10-Q 1 wdfc-20160229x10q.htm 10-Q 5 Q2 FY16 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 February 29, 2016

 

 

 

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 4, 2016 was 14,320,566.

1

 


 

WD-40 COMPANY

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended February 29, 2016

 

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

42 

Item 4.

Controls and Procedures

42 

 

 

PART II —  OTHER INFORMATION 

 

 

 

 

Item 1.

Legal Proceedings

43 

Item 1A.

Risk Factors

43 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

44 

Item 6.

Exhibits

45 

 

 

 

 

 

 

 

 

 

 

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 29,

 

August 31,

 

2016

 

2015

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

42,310 

 

$

53,896 

Short-term investments

 

51,235 

 

 

48,603 

Trade and other accounts receivable, less allowance for doubtful

 

 

 

 

 

accounts of $446 and $491 at February 29, 2016

 

 

 

 

 

and August 31, 2015, respectively

 

70,821 

 

 

58,750 

Inventories

 

36,072 

 

 

32,052 

Current deferred tax assets, net

 

6,947 

 

 

5,824 

Other current assets

 

7,012 

 

 

6,127 

Total current assets

 

214,397 

 

 

205,252 

Property and equipment, net

 

11,221 

 

 

11,376 

Goodwill

 

95,903 

 

 

96,409 

Other intangible assets, net

 

20,914 

 

 

22,961 

Other assets

 

2,812 

 

 

3,259 

Total assets

$

345,247 

 

$

339,257 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

17,469 

 

$

17,128 

Accrued liabilities

 

17,192 

 

 

15,200 

Accrued payroll and related expenses

 

11,410 

 

 

13,357 

Revolving credit facility, current

 

4,541 

 

 

 -

Income taxes payable

 

3,213 

 

 

2,287 

Total current liabilities

 

53,825 

 

 

47,972 

Revolving credit facility

 

118,000 

 

 

108,000 

Long-term deferred tax liabilities, net

 

24,419 

 

 

23,145 

Other long-term liabilities

 

2,350 

 

 

2,282 

Total liabilities

 

198,594 

 

 

181,399 

 

 

 

 

 

 

Commitments and Contingencies (Note 11)

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

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

 

 

 

 

 

19,602,908 and 19,546,888 shares issued at February 29, 2016 and

 

 

 

 

 

August 31, 2015, respectively; and 14,344,971 and 14,450,490 shares

 

 

 

 

 

outstanding at February 29, 2016 and August 31, 2015, respectively

 

20 

 

 

20 

Additional paid-in capital

 

143,512 

 

 

141,651 

Retained earnings

 

274,823 

 

 

260,683 

Accumulated other comprehensive income (loss)

 

(20,806)

 

 

(8,722)

Common stock held in treasury, at cost ― 5,257,937 and 5,096,398

 

 

 

 

 

shares at February 29, 2016 and August 31, 2015, respectively

 

(250,896)

 

 

(235,774)

Total shareholders' equity

 

146,653 

 

 

157,858 

Total liabilities and shareholders' equity

$

345,247 

 

$

339,257 

 

 

 

 

 

 

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

 

Six Months Ended

 

 

February 29,

 

 

February 28,

 

 

February 29,

 

 

February 28,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

94,550 

 

$

97,331 

 

$

187,072 

 

$

193,684 

Cost of products sold

 

42,188 

 

 

46,098 

 

 

83,302 

 

 

92,750 

Gross profit

 

52,362 

 

 

51,233 

 

 

103,770 

 

 

100,934 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative

 

28,692 

 

 

27,360 

 

 

56,540 

 

 

54,784 

Advertising and sales promotion

 

5,017 

 

 

5,485 

 

 

10,677 

 

 

11,400 

Amortization of definite-lived intangible assets

 

747 

 

 

757 

 

 

1,502 

 

 

1,526 

Total operating expenses

 

34,456 

 

 

33,602 

 

 

68,719 

 

 

67,710 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

17,906 

 

 

17,631 

 

 

35,051 

 

 

33,224 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

183 

 

 

178 

 

 

331 

 

 

312 

Interest expense

 

(417)

 

