

Total liabilities and shareholders' equity

$

325,610 

 

$

323,064 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

WD-40 COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share amounts)

 

 

 

 

 

 

 

Three Months Ended November 30,

 

 

2013

 

 

2012

 

 

 

 

 

 

Net sales

$

95,541 

 

$

95,264 

Cost of products sold

 

45,868 

 

 

47,537 

Gross profit

 

49,673 

 

 

47,727 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

26,699 

 

 

25,329 

Advertising and sales promotion

 

5,615 

 

 

6,067 

Amortization of definite-lived intangible assets

 

592 

 

 

466 

Total operating expenses

 

32,906 

 

 

31,862 

 

 

 

 

 

 

Income from operations

 

16,767 

 

 

15,865 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

131 

 

 

62 

Interest expense

 

(215)

 

 

(125)

Other (expense) income, net

 

(214)

 

 

52 

Income before income taxes

 

16,469 

 

 

15,854 

Provision for income taxes

 

4,987 

 

 

4,910 

Net income

$

11,482 

 

$

10,944 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

Basic

$

0.75 

 

$

0.69 

Diluted

$

0.74 

 

$

0.69 

 

 

 

 

 

 

Shares used in per share calculations:

 

 

 

 

 

Basic

 

15,279 

 

 

15,693 

Diluted

 

15,366 

 

 

15,807 

Dividends declared per common share

$

0.31 

 

$

0.29 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

4

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WD-40 COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited and in thousands)

 

 

 

 

 

 

 

Three Months Ended November 30,

 

2013

 

2012

 

 

 

 

 

 

Net income

$

11,482 

 

$

10,944 

Other comprehensive income:

 

 

 

 

 

Foreign currency translation adjustment

 

4,599 

 

 

1,035 

Total comprehensive income

$

16,081 

 

$

11,979 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

5

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WD-40 COMPANY

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY

(Unaudited and in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

Other

 

 

 

 

 

Total

 

Common Stock

 

Paid-in

 

Retained

 

Comprehensive

 

Treasury Stock

 

Shareholders'

 

Shares

 

Amount

 

Capital

 

Earnings

 

Loss

 

Shares

 

Amount

 

Equity

Balance at August 31, 2013

19,392,979 

 

$

19 

 

$

133,239 

 

$

214,034 

 

$

(5,043)

 

4,107,443 

 

$

(162,742)

 

$

179,507 

Issuance of common stock upon

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

settlements of stock-based equity awards

66,755 

 

 

 

 

 

(264)

 

 

 

 

 

 

 

 

 

 

 

 

 

(264)

Stock-based compensation

 

 

 

 

 

 

517 

 

 

 

 

 

 

 

 

 

 

 

 

 

517 

Tax benefits from settlements of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

stock-based equity awards

 

 

 

 

 

 

783 

 

 

 

 

 

 

 

 

 

 

 

 

 

783 

Cash dividends ($0.31 per share)

 

 

 

 

 

 

 

 

 

(4,758)

 

 

 

 

 

 

 

 

 

 

(4,758)

Acquisition of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

77,983 

 

 

(5,264)

 

 

(5,264)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

4,599 

 

 

 

 

 

 

 

4,599 

Net income

 

 

 

 

 

 

 

 

 

11,482 

 

 

 

 

 

 

 

 

 

 

11,482 

Balance at November 30, 2013

19,459,734 

 

$

19 

 

$

134,275 

 

$

220,758 

 

$

(444)

 

4,185,426 

 

$

(168,006)

 

$

186,602 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WD-40 COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

 

 

 

 

 

 

Three Months Ended November 30,

 

2013

 

2012

Operating activities:

 

 

 

 

 

Net income

$

11,482 

 

$

10,944 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,378 

 

 

1,203 

Net gains on sales and disposals of property and equipment

 

(17)

 

 

(9)

Deferred income taxes

 

(154)

 

 

183 

Excess tax benefits from settlements of stock-based equity awards

 

(777)

 

 

375 

Stock-based compensation

 

517 

 

 

619 

Unrealized foreign currency exchange gains, net

 

(1,053)

 

 

(210)

Provision for bad debts

 

215 

 

 

221 

Changes in assets and liabilities:

 

 

 

 

 

Trade accounts receivable

 

2,302 

 

 

(1,111)

Inventories

 

(1,088)

 

 

(890)

Other assets

 

117 

 

 

(613)

Accounts payable and accrued liabilities

 

(2,580)

 

 

646 

Accrued payroll and related expenses

 

(6,720)

 

 

981 

Income taxes payable

 

3,052 

 

 

3,199 

Deferred and other long-term liabilities

 

35 

 

 

57 

Net cash provided by operating activities

 

6,709 

 

 

15,595 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(1,186)

 

 

(527)

Proceeds from sales of property and equipment

 

95 

 

 

64 

Purchases of short-term investments

 

(1,282)

 

 

(20,928)

Net cash used in investing activities

 

(2,373)

 

 

(21,391)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Dividends paid

 

(4,758)

 

 

(4,579)

Proceeds from issuance of common stock

 

1,149 

 

 

944 

Treasury stock purchases

 

(5,264)

 

 

(8,091)

Excess tax benefits from settlements of stock-based equity awards

 

777 

 

 

(375)

 Net cash used in financing activities

 

(8,096)

 

 

(12,101)

Effect of exchange rate changes on cash and cash equivalents

 

1,745 

 

 

613 

Net decrease in cash and cash equivalents

 

(2,015)

 

 

(17,284)

Cash and cash equivalents at beginning of period

 

53,434 

 

 

69,719 

Cash and cash equivalents at end of period

$

51,419 

 

$

52,435 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

7

 


 

 

WD-40 COMPANY

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

Note 1.  The Company

 

