10-Q 1 wdfc-20150531x10q.htm 10-Q 7 Q3 FY15 10Q_Final

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 May 31, 2015

 

 

 

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 July 2, 2015 was 14,488,132.

1

 


 

WD-40 COMPANY

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended May 31, 2015

 

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

41 

Item 4.

Controls and Procedures

41 

 

 

PART II —  OTHER INFORMATION 

 

 

 

 

Item 1.

Legal Proceedings

42 

Item 1A.

Risk Factors

42 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

43 

Item 6.

Exhibits

44 

 

 

 

 

 

 

 

 

 

 

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)

 

 

 

 

 

 

 

May 31,

 

August 31,

 

2015

 

2014

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

46,917 

 

$

57,803 

Short-term investments

 

48,261 

 

 

45,050 

Trade and other accounts receivable, less allowance for doubtful

 

 

 

 

 

accounts of $424 and $406 at May 31, 2015

 

 

 

 

 

and August 31, 2014, respectively

 

62,213 

 

 

63,618 

Inventories

 

33,203 

 

 

34,989 

Current deferred tax assets, net

 

5,709 

 

 

5,855 

Other current assets

 

4,066 

 

 

8,339 

Total current assets

 

200,369 

 

 

215,654 

Property and equipment, net

 

11,214 

 

 

9,702 

Goodwill

 

96,440 

 

 

95,499 

Other intangible assets, net

 

23,749 

 

 

23,671 

Other assets

 

3,262 

 

 

3,154 

Total assets

$

335,034 

 

$

347,680 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

18,502 

 

$

18,031 

Accrued liabilities

 

15,937 

 

 

18,382 

Revolving credit facility, current portion

 

 -

 

 

98,000 

Accrued payroll and related expenses

 

11,186 

 

 

15,969 

Income taxes payable

 

28 

 

 

1,529 

Total current liabilities

 

45,653 

 

 

151,911 

Revolving credit facility

 

108,000 

 

 

 -

Long-term deferred tax liabilities, net

 

23,142 

 

 

24,253 

Other long-term liabilities

 

2,250 

 

 

2,101 

Total liabilities

 

179,045 

 

 

178,265 

 

 

 

 

 

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

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

 

 

 

 

 

19,527,923 and 19,464,310 shares issued at May 31, 2015 and

 

 

 

 

 

August 31, 2014, respectively; and 14,481,172 and 14,754,362 shares

 

 

 

 

 

outstanding at May 31, 2015 and August 31, 2014, respectively

 

20 

 

 

19 

Additional paid-in capital

 

140,147 

 

 

136,212 

Retained earnings

 

254,503 

 

 

237,596 

Accumulated other comprehensive income (loss)

 

(7,280)

 

 

1,103 

Common stock held in treasury, at cost ― 5,046,751 and 4,709,948

 

 

 

 

 

shares at May 31, 2015 and August 31, 2014, respectively

 

(231,401)

 

 

(205,515)

Total shareholders' equity

 

155,989 

 

 

169,415 

Total liabilities and shareholders' equity

$

335,034 

 

$

347,680 

 

 

 

 

 

 

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 May 31,

 

Nine Months Ended May 31,

 

 

2015

 

 

2014

 

 

2015

 

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

92,485 

 

$

95,650 

 

$

286,169 

 

$

285,375 

Cost of products sold

 

43,213 

 

 

46,511 

 

 

135,963 

 

 

138,005 

Gross profit

 

49,272 

 

 

49,139 

 

 

150,206 

 

 

147,370 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

26,640 

 

 

26,887 

 

 

81,424 

 

 

80,237 

Advertising and sales promotion

 

5,506 

 

 

6,465 

 

 

16,906 

 

 

18,081 

Amortization of definite-lived intangible assets

 

754 

 

 

684 

 

 

2,280 

 

 

1,930 

Total operating expenses

 

32,900 

 

 

34,036 

 

 

100,610 

 

 

100,248 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

16,372 

 

 

15,103 

 

 

49,596 

 

 

47,122 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

113 

 

 

136 

 

 

425 

 

 

425 

Interest expense

 

(343)

 

 

(268)

 

 

(912)

 

 

(709)

Other expense

 

(444)

 

 

(11)

 

 

(1,785)

 

 

(454)

Income before income taxes

 

15,698 

 

 

14,960 

 

 