 

(275)

 

 

(789)

 

 

(569)

Other income (expense), net

 

1,320 

 

 

(1,443)

 

 

1,269 

 

 

(1,341)

Income before income taxes

 

18,992 

 

 

16,091 

 

 

35,862 

 

 

31,626 

Provision for income taxes

 

5,323 

 

 

4,758 

 

 

10,131 

 

 

9,507 

Net income

$

13,669 

 

$

11,333 

 

$

25,731 

 

$

22,119 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

0.95 

 

$

0.77 

 

$

1.78 

 

$

1.50 

Diluted

$

0.94 

 

$

0.76 

 

$

1.77 

 

$

1.49 

 

 

 

 

 

 

 

 

 

 

 

 

Shares used in per share calculations:

 

 

 

 

 

 

 

 

 

 

 

Basic

 

14,386 

 

 

14,636 

 

 

14,395 

 

 

14,652 

Diluted

 

14,429 

 

 

14,703 

 

 

14,445 

 

 

14,720 

Dividends declared per common share

$

0.42 

 

$

0.38 

 

$

0.80 

 

$

0.72 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

Six Months Ended

 

 

February 29,

 

 

February 28,

 

 

February 29,

 

 

February 28,

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

Net income

$

13,669 

 

$

11,333 

 

$

25,731 

 

$

22,119 

Other comprehensive loss:

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(9,421)

 

 

(1,950)

 

 

(12,084)

 

 

(8,246)

Total comprehensive income

$

4,248 

 

$

9,383 

 

$

13,647 

 

$

13,873 

 

 

 

 

 

 

 

 

 

 

 

 

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, 2015

19,546,888 

 

$

20 

 

$

141,651 

 

$

260,683 

 

$

(8,722)

 

5,096,398 

 

$

(235,774)

 

$

157,858 

Issuance of common stock under share-based

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation plan, net of shares withheld for taxes

56,020 

 

 

 

 

 

(1,571)

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,571)

Stock-based compensation

 

 

 

 

 

 

1,889 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,889 

Tax benefits from settlements of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

stock-based equity awards

 

 

 

 

 

 

1,543 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,543 

Cash dividends ($0.80 per share)

 

 

 

 

 

 

 

 

 

(11,591)

 

 

 

 

 

 

 

 

 

 

(11,591)

Acquisition of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

161,539 

 

 

(15,122)

 

 

(15,122)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

(12,084)

 

 

 

 

 

 

 

(12,084)

Net income

 

 

 

 

 

 

 

 

 

25,731 

 

 

 

 

 

 

 

 

 

 

25,731 

Balance at February 29, 2016

19,602,908 

 

$

20 

 

$

143,512 

 

$

274,823 

 

$

(20,806)

 

5,257,937 

 

$

(250,896)

 

$

146,653 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 29,

 

February 28,

 

2016

 

2015

Operating activities:

 

 

 

 

 

Net income

$

25,731 

 

$

22,119 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

operating activities:

 

 

 

 

 

Depreciation and amortization

 

3,311 

 

 

3,247 

Net gains on sales and disposals of property and equipment

 

(15)

 

 

(31)

Deferred income taxes

 

(407)

 

 

(1,046)

Excess tax benefits from settlements of stock-based equity awards

 

(1,544)

 

 

(587)

Stock-based compensation

 

1,889 

 

 

1,636 

Unrealized foreign currency exchange (gains) losses, net

 

(1,116)

 

 

1,745 

Provision for bad debts

 

97 

 

 

209 

Changes in assets and liabilities:

 

 

 

 

 

Trade and other accounts receivable

 

(14,828)

 

 

(12,602)

Inventories

 

(4,858)

 

 

(408)

Other assets

 

(660)

 

 

2,332 

Accounts payable and accrued liabilities

 

3,199 

 

 

4,501 

Accrued payroll and related expenses

 

(3,948)

 

 

(8,037)

Income taxes payable

 

3,346 

 

 

318 

Other long-term liabilities

 

84 

 

 

100 

Net cash provided by operating activities

 

10,281 

 

 

13,496 

 

 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(2,155)

 

 

(2,833)

