10-Q 1 wdfc-20140228x10q.htm 10-Q b28266ce94d74f0

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 February 28, 2014

 

 

 

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 April 2, 2014 was 14,977,975.

1

 


 

WD-40 COMPANY

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended February 28, 2014

 

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

40 

Item 4.

Controls and Procedures

40 

 

 

PART II —  OTHER INFORMATION 

 

 

 

 

Item 1.

Legal Proceedings

41 

Item 1A.

Risk Factors

42 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

42 

Item 6.

Exhibits

43 

 

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)

 

 

 

 

 

 

 

February 28,

 

August 31,

 

2014

 

2013

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

40,962 

 

$

53,434 

Short-term investments

 

45,021 

 

 

37,516 

Trade accounts receivable, less allowance for doubtful

 

 

 

 

 

accounts of $717 and $540 at February 28, 2014

 

 

 

 

 

and August 31, 2013, respectively

 

63,042 

 

 

56,878 

Inventories

 

34,143 

 

 

32,433 

Current deferred tax assets, net

 

5,678 

 

 

5,672 

Other current assets

 

9,398 

 

 

6,210 

Total current assets

 

198,244 

 

 

192,143 

Property and equipment, net

 

9,054 

 

 

8,535 

Goodwill

 

95,522 

 

 

95,236 

Other intangible assets, net

 

25,056 

 

 

24,292 

Other assets

 

3,157 

 

 

2,858 

Total assets

$

331,033 

 

$

323,064 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

22,474 

 

$

19,693 

Accrued liabilities

 

19,845 

 

 

16,562 

Revolving credit facility

 

73,000 

 

 

63,000 

Accrued payroll and related expenses

 

9,372 

 

 

17,244 

Income taxes payable

 

2,319 

 

 

1,146 

Total current liabilities

 

127,010 

 

 

117,645 

Long-term deferred tax liabilities, net

 

24,455 

 

 

24,011 

Deferred and other long-term liabilities

 

1,941 

 

 

1,901 

Total liabilities

 

153,406 

 

 

143,557 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

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

 

 

 

 

 

19,462,926 and 19,392,979 shares issued at February 28, 2014 and

 

 

 

 

 

August 31, 2013, respectively; and 15,037,999 and 15,285,536 shares

 

 

 

 

 

outstanding at February 28, 2014 and August 31, 2013, respectively

 

19 

 

 

19 

Additional paid-in capital

 

135,373 

 

 

133,239 

Retained earnings

 

225,860 

 

 

214,034 

Accumulated other comprehensive income (loss)

 

1,387 

 

 

(5,043)

Common stock held in treasury, at cost ― 4,424,927 and 4,107,443

 

 

 

 

 

shares at February 28, 2014 and August 31, 2013, respectively

 

(185,012)

 

 

(162,742)

Total shareholders' equity

 

177,627 

 

 

179,507 

Total liabilities and shareholders' equity

$

331,033 

 

$

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 February 28,

 

Six Months Ended February 28,

 

 

2014

 

 

2013

 

 

2014

 

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

94,184 

 

$

86,712 

 

$

189,725 

 

$

181,976 

Cost of products sold

 

45,626 

 

 

42,586 

 

 

91,494 

 

 

90,123 

Gross profit

 

48,558 

 

 

44,126 

 

 

98,231 

 

 

91,853 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

26,651 

 

 

23,956 

 

 

53,350 

 

 

49,285 

Advertising and sales promotion

 

6,001 

 

 

5,270 

 

 

11,616 

 

 

11,337 

Amortization of definite-lived intangible assets

 

654 

 

 

465 

 

 

1,246 

 

 

931 

Total operating expenses

 

33,306 

 

 

29,691 

 

 

66,212 

 

 

61,553 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

15,252 

 

 

14,435 

 

 

32,019 

 

 

30,300 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

158 

 

 

195 

 

 

289 

 

 

257 

Interest expense

 

(226)

 

 

(176)

 

 

(441)

 

 

(301)

Other (expense) income, net

 

(229)

 

 

535 

 

 

(443)

 

 

587 

Income before income taxes

 

14,955 

 

 

14,989 

 

 

31,424 

 

 

30,843 

Provision for income taxes

 