WD-40 Company (“the Company”), based in San Diego, California, is a global consumer products company dedicated to delivering unique, high value and easy-to-use solutions for a wide variety of maintenance needs of “doer” and “on-the-job” users by leveraging and building upon the Company’s fortress of brands. The Company markets multi-purpose maintenance products – under the WD-40® and 3-IN-ONE® brand names. Currently included in the WD-40 brand are the WD-40 multi-use product and the WD-40 Specialist® and WD-40 BikeTM    product lines. The Company launched the WD-40 Specialist product line in early fiscal year 2012 and currently sells this product line in various regions throughout theAmericas, EMEA and Asia-Pacific. The WD-40 Specialist product line has contributed to sales of the multi-purpose maintenance products since its initial launch.  In the fourth quarter of fiscal year 2012, the Company developed the WD-40 Bike product line, which is focused on a comprehensive line of bicycle maintenance products that include wet and dry chain lubricants, heavy-duty degreasers, foaming bike wash and frame protectants that are designed specifically for the avid cyclist, bike enthusiasts and mechanics. The Company also markets the following homecare and cleaning brands: X-14® mildew stain remover and automatic toilet bowl cleaners, 2000 Flushes® automatic toilet bowl cleaners, Carpet Fresh® and No Vac® rug and room deodorizers, Spot Shot® aerosol and liquid carpet stain removers, 1001® household cleaners and rug and room deodorizers and Lava® and Solvol® heavy-duty hand cleaners.

 

The Company’s brands are sold in various locations around the world. Multi-purpose maintenance products are sold worldwide in markets throughout North, Central and South America, Asia, Australia and the Pacific Rim, Europe, the Middle East and Africa. Homecare and cleaning products are sold primarily in North America, the United Kingdom (“U.K.”) and Australia. The Company’s products are sold primarily through mass retail and home center stores, warehouse club stores, grocery stores, hardware stores, automotive parts outlets, sport retailers, independent bike dealers and industrial distributors and suppliers.

 

Note 2.  Basis of Presentation and Summary of Significant Accounting Policies

 

Basis of Consolidation

 

The condensed consolidated financial statements included herein have been prepared by the Company, without audit, according to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The August 31, 2013 year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

 

In the opinion of management, the unaudited financial information for the interim periods shown reflects all adjustments necessary for a fair statement thereof. These condensed consolidated financial statements 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 fiscal year ended August 31, 2013, which was filed with the SEC on October 22, 2013.

 

The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.

8

 


 

Foreign Currency Forward Contracts

 

In the normal course of business, the Company employs established policies and procedures to manage its exposure to fluctuations in foreign currency exchange rates. The Company’s U.K. subsidiary, whose functional currency is Pound Sterling, utilizes foreign currency forward contracts to limit its exposure in converting forecasted cash balances denominated in non-functional currencies. The principal currency affected is the Euro. The Company regularly monitors its foreign currency exchange rate exposures to ensure the overall effectiveness of its foreign currency hedge positions. While the Company engages in foreign currency hedging activity to reduce its risk, for accounting purposes, none of its foreign currency forward contracts are designated as hedges.

 

Foreign currency forward contracts are carried at fair value, with net realized and unrealized gains and losses recognized currently in other income (expense) in the Company’s condensed consolidated statements of operations. Cash flows from settlements of foreign currency forward contracts are included in operating activities in the condensed consolidated statements of cash flows. Foreign currency forward contracts in an asset position at the end of the reporting period are included in other current assets, while foreign currency forward contracts in a liability position at the end of the reporting period are included in accrued liabilities in the Company’s condensed consolidated balance sheets.  At November 30, 2013, the Company had a notional amount of $9.5 million outstanding in foreign currency forward contracts, which mature from December 2013 through March 2014. Unrealized net gains and losses related to foreign currency forward contracts were not significant at November 30, 2013 and August 31, 2013.

 

Long-lived Assets

 

The Company’s long-lived assets consist of property and equipment and definite-lived intangible assets. Long-lived assets are depreciated or amortized, as applicable, on a straight-line basis over their estimated useful lives. The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and/or its remaining useful life may no longer be appropriate. Any required impairment loss would be measured as the amount by which the asset’s carrying amount exceeds its fair value, which is the amount at which the asset could be bought or sold in a current transaction between willing market participants and would be recorded as a reduction in the carrying amount of the related asset and a charge to results of operations. An impairment loss would be recognized when the sum of the expected future undiscounted net cash flows is less than the carrying amount of the asset.

 

During the fourth quarter of fiscal year 2013, the Company recorded a non-cash, before tax impairment charge of $1.1 million to reduce the carrying value of the 2000 Flushes trade name intangible asset to its fair value. For additional details, refer to the information set forth in Note 5 – Goodwill and Other Intangible Assets.

 

Income Taxes

 

Current income tax expense is the amount of income taxes expected to be payable for the current year. A deferred income tax liability or asset is established for the expected future tax consequences resulting from the differences in financial reporting and tax bases of assets and liabilities. A valuation allowance is provided if it is more likely than not that some or all of the deferred tax assets will not be realized. In addition to valuation allowances, the Company provides for uncertain tax positions when such tax positions do not meet the recognition thresholds or measurement standards prescribed by the authoritative guidance on income taxes. Amounts for uncertain tax positions are adjusted in periods when new information becomes available or when positions are effectively settled. The Company recognizes accrued interest and penalties related to uncertain tax positions as a component of income tax expense.

 

U.S. federal income tax expense is provided on remittances of foreign earnings and on unremitted foreign earnings that are not indefinitely reinvested. U.S. federal income taxes and foreign withholding taxes are not provided when foreign earnings are indefinitely reinvested. The Company determines whether its foreign subsidiaries will invest their undistributed earnings indefinitely based on the capital needs of the foreign subsidiaries and reassesses this determination each reporting period. Changes to the Company’s determination may be warranted based on the Company’s experience as well as its plans regarding future international operations and expected remittances.

 

Earnings per Common Share

 

Unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities that are required to be included in the computation of earnings per common share pursuant to the two-class method. Accordingly, the Company’s outstanding unvested, if any, and outstanding vested restricted stock units that provide such nonforfeitable rights to dividend equivalents are included

9

 


 

as participating securities in the calculation of earnings per common share (“EPS”) pursuant to the two-class method.