47,324 

 

 

46,384 

Provision for income taxes

 

4,733 

 

 

4,554 

 

 

14,240 

 

 

14,179 

Net income

$

10,965 

 

$

10,406 

 

$

33,084 

 

$

32,205 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.75 

 

$

0.69 

 

$

2.25 

 

$

2.11 

Diluted

$

0.75 

 

$

0.69 

 

$

2.24 

 

$

2.10 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in per share calculations:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

14,546 

 

 

14,977 

 

 

14,616 

 

 

15,152 

Diluted

 

14,615 

 

 

15,051 

 

 

14,685 

 

 

15,229 

Dividends declared per common share

$

0.38 

 

$

0.34 

 

$

1.10 

 

$

0.99 

 

 

 

 

 

 

 

 

 

 

 

 

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 May 31,

 

Nine Months Ended May 31,

 

2015

 

2014

 

2015

 

2014

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

10,965 

 

$

10,406 

 

$

33,084 

 

$

32,205 

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(137)

 

 

805 

 

 

(8,383)

 

 

7,235 

Total comprehensive income

$

10,828 

 

$

11,211 

 

$

24,701 

 

$

39,440 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2014

19,464,310 

 

$

19 

 

$

136,212 

 

$

237,596 

 

$

1,103 

 

4,709,948 

 

$

(205,515)

 

$

169,415 

Issuance of common stock under share-based

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation plan, net of shares withheld for taxes

63,613 

 

 

 

 

821 

 

 

 

 

 

 

 

 

 

 

 

 

 

822 

Stock-based compensation

 

 

 

 

 

 

2,205 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,205 

Tax benefits from settlements of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

stock-based equity awards

 

 

 

 

 

 

909 

 

 

 

 

 

 

 

 

 

 

 

 

 

909 

Cash dividends ($1.10 per share)

 

 

 

 

 

 

 

 

 

(16,177)

 

 

 

 

 

 

 

 

 

 

(16,177)

Acquisition of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

336,803 

 

 

(25,886)

 

 

(25,886)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

(8,383)

 

 

 

 

 

 

 

(8,383)

Net income

 

 

 

 

 

 

 

 

 

33,084 

 

 

 

 

 

 

 

 

 

 

33,084 

Balance at May 31, 2015

19,527,923 

 

$

20 

 

$

140,147 

 

$

254,503 

 

$

(7,280)

 

5,046,751 

 

$

(231,401)

 

$

155,989 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

6

 


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

WD-40 COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)

 

 

 

 

 

 

 

Nine Months Ended May 31,

 

2015

 

2014

Operating activities:

 

 

 

 

 

Net income

$

33,084 

 

$

32,205 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

operating activities:

 

 

 

 

 

Depreciation and amortization

 

4,824 

 

 

4,337 

Net gains on sales and disposals of property and equipment

 

(82)

 

 

(41)

Deferred income taxes

 

(1,229)

 

 

(330)

Excess tax benefits from settlements of stock-based equity awards

 

(906)

 

 

(824)

Stock-based compensation

 

2,205 

 

 

1,942 

Unrealized foreign currency exchange losses (gains), net

 

2,393 

 

 

(159)

Provision for bad debts

 

214 

 

 

174 

Changes in assets and liabilities:

 

 

 

 

 

Trade and other accounts receivable

 

(3,787)

 

 

(3,681)

Inventories

 

1,078 

 

 

(4,716)

Other assets

 

3,817 

 

 

(1,616)

Accounts payable and accrued liabilities

 

(1,596)

 

 

21 

Accrued payroll and related expenses

 

(5,003)

 

 

(6,924)

Income taxes payable

 

130 

 

 

1,718 

Other long-term liabilities

 

184 

 

 

17 

Net cash provided by operating activities

 

35,326 

 

 

22,123 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(4,068)

 

 

(3,023)

Proceeds from sales of property and equipment

 

420 

 

 

250 

Purchase of intangible assets

 

 -

 

 

(1,789)

Acquisition of business

 

(3,705)

 

 

 -

Purchases of short-term investments

 

(8,167)

 

 

(5,756)

Maturities of short-term investments

 

1,636 

 

 

914 

Net cash used in investing activities

 

(13,884)

 

 

(9,404)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Treasury stock purchases

 

(25,886)

 

 

(30,482)

Dividends paid

 

(16,177)

 