4,638 

 

 

4,528 

 

 

9,625 

 

 

9,438 

Net income

$

10,317 

 

$

10,461 

 

$

21,799 

 

$

21,405 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.67 

 

$

0.67 

 

$

1.42 

 

$

1.36 

Diluted

$

0.67 

 

$

0.66 

 

$

1.41 

 

$

1.35 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in per share calculations:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

15,202 

 

 

15,585 

 

 

15,241 

 

 

15,639 

Diluted

 

15,272 

 

 

15,679 

 

 

15,319 

 

 

15,744 

Dividends declared per common share

$

0.34 

 

$

0.31 

 

$

0.65 

 

$

0.60 

 

 

 

 

 

 

 

 

 

 

 

 

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 February 28,

 

Six Months Ended February 28,

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

10,317 

 

$

10,461 

 

$

21,799 

 

$

21,405 

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

1,831 

 

 

(4,812)

 

 

6,430 

 

 

(3,777)

Total comprehensive income

$

12,148 

 

$

5,649 

 

$

28,229 

 

$

17,628 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Income (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

69,947 

 

 

 

 

 

(172)

 

 

 

 

 

 

 

 

 

 

 

 

 

(172)

Stock-based compensation

 

 

 

 

 

 

1,479 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,479 

Tax benefits from settlements of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

stock-based equity awards

 

 

 

 

 

 

827 

 

 

 

 

 

 

 

 

 

 

 

 

 

827 

Cash dividends ($0.65 per share)

 

 

 

 

 

 

 

 

 

(9,973)

 

 

 

 

 

 

 

 

 

 

(9,973)

Acquisition of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

317,484 

 

 

(22,270)

 

 

(22,270)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

6,430 

 

 

 

 

 

 

 

6,430 

Net income

 

 

 

 

 

 

 

 

 

21,799 

 

 

 

 

 

 

 

 

 

 

21,799 

Balance at February 28, 2014

19,462,926 

 

$

19 

 

$

135,373 

 

$

225,860 

 

$

1,387 

 

4,424,927 

 

$

(185,012)

 

$

177,627 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WD-40 COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

 

 

 

 

 

 

Six Months Ended February 28,

 

2014

 

2013

Operating activities:

 

 

 

 

 

Net income

$

21,799 

 

$

21,405 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

operating activities:

 

 

 

 

 

Depreciation and amortization

 

2,849 

 

 

2,438 

Net gains on sales and disposals of property and equipment

 

(33)

 

 

(5)

Deferred income taxes

 

(335)

 

 

263 

Excess tax benefits from settlements of stock-based equity awards

 

(820)

 

 

(528)

Stock-based compensation

 

1,479 

 

 

1,369 

Unrealized foreign currency exchange losses (gains), net

 

132 

 

 

(822)

Provision for bad debts

 

174 

 

 

382 

Changes in assets and liabilities:

 

 

 

 

 

Trade accounts receivable

 

(4,885)

 

 

(2,203)

Inventories

 

(1,387)

 

 

(4,075)

Other assets

 

(3,309)

 

 

(2,543)

Accounts payable and accrued liabilities

 

5,470 

 

 

2,770 

Accrued payroll and related expenses

 

(9,603)

 

 

1,204 

Income taxes payable

 

2,744 

 

 

2,610 

Deferred and other long-term liabilities

 

32 

 

 

58 

Net cash provided by operating activities

 

14,307 

 

 

22,323 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(1,991)

 

 

(1,151)

Proceeds from sales of property and equipment

 

171 

 

 

70 

Purchases of intangible assets

 

(1,776)

 

 

 -

Purchases of short-term investments

 

(5,643)

 

 

(31,279)

Maturities of short-term investments

 

908 

 

 

1,037 

Net cash used in investing activities

 

(8,331)

 

 

(31,323)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Proceeds from revolving credit facility

 

10,000 

 

 

5,000 

Dividends paid

 

(9,973)

 

 

(9,441)

Proceeds from issuance of common stock

 

1,241 

 

 

2,451 

Treasury stock purchases

 

(22,270)

 

 

(12,414)

Excess tax benefits from settlements of stock-based equity awards

 

820 

 

 

528 

 Net cash used in financing activities

 

(20,182)