Proceeds from sales of property and equipment

 

92 

 

 

250 

Acquisition of business

 

 -

 

 

(3,705)

Purchases of short-term investments

 

(11,829)

 

 

(1,831)

Maturities of short-term investments

 

4,278 

 

 

1,673 

Net cash used in investing activities

 

(9,614)

 

 

(6,446)

 

 

 

 

 

 

Financing activities:

 

 

 

 

 

Treasury stock purchases

 

(15,122)

 

 

(14,551)

Dividends paid

 

(11,591)

 

 

(10,606)

Proceeds from issuance of common stock

 

708 

 

 

856 

Excess tax benefits from settlements of stock-based equity awards

 

1,544 

 

 

587 

Net proceeds from revolving credit facility

 

14,541 

 

 

5,000 

 Net cash used in financing activities

 

(9,920)

 

 

(18,714)

Effect of exchange rate changes on cash and cash equivalents

 

(2,333)

 

 

(2,438)

Net decrease in cash and cash equivalents

 

(11,586)

 

 

(14,102)

Cash and cash equivalents at beginning of period

 

53,896 

 

 

57,803 

Cash and cash equivalents at end of period

$

42,310 

 

$

43,701 

 

 

 

 

 

 

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 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 BIKE® product lines. 

 

The Company’s brands are sold in various locations around the world. 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, 2015 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, 2015, which was filed with the SEC on October 22, 2015.

 

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 periods. 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 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.  

8

 


 

 

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 consolidated statements of operations. Cash flows from settlements of foreign currency forward contracts are included in operating activities in the 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 consolidated balance sheets.  At February 29, 2016,  the Company had a notional amount of $6.1 million outstanding in foreign currency forward contracts, which mature from March through June 2016. Unrealized net gains and losses related to foreign currency forward contracts were not significant at February 29, 2016 and August 31, 2015. Realized net gains and losses related to foreign currency forward contracts were not material for each of the three and six month periods ended February 29, 2016 and February 28, 2015.

 

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 February 29, 2016, 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 six months ended February 29, 2016, the Company did not record any significant nonrecurring fair value measurements for assets or liabilities in periods subsequent to their initial recognition.

 

Recently Issued Accounting Standards

 

In March 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”. The amendments in this updated guidance include changes to simplify the Codification for several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2016, 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 2016, the FASB issued ASU No. 2016-02, “Leases”. The new standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted and should be applied using a modified retrospective approach.  The Company is in the process of evaluating the potential impacts of this new guidance on its consolidated financial statements and related disclosures.

 

In November 2015, the FASB issued ASU No. 2015-17, “Balance Sheet Classification of Deferred Taxes”, which requires that all deferred tax liabilities and assets be classified as noncurrent on the balance sheet, and eliminates the current requirement for an entity to separate these liabilities and assets into current and noncurrent amounts.  This guidance is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption is permitted and may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods

9

 


 

presented. The Company plans to adopt this updated guidance as of the end of fiscal year 2016, which is expected to decrease reported total current assets.  The Company does not expect the adoption of this guidance to have a significant impact on the Company’s financial position, operations, or cash flows as there are currently no financial covenant calculations under the revolving credit facility that are impacted by reported amounts of current or noncurrent assets or liabilities.

 

 In July 2015, the FASB issued ASU No. 2015-11, “Simplifying the Measurement of Inventory”, which simplifies the subsequent measurement of inventories valued under first-in, first-out (“FIFO”) or the average cost method. Under this new guidance, inventory will be measured at the lower of cost and net realizable value, with net realizable value defined as the estimated selling price less reasonable costs to sell the inventory. This guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is permitted and should be applied prospectively. 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.