 

The Company calculates EPS using the two-class method, which provides for an allocation of net income between common stock and other participating securities based on their respective participation rights to share in dividends.  Basic EPS is calculated by dividing net income available to common shareholders for the period by the weighted-average number of common shares outstanding during the period.  Net income available to common shareholders for the period includes dividends paid to common shareholders during the period plus a proportionate share of undistributed net income allocable to common shareholders for the period; the proportionate share of undistributed net income allocable to common shareholders for the period is based on the proportionate share of total weighted-average common shares and participating securities outstanding during the period.

 

Diluted EPS is calculated by dividing net income available to common shareholders for the period by the weighted-average number of common shares outstanding during the period increased by the weighted-average number of potentially dilutive common shares (dilutive securities) that were outstanding during the period if the effect is dilutive. Dilutive securities are comprised of stock options, restricted stock units, performance share units and market share units granted under the Company’s prior stock option plan and current equity incentive plan. 

   

Fair Value Measurements

 

Accounting Standards Codification 820, Fair Value Measurements and Disclosures, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes its financial assets and liabilities measured at fair value into a hierarchy that categorizes fair value measurements into the following three levels based on the types of inputs used in measuring their fair value: 

 

Level 1:  Observable inputs such as quoted market prices in active markets for identical assets or liabilities;

Level 2:  Observable market-based inputs or observable inputs that are corroborated by market data; and

Level 3:  Unobservable inputs reflecting the Company’s own assumptions.

 

Under fair value accounting, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. As of November 30, 2013, the Company had no assets or liabilities that are measured at fair value in the financial statements on a recurring basis, with the exception of the foreign currency forward contracts. The Company’s financial instruments include cash equivalents, short-term investments, trade accounts receivable, accounts payable, short-term borrowings and foreign currency exchange contracts. The carrying amounts of these financial instruments approximate their fair values due to their short-term maturities.

 

During the three months ended November 30, 2013, the Company did not record any significant nonrecurring fair value measurements for assets or liabilities in periods subsequent to their initial recognition. During the fourth quarter of fiscal 2013, the Company was required to make a nonrecurring fair value measurement related to the 2000 Flushes trade name intangible asset, for which an impairment charge of $1.1 million was recorded during that quarter. For additional details, refer to the information set forth in Note 5 – Goodwill and Other Intangible Assets.

 

Segment Information

 

The Company discloses certain information about its business segments, which are determined consistent with the way the Company’s Chief Operating Decision Maker organizes and evaluates financial information internally for making operating decisions and assessing performance. In addition, the Chief Operating Decision Maker assesses and measures revenue based on product groups. The Company is organized on the basis of geographical area into the following three segments:

 

·

Americas segment consists of the U.S., Canada and Latin America;

·

Europe, Middle East and Africa (“EMEA”) segment consists of countries in Europe, the Middle East, Africa and India; and

·

Asia-Pacific segment consists of Australia, China and other countries in the Asia region.

 

 

Recently Adopted Accounting Standards

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2011-11, “Disclosures about Offsetting Assets and Liabilities”. The objective of this updated guidance is to provide enhanced disclosures

10

 


 

that will enable users of financial statements to evaluate the effect or potential effect of netting arrangements on an entity’s financial position. The new rules require companies to disclose both gross and net information about instruments and transactions eligible for offset in the statement of financial position, as well as instruments and transactions subject to a netting arrangement. In January 2013, the FASB further issued ASU No. 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities” to address implementation issues surrounding the scope of ASU No. 2011-11 and to clarify the scope of the offsetting disclosures and address any unintended consequences. In September 2013, the Company adopted ASU No. 2011-11 and the adoption of this new authoritative guidance did not have a material impact on the Company’s consolidated financial statement disclosures.

 

Recently Issued Accounting Standards

 

In July 2013, the FASB issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists”,  which is effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The new rules require companies to present in the financial statements an unrecognized tax benefit as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward except to the extent such items are not available or not intended to be used at the reporting date to settle any additional income taxes that would result from the disallowance of a tax position. In such instances, the unrecognized tax benefit is required to be presented in the financial statements as a liability and not be combined with deferred tax assets. The Company is currently evaluating this updated authoritative guidance, but it does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.

 

Note 3.  Inventories

 

Inventories consisted of the following (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 30,

 

August 31,

 

2013

 

2013

Product held at third-party contract manufacturers

$

4,203 

 

$

3,790 

Raw materials and components

 

4,213 

 

 

4,597 

Work-in-process

 

184 

 

 

18 

Finished goods

 

25,190 

 

 

24,028 

Total

$

33,790 

 

$

32,433 

 

 

 

 

 

 

 

Note 4.  Property and Equipment

 

Property and equipment, net, consisted of the following (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 30,

 

August 31,

 

2013

 

2013

Machinery, equipment and vehicles

$

12,309 

 

$

12,035 

Buildings and improvements

 

3,918 

 

 

3,781 

Computer and office equipment

 

3,440 

 

 

3,389 

Software

 

6,290 

 

 

5,997 

Furniture and fixtures

 

1,310 

 

 

1,285 

Land

 

292 

 

 

283 

Subtotal

 

27,559 

 

 

26,770 

Less: accumulated depreciation and amortization

 

(18,471)

 

 

(18,235)

Total

$

9,088 

 

$

8,535 

 

 

 

 

 

 

 

Note 5.  Goodwill and Other Intangible Assets

 

Goodwill represents the excess of the purchase price over the fair value of tangible and intangible assets acquired. The carrying value of goodwill is reviewed for possible impairment in accordance with the authoritative guidance on goodwill, intangibles and other. The Company assesses possible impairments to goodwill at least annually during its second fiscal quarter and otherwise when there is evidence that events or changes in circumstances indicate that an

11

 


 

impairment condition may exist. In performing the annual impairment test of its goodwill, the Company considers the fair value concepts of a market participant and the highest and best use for its intangible assets. In addition to the annual impairment test, goodwill is evaluated each reporting period to determine whether events and circumstances would more likely than not reduce the fair value of a reporting unit below its carrying value. 