 

 

(13,876)

Effect of exchange rate changes on cash and cash equivalents

 

1,734 

 

 

(1,229)

Net decrease in cash and cash equivalents

 

(12,472)

 

 

(24,105)

Cash and cash equivalents at beginning of period

 

53,434 

 

 

69,719 

Cash and cash equivalents at end of period

$

40,962 

 

$

45,614 

 

 

 

 

 

 

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 the Americas, Europe, Middle East and Africa (“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 February 28, 2014, the Company had a notional amount of $11.0 million outstanding in foreign currency forward contracts, which mature from March 2014 through June 2014. Unrealized net gains and losses related to foreign currency forward contracts were not significant at February 28, 2014 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.

 

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 February 28, 2014, 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 six months ended February 28, 2014, 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.

9

 


 

 

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;

·

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 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 consist primarily of raw materials and components, finished goods, and product held at third-party contract manufacturers. Inventories are stated at the lower of cost or market and cost is determined based on a first-in, first-out method or, for a portion of raw materials inventory, the average cost method.  Inventories consisted of the following (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 28,

 

August 31,

 

2014

 

2013

Product held at third-party contract manufacturers

$

5,100 

 

$

3,790 

Raw materials and components

 

3,646 

 

 

4,597 

Work-in-process

 

210 

 

 

18 

Finished goods

 

25,187 

 

 

24,028 

Total

$

34,143 

 

$

32,433 

 

 

 

 

 

 

10

 


 

Note 4.  Property and Equipment

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 28,

 

August 31,

 

2014

 

2013

Machinery, equipment and vehicles

$

12,425 

 

$

12,035 

Buildings and improvements

 

3,979 

 

 

3,781 

Computer and office equipment

 

3,518 

 

 

3,389 

Software

 

6,606 

 

 

5,997 

Furniture and fixtures

 

1,318 

 

 

1,285 

Land

 

296 

 

 

283 

Subtotal

 

28,142 

 

 

26,770 

Less: accumulated depreciation and amortization

 

(19,088)

 

 

(18,235)

Total

$

9,054 

 

$

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 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

 

38 

 

 

248 

 

 

 -

 

 

286 

Balance as of February 28, 2014

$

85,583 

 

$

8,728 

 

$

1,211 

 

$

95,522 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the second quarter of fiscal year 2014, the Company performed its annual goodwill impairment test. The annual goodwill impairment test was performed at the reporting unit level as required by the authoritative guidance. In accordance with ASU No. 2011-08, “Testing Goodwill for Impairment”, companies are permitted to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. The Company performed a qualitative assessment of each reporting unit to determine whether it was more likely than not that the fair value of a reporting unit was less than its carrying amount. In performing this qualitative assessment, the Company assessed relevant events and circumstances that may impact the fair value and the carrying amount of each of its reporting units. Factors that were considered included, but were not limited to, the following: (1) macroeconomic conditions; (2) industry and market conditions; (3) overall financial performance and expected financial performance; (4) other entity specific events, such as changes in management or key personnel; and (5) events affecting the Company’s reporting units, such as a change in the composition of net assets or any expected dispositions. Based on the results of this qualitative assessment, the Company determined that it is more likely than not that the carrying value of each of its reporting units is less than its fair value and, thus, the two-step quantitative analysis was not required.  As a result, the Company concluded that no impairment of its goodwill existed as of February 28, 2014.

 

Definite-lived Intangible Assets

11

 


 

 

The Company’s definite-lived intangible assets, which include the 2000 Flushes, Spot Shot, Carpet Fresh and 1001 trade names and the Belgium customer list, 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 28,

 

August 31,

 

2014

 

2013

Gross carrying amount

$

36,698 

 

$

34,615 

Accumulated amortization

 

(10,676)

 

 

(9,124)

Accumulated impairment of intangible assets

 

(1,077)

 

 

(1,077)

Translation adjustments

 

111 

 

 

(122)

Net carrying amount

$

25,056 

 

$

24,292 

 

 

 

 

 

 

During the second quarter of fiscal year 2014, the Company entered into an Asset Purchase Agreement (the “Purchase Agreement”) by and between Etablissements Decloedt SA/NV (“Etablissements”) and WD-40 Company Limited. Since January 1998, Etablissements has acted as one of the Company’s international marketing distributors located in Belgium where it markets and distributes certain of the WD-40 products. Pursuant to the Purchase Agreement, the Company acquired the list of customers and related information (the “customer list”) from Establissements for a purchase consideration of $1.8 million in cash. The Company intends to use this customer list to begin soliciting and transacting direct sales of its products in Belgium. The Company began to amortize this customer list definite-lived intangible asset on a straight-line basis over its estimated useful life of five years in the second quarter of fiscal year 2014.