 

(15,096)

Proceeds from issuance of common stock

 

1,483 

 

 

1,265 

Excess tax benefits from settlements of stock-based equity awards

 

906 

 

 

824 

Proceeds from revolving credit facility

 

10,000 

 

 

20,000 

 Net cash used in financing activities

 

(29,674)

 

 

(23,489)

Effect of exchange rate changes on cash and cash equivalents

 

(2,654)

 

 

2,231 

Net decrease in cash and cash equivalents

 

(10,886)

 

 

(8,539)

Cash and cash equivalents at beginning of period

 

57,803 

 

 

53,434 

Cash and cash equivalents at end of period

$

46,917 

 

$

44,895 

 

 

 

 

 

 

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 marketing organization dedicated to creating positive lasting memories by developing and selling products which solve problems in workshops, factories and homes around the world. The Company markets its multi-purpose maintenance products and its homecare and cleaning products under the following well-known brands: WD-40®, 3-IN-ONE®, GT85®, X-14®, 2000 Flushes®, Carpet Fresh®, no vac®, Spot Shot®, 1001®, Lava® and Solvol®.  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’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, 2014 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 and such adjustments are of a normal recurring nature. 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, 2014, which was filed with the SEC on October 21, 2014.

 

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.

 

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

8

 


 

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 May 31, 2015, the Company had a notional amount of $6.7 million outstanding in foreign currency forward contracts, which mature from June through August 2015. Unrealized net gains and losses related to foreign currency forward contracts were not significant at May 31, 2015 and August 31, 2014. Realized net gains and losses related to foreign currency forward contracts were not material for each of the three and nine month periods ended May 31, 2015 and 2014.

 

Fair Value Measurements

 

Accounting Standards Codification (“ASC”) 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 May 31, 2015, 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, which are classified as Level 2 within the fair value hierarchy.  The carrying values of cash equivalents, short-term investments and short-term borrowings are recorded at cost, which approximates their fair values primarily due to their short-term maturities and are classified as Level 2 within the fair value hierarchy. During the nine months ended May 31, 2015, the Company did not record any significant nonrecurring fair value measurements for assets or liabilities in periods subsequent to their initial recognition.

 

Recently Adopted Accounting Standards

 

In July 2013, the Financial Accounting Standards Board (“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 rule requires 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 adoption of this authoritative guidance did not have a material impact on the Company’s consolidated financial statement and related disclosures.  

 

Recently Issued Accounting Standards

 

In April 2015, the FASB issued ASU No. 2015-05, “Intangibles-Goodwill and Other – Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement”, which provides guidance on accounting for fees paid by a customer in a cloud computing arrangement. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. This guidance is effective for fiscal years beginning after

9

 


 

December 15, 2015, including interim periods within that reporting period. Early adoption is permitted. The Company is in the process of evaluating the potential impacts of this new guidance on its consolidated financial statements.

 

In February 2015, the FASB issued ASU No. 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis”, which amends existing consolidation guidance for reporting  organizations such as limited partnerships and other similar entities that are required to evaluate whether they should consolidate certain legal entities. This guidance is effective for fiscal years beginning after December 15, 2015, including interim periods within that reporting period. Early adoption is permitted. The Company has evaluated the potential impacts of this updated guidance, and it does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.

 

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers”, which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition”The core principle of this updated guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new rule also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.  This guidance is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Companies are permitted to adopt this new rule following either a full or modified retrospective approach. Early adoption is not permitted. The Company is in the process of evaluating the potential impacts of this updated authoritative guidance on its consolidated financial statements.

 

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): 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 31,

 

August 31,

 

2015

 

2014

Product held at third-party contract manufacturers

$

4,798 

 

$

3,945 

Raw materials and components

 

4,066 

 

 

3,670 

Work-in-process

 

380 

 

 

261 

Finished goods

 

23,959 

 

 

27,113 

Total

$

33,203 

 

$

34,989 

 

 

 

 

 

 

 

 

Note 4.  Property and Equipment

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 31,

 

August 31,

 

2015

 

2014

Machinery, equipment and vehicles

$

15,396 

 

$

13,459 

Buildings and improvements

 

4,182 

 

 

4,044 

Computer and office equipment

 

4,001 

 

 

3,312 

Software

 

7,061 

 

 

6,824 

Furniture and fixtures

 

1,458 

 