 

Intangible assets that are determined to have definite lives are amortized on a straight-line basis over their estimated useful lives and are evaluated each reporting period to determine whether events and circumstances indicate that their carrying amounts may not be recoverable and/or their remaining useful lives may no longer be appropriate.

 

Goodwill

 

The following table summarizes the changes in the carrying amounts of goodwill by segment (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

EMEA

 

Asia-Pacific

 

Total

Balance as of August 31, 2013

$

85,545 

 

$

8,480 

 

$

1,211 

 

$

95,236 

Translation adjustments

 

28 

 

 

174 

 

 

 -

 

 

202 

Balance as of November 30, 2013

$

85,573 

 

$

8,654 

 

$

1,211 

 

$

95,438 

 

 

 

 

 

 

 

 

 

 

 

 

 

There were no indicators of impairment identified as a result of the Company’s review of events and circumstances related to its goodwill subsequent to February 28, 2013, the date of its most recent annual goodwill impairment test. To date, there have been no impairment losses identified and recorded related to the Company’s goodwill.

 

Definite-lived Intangible Assets

 

The Company’s definite-lived intangible assets, which include the 2000 Flushes, Spot Shot, Carpet Fresh and 1001 trade names, are included in other intangible assets, net in the Company’s condensed consolidated balance sheets. The following table summarizes the definite-lived intangible assets and the related accumulated amortization and impairment (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 30,

 

August 31,

 

2013

 

2013

Gross carrying amount

$

34,807 

 

$

34,615 

Accumulated amortization

 

(9,929)

 

 

(9,124)

Accumulated impairment of intangible assets

 

(1,077)

 

 

(1,077)

Translation adjustments

 

40 

 

 

(122)

Net carrying amount

$

23,841 

 

$

24,292 

 

 

 

 

 

 

During the fourth quarter of fiscal year 2013, as part of the Company’s ongoing evaluation of potential strategic alternatives for certain of its homecare and cleaning products, the Company determined based on its review of events and circumstances that there were indicators of impairment for the Carpet Fresh and 2000 Flushes trade names. Management accordingly performed the Step 1 recoverability test for these two trade names and based on the results of this analysis, it was determined that the total of the undiscounted cash flows significantly exceeded the carrying value for the Carpet Fresh asset group and that no impairment existed for this trade name as of August 31, 2013. However, the Step 1 analysis indicated that the carrying value of the asset group for the 2000 Flushes exceeded its undiscounted future cash flows, and consequently, a second phase of the impairment test (“Step 2”) was performed specific to the 2000 Flushes trade name to determine whether this trade name was impaired. The 2000 Flushes trade name failed Step 1 in the fourth quarter analysis primarily driven by changes in management’s current expectations for future growth and profitability for the 2000 Flushes trade name as compared to those used in the previous Step 1 analysis performed in the third quarter of fiscal year 2013. In performing the Step 2 analysis, the Company determined the fair value of the asset group utilizing the income approach, which is based on the present value of the estimated future cash flows. The calculation that is prepared in order to determine the estimated fair value of an asset group requires management to make assumptions about key inputs in the estimated cash flows, including long-term forecasts, discount rates and terminal growth rates. In estimating the fair value of the 2000 Flushes trade name, the Company applied a discount rate of 11.3%, annual revenue growth rates ranging from negative 13.6% to positive 1.5% and a long-term terminal growth rate of 1.5%. Cash flow projections used were based on management’s estimates of revenue growth rates, contribution margins and earnings before income taxes, depreciation and amortization (“EBITDA”). The discount rate used was based on the weighted-average cost of capital. The Company also considered the fair value concepts of a market participant and thus all amounts included in the long-term forecast reflect management’s best estimate of what a market participant could realize over the

12

 


 

projection period. After taking all of these factors into consideration, the estimated fair value of the asset group was then compared to the carrying value of the 2000 Flushes trade name asset group to determine the amount of the impairment. The inputs used in the impairment fair value analysis fall within Level 3 of the fair value hierarchy due to the significant unobservable inputs used to determine fair value. Based on the results of this Step 2 analysis, the 2000 Flushes asset group’s estimated fair value was determined to be lower than its carrying value. Consequently, the Company recorded a non-cash, before tax impairment charge of $1.1 million in the fourth quarter of fiscal year 2013 to reduce the carrying value of the 2000 Flushes asset to its fair value of $7.9 million. 

 

An intangible asset valuation is dependent on a number of significant estimates and assumptions, including macroeconomic conditions, overall category growth rates, sales growth rates, cost containment and margin expansion and expense levels for advertising and promotions and general overhead, all of which must be developed from a market participant standpoint. While the Company believes that the estimates and assumptions used in such analyses are reasonable, actual events and results could differ substantially from those included in the valuation. In the event that business conditions change in the future, the Company may be required to reassess and update its forecasts and estimates used in subsequent impairment analyses. If the results of these future analyses are lower than current estimates, an additional impairment charge may result at that time.

 

In addition, there were no indicators of potential impairment identified as a result of the Company’s review of events and circumstances related to its existing definite-lived intangible assets for the quarter ended November 30, 2013.

 

Changes in the carrying amounts of definite-lived intangible assets by segment for the three months ended November 30, 2013 are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

EMEA

 

Asia-Pacific

 

Total

Balance as of August 31, 2013

$

21,536 

 

$

2,756 

 

$

 -

 

$

24,292 

Amortization expense

 

(552)

 

 

(40)

 

 

 -

 

 

(592)

Translation adjustments

 

 -

 

 

141 

 

 

 -

 

 

141 

Balance as of November 30, 2013

$

20,984 

 

$

2,857 

 

$

 -

 

$

23,841 

 

 

 

 

 

 

 

 

 

 

 

 

 

The estimated amortization expense for the Company’s definite-lived intangible assets in future fiscal years is as follows (in thousands):

 

 

 

 

 

 

 

Trade Names

Remainder of fiscal year 2014

$

1,780 

Fiscal year 2015

 

2,373 

Fiscal year 2016

 

2,373 

Fiscal year 2017

 

2,373 

Fiscal year 2018

 

2,373 

Thereafter

 

12,569 

Total

$

23,841 

 

 

 

Included in the total estimated future amortization expense is the amortization expense for the 1001 trade name intangible asset, which is based on current foreign currency exchange rates, and as a result amounts in future periods may differ from those presented due to fluctuations in those rates.