 

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 trade name 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 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 estimated 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

12

 


 

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 February 28, 2014.

 

Changes in the carrying amounts of definite-lived intangible assets by segment for the six months ended February 28, 2014 are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

EMEA

 

Asia-Pacific

 

Total

Balance as of August 31, 2013

$

21,536 

 

$

2,756 

 

$

 -

 

$

24,292 

Amortization expense

 

(1,104)

 

 

(142)

 

 

 -

 

 

(1,246)

Customer list

 

 -

 

 

1,809 

 

 

 -

 

 

1,809 

Translation adjustments

 

 -

 

 

201 

 

 

 -

 

 

201 

Balance as of February 28, 2014

$

20,432 

 

$

4,624 

 

$

 -

 

$

25,056 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade Names

 

Customer List

Remainder of fiscal year 2014

$

1,188 

 

$

180 

Fiscal year 2015

 

2,377 

 

 

362 

Fiscal year 2016

 

2,377 

 

 

362 

Fiscal year 2017

 

2,377 

 

 

362 

Fiscal year 2018

 

2,377 

 

 

362 

Thereafter

 

12,612 

 

 

120 

Total

$

23,308 

 

$

1,748 

 

 

 

 

 

 

 

Note 6. Accrued and Other Liabilities

 

Accrued liabilities consisted of the following (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 28,

 

August 31,

 

2014

 

2013

Accrued advertising and sales promotion expenses

$

10,087 

 

$

9,986 

Accrued professional services fees

 

1,409 

 

 

1,358 

Accrued sales taxes

 

1,463 

 

 

1,494 

Accrued other taxes

 

513 

 

 

368 

Other

 

6,373 

 

 

3,356 

Total

$

19,845 

 

$

16,562 

 

 

 

 

 

 

 

13

 


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 28,

 

August 31,

 

2014

 

2013

Accrued bonuses

$

4,418 

 

$

9,847 

Accrued payroll

 

2,556 

 

 

2,048 

Accrued profit sharing

 

770 

 

 

2,739 

Accrued payroll taxes

 

1,165 

 

 

1,991 

Other

 

463 

 

 

619 

Total

$

9,372 

 

$

17,244 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 28,

 

August 31,

 

2014

 

2013

Supplemental employee retirement plan benefits liability

$

532 

 

$

548 

Other income taxes payable

 

1,252 

 

 

1,243 

Other

 

157 

 

 

110 

Total

$

1,941 

 

$

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 six months ended February 28, 2014,  the Company borrowed an additional $10.0 million U.S. dollars under the revolving credit facility. The Company regularly converts existing draws on its line of credit to new draws with new maturity dates and interest rates. The balance on these draws and conversions have remained within a short-term classification due to certain contractual clauses included in its line of credit agreement with Bank of

14

 


 

America. As of February 28, 2014, the Company had a $73.0 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 February 28, 2014, the Company repurchased 363,117 shares at a total cost of $24.9 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 February 28,

 

Six Months Ended February 28,

 

2014

 

2013

 

2014

 

2013

Net income

$

10,317 

 

$

10,461 

 

$

21,799 

 

$

21,405 

Less: Net income allocated to

 

 

 

 

 

 

 

 

 

 

 

participating securities

 

(56)

 

 

(52)

 

 

(114)

 

 

(99)

Net income available to common shareholders

$

10,261 

 

$

10,409 

 

$

21,685 

 

$

21,306 

 

 

 

 

 

 

 

 

 

 

 

 

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 February 28,

 

Six Months Ended February 28,

 

2014

 

2013

 

2014

 

2013

Weighted-average common

 

 

 

 

 

 

 

 

 

 

 

shares outstanding, basic

 

15,202 

 

 

15,585 

 

 

15,241 

 

 

15,639 

Weighted-average dilutive securities

 

70 

 

 

94 

 

 

78 

 

 

105 

Weighted-average common

 

 

 

 

 

 

 

 

 

 

 

shares outstanding, diluted

 

15,272 

 

 

15,679 

 

 

15,319 

 

 

15,744 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended February 28, 2014, there were no anti-dilutive stock-based equity awards outstanding. For the six months ended February 28, 2014,  8,909 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.  There were no anti-dilutive stock-based equity awards outstanding for the three and six months ended February 28, 2013.