 

1,421 

Land

 

282 

 

 

295 

Subtotal

 

32,380 

 

 

29,355 

Less: accumulated depreciation and amortization

 

(21,166)

 

 

(19,653)

Total

$

11,214 

 

$

9,702 

 

 

 

 

 

 

 

 

    

10

 


 

Note 5.  Goodwill and Other Intangible Assets

 

Acquisitions

 

During the first quarter of fiscal year 2015, the Company entered into an agreement by and between GT 85 Limited (“GT85”) and WD-40 Company Limited, which is the Company’s U.K. subsidiary, to acquire the GT85 business and certain of its assets for a purchase consideration of $4.1 million. Of this purchase consideration, $3.7 million was paid in cash upon completion of the acquisition (“completion) and the remaining balance will be paid nine months following completion provided that the WD-40 Company Limited has not asserted a claim arising under the terms of the acquisition agreement.  If an unresolved claim is outstanding nine months following completion, the asserted amount of the claim will continue to be retained until the matter is resolved.  Located in the U.K., the GT85 business was engaged in the marketing and sale of the GT85® and SG85 brands of multi-purpose maintenance products. This acquisition complements the Company’s multi-purpose maintenance products and will help to build upon its strategy to develop new product categories for WD-40 Specialist and WD-40 BIKE.

 

The purchase price was allocated to certain customer-related, trade name-related, and technology-based intangible assets in the amount of $1.7 million, $0.9 million, and $0.2 million, respectively. The Company began to amortize these definite-lived intangible assets on a straight-line basis over their estimated useful lives of eight,  ten, and four years, respectively, in the first quarter of fiscal year 2015. The purchase price exceeded the fair value of the intangible assets acquired and, as a result, the Company recorded goodwill of $1.3 million in connection with this transaction. The amount of goodwill expected to be deductible for tax purposes is also $1.3 million. This acquisition did not have a material impact on the Company’s condensed consolidated financial statements, and as a result no pro forma disclosures have been presented.

 

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. From January 1998 through the date of this Purchase Agreement, Etablissements acted as one of the Company’s international marketing distributors located in Belgium where it marketed and distributed 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 has been using this customer list since its acquisition to solicit and transact 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. 

 

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, 2014

$

85,581 

 

$

8,707 

 

$

1,211 

 

$

95,499 

GT85 acquisition

 

 -

 

 

1,231 

 

 

 -

 

 

1,231 

Translation adjustments

 

(44)

 

 

(245)

 

 

(1)

 

 

(290)

Balance as of May 31, 2015

$

85,537 

 

$

9,693 

 

$

1,210 

 

$

96,440 

 

 

 

 

 

 

 

 

 

 

 

 

 

During the second quarter of fiscal year 2015, 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”, the Company performed the two-step quantitative assessment for each of its reporting units to determine whether the fair value of any of the reporting units  were less than their carrying amounts. The Company determined the fair value of its reporting units in step one of the analysis by following the income approach which uses a discounted cash flow methodology.  When using the discounted cash flow methodology, the fair value of each of the reporting units is based on the present value of the estimated future cash flows of each of the respective reporting units. The discounted cash flow methodology also requires management to make assumptions about certain key inputs in the estimated cash flows, including long-term sales forecasts or growth rates, terminal growth rates and discount rates, all of which are inherently uncertain. The Company determined that a discount rate of 9%, a sales growth rate of 4.5% and a terminal growth rate of 2% was appropriate to use in step one of the analysis for all of its reporting units. The

11

 


 

forecast of future cash flows was based on management’s best estimates of sales growth rates and operating margins for the next five fiscal years. The discount rate used was based on the current weighted-average cost of capital for the Company. As these assumptions are largely unobservable, the estimate of fair value analysis falls within Level 3 of the fair value hierarchy. Based on the results of step one of the quantitative two-step analysis, the Company determined that the estimated fair value of each of its reporting units significantly exceeded their respective carrying values. As a result, step two of the quantitative analysis was not required and the Company concluded that no impairment of its goodwill existed as of February 28, 2015. 

 

While the Company believes that the estimates and assumptions used in its goodwill impairment test and analyses are reasonable, actual events and results could differ substantially from those included in the calculation. 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 goodwill impairment analyses. If the results of these future analyses are lower than current estimates, an impairment charge to the Company’s goodwill balances may result at that time.