 

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 was originally to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In July 2015, the FASB approved a one year deferral for the effective date of this guidance. Early adoption is permitted but only to the original effective date. The Company does not intend to adopt this guidance early and it will become effective for the Company on September 1, 2018 with the one year deferral. Companies are permitted to adopt this new rule following either a full or modified retrospective approach.  The Company has not yet decided which implementation method it will adopt. The Company is also 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): 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 29,

 

August 31,

 

2016

 

2015

Product held at third-party contract manufacturers

$

3,565 

 

$

3,224 

Raw materials and components

 

3,539 

 

 

3,597 

Work-in-process

 

480 

 

 

141 

Finished goods

 

28,488 

 

 

25,090 

Total

$

36,072 

 

$

32,052 

 

 

 

 

 

 

 

10

 


 

 

Note 4.  Property and Equipment

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 29,

 

August 31,

 

2016

 

2015

Machinery, equipment and vehicles

$

16,126 

 

$

15,585 

Buildings and improvements

 

4,207 

 

 

4,264 

Computer and office equipment

 

3,931 

 

 

3,895 

Software

 

7,426 

 

 

7,029 

Furniture and fixtures

 

1,402 

 

 

1,414 

Land

 

264 

 

 

282 

Subtotal

 

33,356 

 

 

32,469 

Less: accumulated depreciation and amortization

 

(22,135)

 

 

(21,093)

Total

$

11,221 

 

$

11,376 

 

 

 

 

 

 

 

 

 

 

 

 

    

Note 5.  Goodwill and Other Intangible Assets

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, 2015

$

85,532 

 

$

9,667 

 

$

1,210 

 

$

96,409 

Translation adjustments

 

(54)

 

 

(452)

 

 

 -

 

 

(506)

Balance as of February 29, 2016

$

85,478 

 

$

9,215 

 

$

1,210 

 

$

95,903 

 

 

 

 

 

 

 

 

 

 

 

 

During the second quarter of fiscal year 2016, 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) historical 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 goodwill impairment charges were required to be recorded.

11

 


 

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 29,

 

August 31,

 

2016

 

2015

Gross carrying amount

$

36,565 

 

$

37,805 

Accumulated amortization

 

(15,651)

 

 

(14,844)

Net carrying amount

$

20,914 

 

$

22,961 

 

 

 

 

 

 

 

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 29, 2016.

 

Changes in the carrying amounts of definite-lived intangible assets by segment for the six months ended February 29, 2016 are summarized below (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Americas

 

EMEA

 

Asia-Pacific

 

Total

Balance as of August 31, 2015

$

17,121 

 

$

5,840 

 

$

 -

 

$

22,961 

Amortization expense

 

(1,104)

 

 

(398)

 

 

 -

 

 

(1,502)

Translation adjustments

 

 -

 

 

(545)

 

 

 -

 

 

(545)

Balance as of February 29, 2016

$

16,017 

 

$

4,897 

 

$

 -

 

$

20,914 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 2016

$

1,220 

 

$

239 

 

$

18 

Fiscal year 2017

 

2,429 

 

 

478 

 

 

36 

Fiscal year 2018

 

2,429 

 

 

478 

 

 

36 

Fiscal year 2019

 

2,429 

 

 

277 

 

 

 -

Fiscal year 2020

 

2,034 

 

 

177 

 

 

 -

Thereafter

 

8,280 

 

 

354 

 

 

 -

Total

$

18,821 

 

$

2,003 

 

$

90 

 

 

 

 

 

 

 

 

 

Included in the total estimated future amortization expense is the amortization expense for the 1001 trade name and the GT85 intangible assets, which are based on current foreign currency exchange rates, and as a result amounts in future periods may differ from those presented due to fluctuations in those rates.

12

 


 

 

 

Note 6. Accrued and Other Liabilities

 

Accrued liabilities consisted of the following (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 29,

 

August 31,

 

2016

 

2015

Accrued advertising and sales promotion expenses

$

10,484 

 

$

9,259 

Accrued professional services fees

 

1,243 

 

 

1,207 

Accrued sales taxes

 

1,350 

 

 

797 

Accrued other taxes

 

306 

 

 

246 

Other

 

3,809 

 

 

3,691 

Total

$

17,192 

 

$

15,200 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 29,

 

August 31,

 

2016

 

2015

Accrued incentive compensation

$

5,522 

 

$

5,530 

Accrued payroll

 

3,625 

 

 

3,644 

Accrued profit sharing

 

764 

 

 

2,508 

Accrued payroll taxes

 

1,057 

 

 