 

Note 6. Accrued and Other Liabilities

 

Accrued liabilities consisted of the following (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 30,

 

August 31,

 

2013

 

2013

Accrued advertising and sales promotion expenses

$

9,820 

 

$

9,986 

Accrued professional services fees

 

1,251 

 

 

1,358 

Accrued sales taxes

 

931 

 

 

1,494 

Accrued other taxes

 

404 

 

 

368 

Other

 

3,513 

 

 

3,356 

Total

$

15,919 

 

$

16,562 

13

 


 

 

 

 

 

 

 

 

Accrued payroll and related expenses consisted of the following (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 30,

 

August 31,

 

2013

 

2013

Accrued bonuses

$

2,685 

 

$

9,847 

Accrued payroll

 

3,182 

 

 

2,048 

Accrued profit sharing

 

3,069 

 

 

2,739 

Accrued payroll taxes

 

2,650 

 

 

1,991 

Other

 

606 

 

 

619 

Total

$

12,192 

 

$

17,244 

 

 

 

 

 

 

Deferred and other long-term liabilities consisted of the following (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 30,

 

August 31,

 

2013

 

2013

Supplemental employee retirement plan benefits liability

$

540 

 

$

548 

Other income taxes payable

 

1,249 

 

 

1,243 

Other

 

154 

 

 

110 

Total

$

1,943 

 

$

1,901 

 

 

 

 

 

 

 

Note 7. Debt

 

Revolving Credit Facility

 

On June 17, 2011, the Company entered into an unsecured credit agreement with Bank of America, N.A. (“Bank of America”). The agreement consisted of a $75.0 million three-year revolving credit facility. Under the terms of the credit facility agreement, the Company may initiate loans in U.S. dollars or in foreign currencies from time to time during the three-year period, which was set to expire on June 17, 2014. Per the terms of the agreement, all loans denominated in U.S. dollars will accrue interest at the bank’s Prime rate or at LIBOR plus a predetermined margin and all  loans denominated in foreign currencies will accrue interest at LIBOR plus the same predetermined  margin  (together with any applicable mandatory liquid asset costs imposed by non-U.S. banking regulatory authorities).  Interest on outstanding loans is due and payable on a quarterly basis through the credit facility maturity date. The Company may also borrow against the credit facility through the issuance of standby letters of credit. Outstanding letters of credit are subject to a fee equal to a predetermined percent per annum applied to amounts available to be drawn on outstanding letters of credit. The Company will also incur commitment fees for the credit facility at a predetermined annual rate which will be applied to the portion of the total credit facility commitment that has not been borrowed until outstanding loans and letters of credit exceed one half the total amount of the credit facility. 

 

On January 7, 2013, the Company entered into a first amendment (the “Amendment”) to this existing unsecured credit agreement with Bank of America. The Amendment extends the maturity date of the revolving credit facility for five years and increases the revolving commitment to an amount not to exceed $125.0 million.  The new maturity date for the revolving credit facility per the Amendment is January 7, 2018.  In addition, per the terms of the Amendment, the LIBOR margin decreased from 0.90 to 0.85 percent,  the letter of credit fee decreased from 0.90 to 0.85 percent per annum and the commitment fee decreased from an annual rate of 0.15 percent to 0.12 percent.  The Company will incur commitment fees applied to the portion of the total credit facility commitment that has not been borrowed until outstanding loans and letters of credit exceed $62.5 million.  To date, the Company has used the proceeds of the revolving credit facility for its stock repurchases and plans to continue using such proceeds for its general working capital needs and stock repurchases under any existing board approved share buy-back plans. 

 

The agreement includes representations, warranties and covenants customary for credit facilities of this type, as well as customary events of default and remedies. The agreement also requires the Company to maintain minimum consolidated earnings before interest, income taxes, depreciation and amortization (“EBITDA”) of $40.0 million, measured on a trailing twelve month basis, at each reporting period.

 

During the three months ended November 30, 2013, there were no additional borrowings made against the revolving credit facility. The Company regularly converts existing draws on its line of credit to new draws with new maturity

14

 


 

dates and interest rates, however the balance on these draws has remained within a short-term classification as a result of these conversions. As of November 30, 2013, the Company had a $63.0 million outstanding balance on the revolving credit facility and was in compliance with all debt covenants under this credit facility.

 

Note 8. Share Repurchase Plan 

 

On June 18, 2013, the Company’s Board of Directors approved a share buy-back plan. Under the plan, which is in effect from August 1, 2013 through August 31, 2015, the Company is authorized to acquire up to $60.0 million of its outstanding shares on such terms and conditions as may be acceptable to the Company’s Chief Executive Officer or Chief Financial Officer and subject to present loan covenants and in compliance with all laws and regulations applicable thereto. During the period from August 1, 2013 through November 30, 2013, the Company repurchased 123,616 shares at a total cost of $7.9 million.

 

Note 9.  Earnings per Common Share

 

The table below reconciles net income to net income available to common shareholders (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30,

 

2013

 

2012

Net income

$

11,482 

 

$

10,944 

Less: Net income allocated to participating securities

 

(58)

 

 

(47)

Net income available to common shareholders

$

11,424 

 

$

10,897 

 

 

 

 

 

 

The table below summarizes the weighted-average number of common shares outstanding included in the calculation of basic and diluted EPS (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30,

 

2013

 

2012

Weighted-average common shares outstanding, basic

 

15,279 

 

 

15,693 

Weighted-average dilutive securities

 

87 

 

 

114 

Weighted-average common shares outstanding, diluted

 

15,366 

 

 

15,807 

 

 

 

 

 

 

For the three months ended November 30, 2013, 17,818 weighted-average stock-based equity awards outstanding that are non-participating securities were excluded from the calculation of diluted EPS under the treasury stock method as they were anti-dilutive. For the three months ended November 30, 2012, there were no anti-dilutive weighted-average stock-based equity awards outstanding excluded from the calculation of diluted EPS under the treasury stock method.