 

In addition, there were no indicators of impairment identified as a result of the Company’s review of events and circumstances related to its goodwill for the quarter ended May 31, 2015.

 

Definite-lived Intangible Assets

 

The Company’s definite-lived intangible assets, which include the 2000 Flushes, Spot Shot, Carpet Fresh, 1001 and GT85 trade names, the Belgium customer list, the GT85 customer relationships and the GT85 technology 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 31,

 

August 31,

 

2015

 

2014

 

 

 

 

 

 

Gross carrying amount

$

38,925 

 

$

36,670 

Accumulated amortization

 

(13,974)

 

 

(12,021)

Accumulated impairment of intangible assets

 

(1,077)

 

 

(1,077)

Translation adjustments

 

(125)

 

 

99 

Net carrying amount

$

23,749 

 

$

23,671 

 

 

 

 

 

 

 

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 May 31, 2015.

 

Changes in the carrying amounts of definite-lived intangible assets by segment for the nine months ended May 31, 2015 are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

EMEA

 

Asia-Pacific

 

Total

Balance as of August 31, 2014

$

19,328 

 

$

4,343 

 

$

 -

 

$

23,671 

Amortization expense

 

(1,656)

 

 

(624)

 

 

 -

 

 

(2,280)

GT85 customer relationships

 

 -

 

 

1,579 

 

 

 -

 

 

1,579 

GT85 trade name

 

 -

 

 

901 

 

 

 -

 

 

901 

GT85 technology

 

 -

 

 

159 

 

 

 -

 

 

159 

Translation adjustments

 

 -

 

 

(281)

 

 

 -

 

 

(281)

Balance as of May 31, 2015

$

17,672 

 

$

6,077 

 

$

 -

 

$

23,749 

 

 

 

 

 

 

 

 

 

 

 

 

 

12

 


 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trade Names

 

Customer-Based

 

Technology

Remainder of fiscal year 2015

$

618 

 

$

133 

 

$

10 

Fiscal year 2016

 

2,455 

 

 

534 

 

 

40 

Fiscal year 2017

 

2,455 

 

 

533 

 

 

40 

Fiscal year 2018

 

2,455 

 

 

533 

 

 

40 

Fiscal year 2019

 

2,455 

 

 

309 

 

 

 -

Thereafter

 

10,547 

 

 

592 

 

 

 -

Total

$

20,985 

 

$

2,634 

 

$

130 

 

 

 

 

 

 

 

 

 

 

 

Note 6. Accrued and Other Liabilities

 

Accrued liabilities consisted of the following (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 31,

 

August 31,

 

2015

 

2014

Accrued advertising and sales promotion expenses

$

9,288 

 

$

10,140 

Accrued professional services fees

 

1,479 

 

 

1,715 

Accrued sales taxes

 

522 

 

 

934 

Accrued other taxes

 

257 

 

 

476 

Other

 

4,391 

 

 

5,117 

Total

$

15,937 

 

$

18,382 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

May 31,

 

August 31,

 

2015

 

2014

Accrued incentive compensation

$

4,297 

 

$

8,558 

Accrued payroll

 

3,490 

 

 

2,813 

Accrued profit sharing

 

1,638 

 

 

2,424 

Accrued payroll taxes

 

1,288 

 

 

1,602 

Other

 

473 

 

 

572 

Total

$

11,186 

 

$

15,969 

 

 

 

 

 

 

 

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”). On May 13, 2015, the Company entered into a second amendment (the “Second Amendment”) to this existing unsecured credit agreement with Bank of America.   The amended agreement extended the maturity date of the revolving credit facility for five years from the effective date of the Second Amendment and increased the revolving commitment to an amount not to exceed $150.0 millionThe new maturity date for the revolving credit facility is May 13, 2020.  Per the terms of the amended agreement, all loans denominated in U.S. dollars will accrue interest at the bank’s Prime rate or at LIBOR plus a predetermined margin of 0.85 percent 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 0.85 percent per annum applied to amounts available to be

13

 


 

drawn on outstanding letters of credit. In addition, the Company incurs commitment fees for the credit facility at an annual rate of 0.125 percent applied to the portion of the total credit facility commitment that has not been borrowed.  