1,189 

Other

 

442 

 

 

486 

Total

$

11,410 

 

$

13,357 

 

 

 

 

 

 

 

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”). Since June 17, 2011, this unsecured credit agreement has been amended three times, most recently on November 16, 2015, (the “Third Amendment”). This Third Amendment increased the revolving commitment from an amount not to exceed $150.0 million to an amount not to exceed $175.0 million. The Third Amendment also increased the aggregate amount of the Company’s capital stock that it may repurchase from $125.0 million to $150.0 million during the period from and including the Third Amendment effective date to the maturity date of the agreement so long as no default exists immediately prior and after giving effect thereto. This revolving credit facility matures on May 13, 2020, and includes representations, warranties and covenants customary for credit facilities of this type, as well as customary events of default and remedies.  

 

Per the terms of the amended agreement, 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. On February 10, 2016, the Company entered into an autoborrow agreement with Bank of America and this agreement has been in effect since that date. In addition, the definition of consolidated EBITDA includes the add back of non-cash stock-based compensation to consolidated net income when arriving at consolidated EBITDA. The terms of the financial covenants 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.

13

 


 

The amended agreement no longer contains the material adverse effect clause as an event of default. Prior to the removal of the material adverse effect clause as an event of default in the second amendment to the agreement, which was entered into by the Company in May 2015, 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 provides for borrowings to be made and repaid by the Company on a daily basis, any such borrowings made under an active autoborrow agreement are classified as short-term on the Company’s consolidated balance sheets.

 

During the six months ended February 29, 2016,  the Company had net borrowings of $14.5 million U.S. dollars under the revolving credit facility. Of the $14.5 million in net borrowings,  $2.5 million was under the new autoborrow agreement. The Company regularly converts existing draws on its line of credit to new draws with new maturity dates and interest rates. As of February 29, 2016, the Company had a $122.5 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 to refinance the short-term borrowings under the facility with successive short-term borrowings for a period of at least twelve months, the Company has classified $4.5 million outstanding under the revolving credit facility as a short-term liability and $118.0 million as a long-term liability at February 29, 2016.

 

Note 8. Share Repurchase Plans 

 

On October 14, 2014, the Company’s Board of Directors approved a 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 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 February 29, 2016, the Company repurchased 347,582 shares at a total cost of $30.8 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

 

Six Months Ended

 

February 29,

 

February 28,

 

February 29,

 

February 28,

 

2016

 

2015

 

2016

 

2015

Net income

$

13,669 

 

$

11,333 

 

$

25,731 

 

$

22,119 

Less: Net income allocated to

 

 

 

 

 

 

 

 

 

 

 

participating securities

 

(87)

 

 

(68)

 

 

(162)

 

 

(130)

Net income available to common shareholders

$

13,582 

 

$

11,265 

 

$

25,569 

 

$

21,989 

 

 

 

 

 

 

 

 

 

 

 

 

14

 


 

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

 

Six Months Ended

 

February 29,

 

February 28,

 

February 29,

 

February 28,

 

2016

 

2015

 

2016

 

2015

Weighted-average common

 

 

 

 

 

 

 

 

 

 

 

shares outstanding, basic

 

14,386 

 

 

14,636 

 

 

14,395 

 

 

14,652 

Weighted-average dilutive securities

 

43 

 

 

67 

 

 

50 

 

 

68 

Weighted-average common

 

 

 

 

 

 

 

 

 

 

 

shares outstanding, diluted

 

14,429 

 

 

14,703 

 

 

14,445 

 

 

14,720 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the three months ended February 29,  2016,  weighted-average stock-based equity awards outstanding that are non-participating securities in the amount of 8,884 were excluded from the calculation of diluted EPS under the treasury stock method as they were anti-dilutive. For the three months ended February 28, 2015, there were no anti-dilutive stock-based equity awards outstanding.

 

For the six months ended February 29, 2016 and February 28, 2015,  weighted-average stock-based equity awards outstanding that are non-participating securities in the amounts of 8,457 and 2,673, 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 $0.1 million and $0.2 million for the three months ended February 29, 2016 and February 28, 2015, respectively, and $0.4 million for each of the six months ended February 29, 2016 and February 28, 2015.  Accounts receivable from Tractor Supply were not material as of February 29, 2016.  