 

Note 10.  Related Parties

 

On October 11, 2011, the Company’s Board of Directors elected Mr. Gregory A. Sandfort as a director of WD-40 Company. Mr. Sandfort is President and Chief Executive Officer of Tractor Supply Company (“Tractor Supply”), which is a WD-40 Company customer that acquires products from the Company in the ordinary course of business.

 

The condensed consolidated financial statements include sales to Tractor Supply of $0.2 million for each of the three months ended November 30, 2013 and 2012.  Accounts receivable from Tractor Supply were $0.1 million as of November 30, 2013.  

 

Note 11.  Commitments and Contingencies

 

Purchase Commitments 

 

The Company has ongoing relationships with various suppliers (contract manufacturers) who manufacture the Company’s products.  The contract manufacturers maintain title and control of certain raw materials and components, materials utilized in finished products, and of the finished products themselves until shipment to the Company’s customers or third-party distribution centers in accordance with agreed upon shipment terms.  Although the Company typically does not have definitive minimum purchase obligations included in the contract terms with its contract manufacturers, when such obligations have been included, they have been immaterial. In the ordinary course of business, supply needs are communicated by the Company to its contract manufacturers based on orders

15

 


 

and short-term projections, ranging from two to five months. The Company is committed to purchase the products produced by the contract manufacturers based on the projections provided.

 

Upon the termination of contracts with contract manufacturers, the Company obtains certain inventory control rights and is obligated to work with the contract manufacturer to sell through all product held by or manufactured by the contract manufacturer on behalf of the Company during the termination notification period. If any inventory remains at the contract manufacturer at the termination date, the Company is obligated to purchase such inventory which may include raw materials, components and finished goods.  Prior to the fourth quarter of fiscal year 2012, amounts for inventory purchased under termination commitments have been immaterial. As a result of the unanticipated termination of the IQ Products Company contract manufacturing agreement in the fourth quarter of fiscal year 2012, the Company is currently obligated to purchase $1.7 million of inventory which is included in inventories in the Company’s condensed consolidated balance sheet as of November 30, 2013. 

 

In addition to the commitments to purchase products from contract manufacturers described above, the Company may also enter into commitments with other manufacturers to purchase finished goods and components to support innovation initiatives and/or supply chain initiatives. As of November 30, 2013,  no such commitments were outstanding.

 

Litigation

 

The Company is party to various claims, legal actions and complaints, including product liability litigation, arising in the ordinary course of business.

 

On May 31, 2012, a legal action was filed against the Company in the United States District Court, Southern District of Texas, Houston Division (IQ Products Company v. WD-40 Company). IQ Products Company, a Texas corporation ("IQPC"), or an affiliate or a predecessor of IQPC, has provided contract manufacturing services to the Company for many years.  The allegations of IQPC’s complaint arose out of a pending termination of this business relationship. In 2011, the Company requested proposals for manufacturing services from all of its domestic contract manufacturers in conjunction with a project to redesign the Company’s supply chain architecture in North America. IQPC submitted a proposal as requested, and the Company tentatively awarded IQPC a new contract based on the information and pricing included in that proposal. IQPC subsequently sought to materially increase the quoted price for such manufacturing services. As a result, the Company chose to terminate its business relationship with IQPC.  IQPC also raised alleged safety concerns regarding a long-standing manufacturing specification related to the Company’s products. The Company believes that IQPC’s safety concerns are unfounded. 

 

In its complaint, IQPC asserts that the Company is obligated to indemnify IQPC for claims and losses based on a 1993 indemnity agreement and pursuant to common law.  IQPC also asserts that it has been harmed by the Company's allegedly retaliatory conduct in seeking to terminate its relationship with IQPC, allegedly in response to the safety concerns identified by IQPC. IQPC seeks declaratory relief to establish that it is entitled to indemnification and also to establish that the Company is responsible for reporting the alleged safety concerns to the United States Consumer Products Safety Commission and to the United States Department of Transportation. The complaint also seeks damages for alleged economic losses in excess of $40.0 million, attorney’s fees and punitive damages based on alleged misrepresentations and false promises.  The Company believes the case is without merit and will vigorously defend this matter. At this stage in the litigation, the Company does not believe that a loss is probable and management is unable to reasonably estimate a possible loss or range of possible loss.

 

Indemnifications

 

As permitted under Delaware law, the Company has agreements whereby it indemnifies senior officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company maintains Director and Officer insurance coverage that mitigates the Company’s exposure with respect to such obligations. As a result of the Company’s insurance coverage, management believes that the estimated fair value of these indemnification agreements is minimal. Thus, no liabilities have been recorded for these agreements as of November 30, 2013.

 

From time to time, the Company enters into indemnification agreements with certain contractual parties in the ordinary course of business, including agreements with lenders, lessors, contract manufacturers, marketing distributors, customers and certain vendors. All such indemnification agreements are entered into in the context of the particular agreements and are provided in an attempt to properly allocate risk of loss in connection with the consummation of the underlying contractual arrangements. Although the maximum amount of future payments that

16

 


 

the Company could be required to make under these indemnification agreements is unlimited, management believes that the Company maintains adequate levels of insurance coverage to protect the Company with respect to most potential claims arising from such agreements and that such agreements do not otherwise have value separate and apart from the liabilities incurred in the ordinary course of the Company’s business. Thus, no liabilities have been recorded with respect to such indemnification agreements as of November 30, 2013.

 

Note 12.  Income Taxes

 

The Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates, to determine its quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.

 

The provision for income taxes was 30.3% and 31.0% of income before income taxes for the three months ended November 30, 2013 and 2012, respectively. The decrease in the effective income tax rate from period to period was mostly driven by the increasing proportion of the Company’s foreign earnings to total earnings, primarily those in the United Kingdom, which are taxed at lower rates. 