 

In accordance with the Second Amendment, the Company and Bank of America may enter into an autoborrow agreement in form and substance satisfactory to Bank of America, providing for the automatic advance of revolving loans in U.S. Dollars to the Company’s designated account at Bank of America.    No such autoborrow agreement has been signed to date.  The Second Amendment also eliminated the material adverse effect clause as an event of default. In addition to other non-material technical amendments to the agreement, the Second Amendment revised the definition of consolidated EBITDA to include the add back of non-cash stock-based compensation to consolidated net income when arriving at consolidated EBITDA and the terms of the financial covenants per the Second Amendment are as follows:

·

The consolidated leverage ratio cannot be greater than three to one.  The consolidated leverage ratio means, as of any date of determination, the ratio of (a) consolidated funded indebtedness as of such date to (b) consolidated EBITDA for the most recently completed four fiscal quarters

·

The consolidated interest coverage ratio cannot be less than three to one.  The consolidated interest coverage ratio means, as of any date of determination, the ratio of (a) consolidated EBITDA for the most recently completed four fiscal quarters to (b) consolidated interest charges for the most recently completed four fiscal quarters.

The agreement includes representations, warranties and covenants customary for credit facilities of this type, as well as customary events of default and remedies. 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. 

 

Prior to the execution of the Second Amendment and the removal of the material adverse effect clause as an event of default, all amounts outstanding under the revolving credit facility were classified as short-term on the Company’s consolidated balance sheets as Bank of America could require the Company to immediately repay all amounts outstanding on the credit facility based on subjective factors.   With the removal of the material adverse effect clause as an event of default, Bank of America can no longer require this immediate repayment of amounts outstanding on the line of credit.  As a result, the Company is permitted to classify draws on the line of credit as long-term provided that management has determined it has the ability and intent to refinance such draws on the line of credit for a period in excess of twelve months.  The Company assesses its ability and intent associated with draws on the line of credit at the end of each reporting period in order to determine the proper balance sheet classification for amounts outstanding on the line of credit.  Since the autoborrow feature within the Second Amendment allows for borrowings to be made and repaid by the Company on a daily basis, any such borrowings made under an active autoborrow agreement would be classified as short-term on the Company’s consolidated balance sheets.

 

During the nine months ended May 31, 2015,  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. As of May 31, 2015, the Company had a $108.0 million outstanding balance on the revolving credit facility and was in compliance with all debt covenants under this credit facility. Based on management’s ability and intent assessment in the third quarter of fiscal year 2015, it concluded that all amounts outstanding under the revolving credit facility were long-term as of May 31, 2015 and classified them as such on the accompanying consolidated balance sheets.

 

Note 8. Share Repurchase Plans 

 

On June 18, 2013, the Company’s Board of Directors approved a share buy-back plan. Under the plan, which was to be in effect from August 1, 2013 through August 31, 2015, the Company was 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, 2015, the Company repurchased 848,545 shares at a total cost of $60.0 million. As a result, the Company utilized the entire authorized amount and completed the repurchases under this share buy-back plan as of the end of the second quarter of fiscal year 2015.

 

On October 14, 2014, the Company’s Board of Directors approved a new share buy-back plan. Under the plan, which became effective at the beginning of the third quarter of fiscal year 2015, once the Company’s previous $60.0 million plan

14

 


 

was exhausted, the Company is authorized to acquire up to $75.0 million of its outstanding shares through August 31, 2016. The timing and amount of repurchases will be based on terms and conditions as may be acceptable to the Company’s Chief Executive Officer and Chief Financial Officer and in compliance with all laws and regulations applicable thereto. During the period from March 1, 2015 through May 31, 2015, the Company repurchased 136,396 shares at a total cost of $11.3 million under this $75.0 million plan.

 

Note 9.  Earnings per Common Share

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended May 31,

 

Nine Months Ended May 31,

 

2015

 

2014

 

2015

 

2014

Net income

$

10,965 

 

$

10,406 

 

$

33,084 

 

$

32,205 

Less: Net income allocated to

 

 

 

 

 

 

 

 

 

 

 

participating securities

 

(68)

 

 

(59)

 

 

(198)

 

 

(173)

Net income available to common shareholders

$

10,897 

 

$

10,347 

 

$

32,886 

 

$

32,032 

 

 

 

 

 

 

 

 

 

 

 

 

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 May 31,

 

Nine Months Ended May 31,

 

2015

 

2014

 

2015

 

2014

Weighted-average common

 

 

 

 

 

 

 

 

 

 

 

shares outstanding, basic

 

14,546 

 

 

14,977 

 

 

14,616 

 

 

15,152 

Weighted-average dilutive securities

 

69 

 

 

74 

 

 

69 

 

 

77 

Weighted-average common

 

 

 

 

 

 

 

 

 

 

 

shares outstanding, diluted

 

14,615 

 

 

15,051 

 

 

14,685 

 

 

15,229 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended May 31,  2015 and 2014, there were no anti-dilutive stock-based equity awards outstanding.