 

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 to and control of certain raw materials and components, materials utilized in finished products, and of the finished products themselves until shipment to the Company’s customers or third-party distribution centers in accordance with agreed upon shipment terms.  Although the Company typically does not have definitive minimum purchase obligations included in the contract terms with its contract manufacturers, when such obligations have been included, they have been immaterial. In the ordinary course of business, supply needs are communicated by the Company to its contract manufacturers based on orders 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. The amounts for inventory purchased under termination commitments have been immaterial. 

 

15

 


 

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 and renovation initiatives and/or supply chain initiatives. As of February 29, 2016,  no such commitments were outstanding.

 

Litigation 

 

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

 

On May 31, 2012, a legal action was filed against the Company in 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. On November 13, 2014, the Pipeline and Hazardous Materials Safety Administration (“PHMSA”) of the Department of Transportation (“DOT”) addressed a letter to IQPC 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. Following nine days of testimony and full briefing, a panel of three arbitrators issued their Interim Award and decision on the merits of the dispute on May 15, 2015. The arbitrators rejected all of IQPC’s claims.  On August 14, 2015, the arbitrators issued a further Interim Award to declare that the Company is the prevailing party in the proceeding for purposes of awarding attorney’s fees and costs. On November 19, 2015, the arbitrators issued a Final Award, incorporating each of the two Interim Awards and ordering IQPC to pay to the Company the sum of $1.5 million for attorney’s fees and costs.  On December 4, 2015, the Company filed a motion in the United States District Court in Texas to confirm the Final Award and for the entry of judgment for the award of fees and costs.

 

On September 24, 2015, IQPC filed an action in the United States District Court in New Jersey against the DOT and PHMSA alleging that the PHMSA failed to properly follow the applicable regulations when it previously investigated the manufacturing and required regulatory testing of the Company’s products. The Company is not named as a party to this action, but IQPC continues to allege that the Company’s products do not comply with the applicable regulation and that such alleged failure is evidence of a dangerous condition. The Company’s position, supported by the PHMSA’s prior investigation and conclusions noted above, is that all of the Company’s aerosol products are properly manufactured and tested in accordance with the applicable regulation. The Company will monitor this pending litigation and the Company will take such action as may be necessary or appropriate to protect the Company’s interests.

 

The Company does not believe that there is any reasonable possibility that these matters related to IQPC will have a materially negative impact on the Company’s financial condition or results of operations.

 

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 29, 2016.

 

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 29, 2016.

16

 


 

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 28.0% and 29.6% of income before income taxes for the three months ended February 29, 2016 and February 28, 2015, respectively, and 28.3% and 30.1% of income before income taxes for the six months ended February 29, 2016 and February 28, 2015, respectively. The decrease in the effective income tax rate for both the three and six months ended February 29, 2016, as compared to the same periods ended February 28, 2015 was driven by an increase in taxable earnings from foreign operations, particularly those in the U.K., which are taxed at lower tax rates and the benefit received from the permanent extension of the research and experimentation tax credit. In December 2015, legislation was enacted which retroactively extends the research and experimentation tax credit on a permanent basis. As a result of this U.S. law change, the Company recorded a one-time tax benefit of $0.1 million in the second quarter of fiscal year 2016, related to research activities incurred during fiscal year 2015. The ongoing benefit from this credit is reflected in the Company's estimated annual effective tax rate commencing in the second quarter of fiscal year 2016

 

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 2013 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 2012 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

February 29, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

45,542 

 

$

35,626 

 

$

13,382 

 

$

 -

 

$

94,550 

Income from operations

$

10,814 

 

$

9,413 

 

$

3,769 

 

$

(6,090)

 

$

17,906 

Depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization expense

$

1,061 

 

$

514 

 

$

67 

 

$

 

$

1,650 

Interest income

$

 

$

145 

 

$

37 

 

$

 -

 

$

183 

Interest expense

$

414 

 

$

 -

 

$

 

$

 -

 

$

417 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 28, 2015:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$