 

The Company is subject to taxation in the U.S. and in various state and foreign jurisdictions. Due to expired statutes, the Company’s federal income tax returns for years prior to fiscal year 2011 are not subject to examination by the U.S. Internal Revenue Service. Generally, for the majority of state and foreign jurisdictions where the Company does business, periods prior to fiscal year 2009 are no longer subject to examination. The Company has estimated that up to $0.1 million of unrecognized tax benefits related to income tax positions may be affected by the resolution of tax examinations or expiring statutes of limitation within the next twelve months. Audit outcomes and the timing of settlements are subject to significant uncertainty.

17

 


 

Note 13.  Business Segments and Foreign Operations

 

The Company evaluates the performance of its segments and allocates resources to them based on sales and operating income. The Company is organized on the basis of geographical area into the following three segments: the Americas; EMEA; and Asia-Pacific. Segment data does not include inter-segment revenues. Unallocated corporate expenses are general corporate overhead expenses not directly attributable to the operating segments and are reported separate from the Company’s identified segments. The corporate overhead costs include expenses for the Company’s accounting and finance, information technology, human resources, research and development, quality control and executive management functions, as well as all direct costs associated with public company compliance matters including legal, audit and other professional services costs.

 

The Company has updated the financial information previously reported for the business segments to separate out the unallocated corporate expenses. These amounts were included within the Americas segment in the Company’s previously reported business segment information. In addition, effective September 1, 2013, the Company transitioned the management of our India operations to the EMEA segment.  As a result, the India financial results are now being included in the EMEA segment for all periods presented. These amounts were previously included within the Asia-Pacific segment in the Company’s reported business segment information. Summary information about reportable segments is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated

 

 

 

For the Three Months Ended

Americas

 

EMEA

 

Asia-Pacific

 

Corporate (1)

 

Total

November 30, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

44,062 

 

$

36,516 

 

$

14,963 

 

$

 -

 

$

95,541 

Income from operations

$

10,024 

 

$

8,935 

 

$

4,027 

 

$

(6,219)

 

$

16,767 

Depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization expense

$

1,068 

 

$

247 

 

$

52 

 

$

11 

 

$

1,378 

Interest income

$

 

$

101 

 

$

29 

 

$

 -

 

$

131 

Interest expense

$

213 

 

$

 -

 

$

 

$

 -

 

$

215 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 30, 2012:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

45,355 

 

$

35,585 

 

$

14,324 

 

$

 -

 

$

95,264 

Income from operations

$

10,167 

 

$

8,286 

 

$

2,764 

 

$

(5,352)

 

$

15,865 

Depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization expense

$

918 

 

$

240 

 

$

43 

 

$

 

$

1,203 

Interest income

$

 

$

36 

 

$

25 

 

$

 -

 

$

62 

Interest expense

$

123 

 

$

 -

 

$

 

$

 -

 

$

125 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Unallocated corporate expenses are general corporate overhead expenses not directly attributable to any one of the operating segments. These expenses are reported separate from the Company’s identified segments and are included in Selling, General and Administrative expenses on the Company’s condensed consolidated statements of operations.

 

 

The Company’s Chief Operating Decision Maker does not review assets by segment as part of the financial information provided and therefore, no asset information is provided in the above table.

 

Net sales by product group are as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30,

 

2013

 

2012

Multi-purpose maintenance products

$

83,986 

 

$

81,746 

Homecare and cleaning products

 

11,555 

 

 

13,518 

Total

$

95,541 

 

$

95,264 

 

 

 

 

 

 

 

Note 14. Subsequent Events

 

On December 10, 2013, the Company’s Board of Directors declared a 10% increase in the regular quarterly cash dividend, increasing it from $0.31 per share to $0.34 per share. The dividend is payable on January  31, 2014 to shareholders of record on January 6, 2014.  

 

18

 


 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

As used in this report, the terms “we,” “our,” “us” and “the Company” refer to WD-40 Company and its wholly-owned subsidiaries, unless the context suggests otherwise. Amounts and percents in tables and discussions may not total due to rounding.

 

The following information is provided as a supplement to, and should be read in conjunction with, the unaudited condensed consolidated financial statements and notes thereto included in Part IItem 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2013, which was filed with the Securities and Exchange Commission (“SEC”) on October 22, 2013.

 

In order to show the impact of changes in foreign currency exchange rates on our results of operations, we have included constant currency disclosures, where necessary, in the Overview and Results of Operations sections which follow. Constant currency disclosures represent the translation of our current fiscal year revenues and expenses from the functional currencies of our subsidiaries to U.S. dollars using the exchange rates in effect for the corresponding period of the prior fiscal year. We use results on a constant currency basis as one of the measures to understand our operating results and evaluate our performance in comparison to prior periods. Results on a constant currency basis are not in accordance with accounting principles generally accepted in the United States of America (“non-GAAP”) and should be considered in addition to, not as a substitute for, results prepared in accordance with GAAP.

 

Forward-Looking Statements

 

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. This report contains forward-looking statements, which reflect the Company’s current views with respect to future events and financial performance.

 

These forward-looking statements are subject to certain risks and uncertainties. The words “aim,” “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions that indicate future events and trends identify forward-looking statements. These statements include, but are not limited to, references to the near-term growth expectations for multi-purpose maintenance products and homecare and cleaning products, the impact of changes in product distribution, competition for shelf space, the impact of competition on product pricing, the level of promotional and advertising spending, plans for and success of product innovation, the impact of new product introductions on the growth of sales, the impact of customer mix and costs of raw materials, components and finished goods on gross margins, the impact of promotional programs on sales, the rate of sales growth in the Asia-Pacific segment, direct European countries and Eastern and Northern Europe, foreign currency exchange rates and fluctuations in those rates, the impact of changes in inventory management, the effect of future income tax provisions and audit outcomes on tax rates, and the effects of, and changes in, worldwide economic conditions and legal proceedings and other risk factors. The Company undertakes no obligation to revise or update any forward-looking statements.

 

Actual events or results may differ materially from those projected in forward-looking statements due to various factors, including, but not limited to, those identified in Part IItem 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2013, and in the Company’s Quarterly Reports on Form 10-Q, which may be updated from time to time.