 

For the nine months ended May 31, 2015 and 2014,  weighted-average stock-based equity awards outstanding that are non-participating securities in the amounts of 1,782 and 5,939, respectively, were excluded from the calculation of diluted EPS under the treasury stock method as they were anti-dilutive. 

 

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 $0.3 million and $0.2 million for the three months ended May 31, 2015 and 2014, respectively, and $0.7 million and $0.6 million for the nine months ended May 31, 2015 and 2014, respectively.  Accounts receivable from Tractor Supply were not material as of May 31, 2015.  

 

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

15

 


 

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 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 concluded that it was obligated to purchase $1.7 million of finished goods inventory.  As a result, this amount was included in inventory in the Company’s condensed consolidated balance sheet in prior periods beginning with the fourth quarter of fiscal year 2012.  According to the Interim Award of the Arbitration Panel in the Company’s dispute with IQ Products Company as described in the Litigation section below, the Company has no contractual obligation to purchase the finished goods inventory held by IQ Products Company.  Therefore, inventory and the corresponding accrued liability have been reduced by $1.7 million in the Company’s condensed consolidated balance sheet as of May 31, 2015. 

 

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 May 31, 2015,  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, 2014, a suit was filed against the Company in a Superior Court of California (David Wolf v. WD-40 Company).  Mr. Wolf’s complaint sought class action status and alleged that the Company violated California Penal Code Section 632.7, which prohibits the interception or reception and intentional recording of a cordless or cell phone call without the consent of both parties to the communication.  As reported in the Company’s quarterly report on Form 10-Q filed on April 9, 2015, the plaintiff filed a request for dismissal with prejudice on April 6, 2015.  On April 27, 2015, the Superior Court dismissed the proceeding.

 

On May 31, 2012, a legal action was filed against the Company in a United States District Court, in Texas (IQ Products Company v. WD-40 Company). The complaint alleged that the Company wrongfully terminated a contract manufacturing relationship. IQ Products Company (“IQPC”) also raised alleged safety concerns regarding a long-standing manufacturing specification related to the Company’s products.

 

As reported in the Company’s quarterly report on Form 10-Q filed on April 9, 2015, the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) of the Department of Transportation addressed a letter to IQPC on November 13, 2014 to inform IQPC that it concluded an investigation and found no evidence of non-compliance with existing PHMSA regulations or an imminent public safety hazard posed by WD-40 Company products. Pursuant to a court order the dispute was submitted to arbitration. On May 15, 2015, the arbitrators issued their Interim Award and decision on the merits of the dispute.  The arbitrators rejected all of IQPC’s claims.

 

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

16

 


 

believes that the estimated fair value of these indemnification agreements is minimal. Thus, no liabilities have been recorded for these agreements as of May 31, 2015.

 

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 May 31, 2015.

 

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 30.2% and 30.4% of income before income taxes for the three months ended May 31, 2015 and 2014, respectively, and 30.1% and 30.6% of income before income taxes for the nine months ended May 31, 2015 and 2014, respectively. The decrease in the effective income tax rate for both the three and nine months ended May 31, 2015 as compared to the same periods of the prior fiscal year was driven by the portion of the Company’s total earnings from foreign operations, particularly in the United Kingdom, which are taxed at decreasing tax 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 2012 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 2011 are no longer subject to examination. The Company has estimated that up to $0.4 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.

 

Summary information about reportable segments is as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unallocated

 

 

 

For the Three Months Ended

Americas

 

EMEA

 

Asia-Pacific

 

Corporate (1)

 

Total

May 31, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

49,744 

 

$

30,335 

 

$

12,406 

 

$

 -

 

$

92,485 

Income from operations

$

13,542 

 

$

6,195 

 

$

2,372 

 

$

(5,737)

 

$

16,372 

Depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization expense

$

995 

 

$

509