 

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 February 28, 2014 and 2013 and $0.4 million for each of the six months ended February 28, 2014 and 2013.  Accounts receivable from Tractor Supply were $0.1 million as of February 28, 2014.  

 

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

15

 


 

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 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 February 28, 2014. 

 

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 February 28, 2014,  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 February 25, 2013, a legal action was filed against the Company in the Superior Court of California for San Diego County (David Wolf v. WD-40 Company).  Mr. Wolf’s complaint seeks class action status and alleges that the Company violated California Penal Code Section 632.7 which prohibits the interception and intentional recording of “a communication transmitted between two cellular radio telephones, a cellular radio telephone and a landline telephone, two cordless telephones, a cordless telephone and a landline telephone, or a cordless telephone and a cellular radio telephone” without the consent of both parties to the communication.  Mr. Wolf alleges that he called a toll free number for the Company from his cellular radio telephone and that his call was recorded by the Company without his consent in violation of the statute. The California Penal Code provides for a private right of action to persons who are injured by a violation of the statute.  If entitled to recover, the injured plaintiff may recover the greater of $5,000 or three times the amount of actual damages sustained by the plaintiff.  The Company asserts that the Company has not violated the California Penal Code and the Company intends to vigorously defend this action.  At the present time, the Company is unable to estimate the extent of possible loss or a range of possible loss that could result from this legal proceeding.  

 

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. 

 

16

 


 

On January 22, 2014, proceedings brought by the Company to have all of IQPC’s claims resolved by arbitration under the rules of the American Arbitration Association in accordance with an arbitration provision of the parties’ pre-existing 1996 Manufacturing License and Product Purchase Agreement were concluded.  An Arbitration Panel of 3 Arbitrators selected by the parties confirmed that all claims arising out of the agreement are subject to arbitration. The arbitration proceeding is presently scheduled to be heard in August 2014 in San Diego, California.  In its claim for arbitration, the Company seeks damages from IQPC arising out of the termination of the relationship, including damages arising out of IQPC’s failure to cooperate with the Company with respect to the required sale and shipment of finished goods inventory to the Company in conjunction with the termination of the relationshipIn addition to the claims asserted in its complaint,  IQPC also seeks to recover storage fees for materials and finished goods held at its facilities since termination of the relationship.

 

The Company believes that IQPC’s claims are without merit and the Company continues to vigorously defend this matter.  At the present time, the Company is unable to estimate the extent of possible loss or a range of possible loss that could result from this legal proceeding.

 

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 February 28, 2014.

 

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 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 February 28, 2014.

 

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 31.0% and 30.2% of income before income taxes for the three months ended February 28, 2014 and 2013, respectively.  The increase in the effective income tax rate from period  to period was primarily driven by a decrease in the portion of the Company’s total earnings which originate in foreign jurisdictions and are taxed at lower rates. The provision for income taxes remained constant at 30.6% of income before income taxes for both the six months ended February 28, 2014 and 2013.

 

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 its 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

February 28, 2014:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

45,208 

 

$

38,111 

 

$

10,865 

 

$

 -

 

$

94,184 

Income from operations

$

9,878 

 

$

8,499 

 

$

1,914 

 

$

(5,039)

 

$

15,252 

Depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization expense

$

1,090 

 

$

316 

 

$

61 

 

$

 

$

1,471 

Interest income

$

 

$

113 

 

$

44 

 

$

 -

 

$

158 

Interest expense

$

223 

 

$

 -

 

$

 

$

 -

 

$

226 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 28, 2013:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

40,217 

 

$

32,773 

 

$

13,722 

 

$

 -

 

$