 

 Overview

 

The Company

 

WD-40 Company, based in San Diego, California, is a global consumer products company dedicated to delivering unique, high value and easy-to-use solutions for a wide variety of maintenance needs of “doer” and “on-the-job” users by leveraging and building upon the Company’s fortress of brands. Our vision is to create positive lasting memories by solving problems in the homes and factories around the world. We market multi-purpose maintenance products – under the WD-40® and 3-IN-ONE® brand names. Currently included in the WD-40 brand are the WD-40 multi-use product and the WD-40 Specialist® and WD-40 BikeTM  product lines. We launched the WD-40 Specialist product line in early fiscal year 2012 and currently sell this product line in various regions throughout the Americas, EMEA and Asia-Pacific.  The WD-40 Specialist product line has contributed to sales of the multi-purpose maintenance products since its initial launch.  In the fourth quarter of fiscal year 2012, we developed the WD-40 Bike product line, which is focused on a comprehensive line of bicycle maintenance products that include wet and

19

 


 

dry chain lubricants, heavy-duty degreasers, foaming bike wash and frame protectants that are designed specifically for the avid cyclist, bike enthusiasts and mechanics. We launched the WD-40 Bike product line in the U.S. during fiscal year 2013. We also market the following homecare and cleaning brands: X-14® mildew stain remover and automatic toilet bowl cleaners, 2000 Flushes® automatic toilet bowl cleaners, Carpet Fresh® and No Vac® rug and room deodorizers, Spot Shot® aerosol and liquid carpet stain removers, 1001® household cleaners and rug and room deodorizers and Lava® and Solvol® heavy-duty hand cleaners.

 

Our brands are sold in various locations around the world. Multi-purpose maintenance products are sold worldwide in markets throughout North, Central and South America, Asia, Australia and the Pacific Rim, Europe, the Middle East and Africa. Homecare and cleaning products are sold primarily in North America, the United Kingdom (“U.K.”) and Australia. We sell our products primarily through mass retail and home center stores, warehouse club stores, grocery stores, hardware stores, automotive parts outlets, sport retailers, independent bike dealers and industrial distributors and suppliers.

 

Highlights

 

The following summarizes the financial and operational highlights for our business during the three months ended November 30, 2013:  

 

·

Consolidated net sales increased $0.3 million for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact of $0.9 million on consolidated net sales for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year. Thus, on a constant currency basis, net sales would have increased by $1.2 million from period to period.

·

 

Ø

Multi-purpose maintenance products sales, which include the WD-40 and 3-IN-ONE brands, were $83.9 million, up 3% from the same period last fiscal year.

Ø

Homecare and cleaning products sales, which include all other brands, were $11.6 million, down 15% from the same period last fiscal year.

 

·

Americas segment sales were $44.0 million, down 3% compared to the same period last fiscal year. EMEA segment sales were $36.5 million, up 3% compared to the same period last fiscal year. Asia-Pacific segment sales were $15.0 million, up 4% compared to the same period last fiscal year.

 

·

Gross profit as a percentage of net sales increased to 52.0% for the three months ended November 30, 2013 compared to 50.1% for the corresponding period of the prior fiscal year.

 

·

Consolidated net income increased $0.6 million, or 5%, for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates did not have a material impact on net income for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year.

 

·

Diluted earnings per common share for the three months ended November 30, 2013 were $0.74 versus $0.69 in the prior fiscal year period.

 

·

Progress continues to be made on the development and launch of new multi-purpose maintenance products. The Company launched the WD-40 Specialist product line in early fiscal year 2012 and currently sells this product line in various regions throughout the Americas, EMEA and Asia-Pacific.

 

·

Share repurchases continue to be executed under the current $60.0 million share buy-back plan, which was approved by the Company’s Board of Directors in June 2013. During the three months ended November 30, 2013, the Company repurchased an additional 77,983 shares at an average price of $67.48 per share, bringing the total cost of the repurchases to $7.9 million under this plan.

 

Our core strategic initiatives and the areas where we will continue to focus our time, talent and resources in future periods include: (i) maximizing the WD-40 brand through geographic expansion and market penetration; (ii) leveraging the WD-40 brand to develop new products and categories within the Company’s prioritized platforms; (iii) expanding product and revenue base; (iv) attracting, developing and retaining people; and (v) operating with excellence.

 

 

20

 


 

Results of Operations

 

Three Months Ended November 30, 2013 Compared to Three Months Ended November 30, 2012

 

Operating Items

 

The following table summarizes operating data for our consolidated operations (in thousands, except percentages and per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30,

 

 

 

 

 

 

 

Change from
Prior Year

 

2013

 

2012

 

Dollars

 

Percent

Net sales:

 

 

 

 

 

 

 

 

 

 

 

Multi-purpose maintenance products

$

83,986 

 

$

81,746 

 

$

2,240 

 

 

3% 

Homecare and cleaning products

 

11,555 

 

 

13,518 

 

 

(1,963)

 

 

(15)%

Total net sales

 

95,541 

 

 

95,264 

 

 

277 

 

 

 -

Cost of products sold

 

45,868 

 

 

47,537 

 

 

(1,669)

 

 

(4)%

Gross profit

 

49,673 

 

 

47,727 

 

 

1,946 

 

 

4% 

Operating expenses

 

32,906 

 

 

31,862 

 

 

1,044 

 

 

3% 

Income from operations

$

16,767 

 

$

15,865 

 

$

902 

 

 

6% 

Net income

$

11,482 

 

$

10,944 

 

$

538 

 

 

5% 

Earnings per common share - diluted

$

0.74 

 

$

0.69 

 

$

0.05 

 

 

7% 

 

 

 

 

 

 

 

 

 

 

 

 

Net Sales by Segment

 

Effective September 1, 2013, we transitioned the management of our India operations to the EMEA segment.  As a result, the India financial results are now being included in the EMEA segment for all periods presented. These amounts were previously included within the Asia-Pacific segment in the Company’s reported business segment information. The following table summarizes net sales by segment (in thousands, except percentages):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended November 30,