10-Q 1 wdfc-20171130x10q.htm 10-Q 5 Q1 FY18 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 November 30, 2017

 



 

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.)

 

 

9715 Businesspark Avenue, San Diego, California

 

92131

(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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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

Emerging growth company         

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  

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

Yes      No  

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of January 4, 2018 was 13,974,212.

1

 


 

WD-40 COMPANY

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended November 30, 2017



TABLE OF CONTENTS



 

 



 

 

PART I — FINANCIAL INFORMATION

 



 

Page

Item 1.

Financial Statements (Unaudited)

 



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

21 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36 

Item 4.

Controls and Procedures

36 



 

PART II —  OTHER INFORMATION

 



 

 

Item 1.

Legal Proceedings

37 

Item 1A.

Risk Factors

37 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

37 

Item 6.

Exhibits

38 



 

 







 

2

 


 







 

 

 

 

 



 

 

 

 

 

PART 1 - FINANCIAL INFORMATION



 

 

 

 

 

Item 1. Financial Statements



 

 

 

 

 

WD-40 COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS

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



 

 

 

 

 



November 30,

 

August 31,



2017

 

2017

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

46,932 

 

$

37,082 

Short-term investments

 

82,586 

 

 

80,166 

Trade accounts receivable, less allowance for doubtful

 

 

 

 

 

accounts of $217 and $240 at November 30, 2017

 

 

 

 

 

and August 31, 2017, respectively

 

64,054 

 

 

64,259 

Inventories

 

37,045 

 

 

35,340 

Other current assets

 

4,849 

 

 

8,007 

Total current assets

 

235,466 

 

 

224,854 

Property and equipment, net

 

29,359 

 

 

29,439 

Goodwill

 

95,721 

 

 

95,597 

Other intangible assets, net

 

15,790 

 

 

16,244 

Deferred tax assets, net

 

482 

 

 

495 

Other assets

 

3,076 

 

 

3,088 

Total assets

$

379,894 

 

$

369,717 



 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

17,983 

 

$

20,898 

Accrued liabilities

 

17,820 

 

 

18,997 

Accrued payroll and related expenses

 

12,828 

 

 

14,222 

Short-term borrowings

 

10,800 

 

 

20,000 

Income taxes payable

 

881 

 

 

1,306 

Total current liabilities

 

60,312 

 

 

75,423 

Long-term borrowings

 

153,200 

 

 

134,000 

Deferred tax liabilities, net

 

19,155 

 

 

18,949 

Other long-term liabilities

 

1,874 

 

 

1,958 

Total liabilities

 

234,541 

 

 

230,330 



 

 

 

 

 

Commitments and Contingencies (Note 11)

 

 

 

 

 



 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

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

 

 

 

 

 

19,720,517 and 19,688,238 shares issued at November 30, 2017 and

 

 

 

 

 

August 31, 2017, respectively; and 13,981,212 and 13,984,183 shares

 

 

 

 

 

outstanding at November 30, 2017 and August 31, 2017, respectively

 

20 

 

 

20 

Additional paid-in capital

 

151,110 

 

 

150,692 

Retained earnings

 

321,378 

 

 

315,764 

Accumulated other comprehensive income (loss)

 

(24,248)

 

 

(28,075)

Common stock held in treasury, at cost ― 5,739,305 and 5,704,055

 

 

 

 

 

shares at November 30, 2017 and August 31, 2017, respectively

 

(302,907)

 

 

(299,014)

Total shareholders' equity

 

145,353 

 

 

139,387 

Total liabilities and shareholders' equity

$

379,894 

 

$

369,717 



 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.



 

 

 

 

 

3

 


 











 

 

 

 

 



 

 

 

 

 

WD-40 COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited and in thousands, except per share amounts)



 

 

 

 

 



Three Months Ended November 30,



 

2017

 

 

2016



 

 

 

 

 

Net sales

$

97,597 

 

$

89,248 

Cost of products sold

 

43,400 

 

 

38,208 

Gross profit

 

54,197 

 

 

51,040 



 

 

 

 

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

31,217 

 

 

28,991 

Advertising and sales promotion

 

5,115 

 

 

4,812 

Amortization of definite-lived intangible assets

 

729 

 

 

721 

Total operating expenses

 

37,061 

 

 

34,524 



 

 

 

 

 

Income from operations

 

17,136 

 

 

16,516 



 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

133 

 

 

147 

Interest expense

 

(841)

 

 

(531)

Other income

 

128 

 

 

264 

Income before income taxes

 

16,556 

 

 

16,396 

Provision for income taxes

 

3,926 

 

 

4,638 

Net income

$

12,630 

 

$

11,758 



 

 

 

 

 

Earnings per common share:

 

 

 

 

 

Basic

$

0.90 

 

$

0.82 

Diluted

$

0.90 

 

$

0.82 



 

 

 

 

 

Shares used in per share calculations:

 

 

 

 

 

Basic

 

13,976 

 

 

14,180 

Diluted

 

14,011 

 

 

14,221 

Dividends declared per common share

$

0.49 

 

$

0.42 



 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.



 

 

 

 

 







4

 


 









 

 

 

 

 



 

 

 

 

 

WD-40 COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited and in thousands)



 

 

 

 

 



Three Months Ended November 30,



 

2017

 

 

2016



 

 

 

 

 

Net income

$

12,630 

 

$

11,758 

Other comprehensive income (loss):

 

 

 

 

 

Foreign currency translation adjustment

 

3,827 

 

 

(6,114)

Total comprehensive income

$

16,457 

 

$

5,644 



 

 

 

 

 

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, 2017

19,688,238 

 

$

20 

 

$

150,692 

 

$

315,764 

 

$

(28,075)

 

5,704,055 

 

$

(299,014)

 

$

139,387 

Issuance of common stock under share-based

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation plan, net of shares withheld for taxes

32,279 

 

 

 

 

 

(1,548)

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,548)

Stock-based compensation

 

 

 

 

 

 

1,777 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,777 

Cash dividends ($0.49 per share)

 

 

 

 

 

 

 

 

 

(6,888)

 

 

 

 

 

 

 

 

 

 

(6,888)

Acquisition of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

35,250 

 

 

(3,893)

 

 

(3,893)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

3,827 

 

 

 

 

 

 

 

3,827 

Cumulative effect of change in accounting principle

 

 

 

 

 

 

189 

 

 

(128)

 

 

 

 

 

 

 

 

 

 

61 

Net income

 

 

 

 

 

 

 

 

 

12,630 

 

 

 

 

 

 

 

 

 

 

12,630 

Balance at November 30, 2017

19,720,517 

 

$

20 

 

$

151,110 

 

$

321,378 

 

$

(24,248)

 

5,739,305 

 

$

(302,907)

 

$

145,353 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying notes to condensed consolidated financial statements.



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

















 

6

 


 

























 

 

 

 

 



 

 

 

 

 

WD-40 COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited and in thousands)



 

 

 

 

 



Three Months Ended November 30,



2017

 

2016

Operating activities:

 

 

 

 

 

Net income

$

12,630 

 

$

11,758 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,917 

 

 

1,620 

Net gains on sales and disposals of property and equipment

 

(45)

 

 

(54)

Deferred income taxes

 

261 

 

 

(405)

Stock-based compensation

 

1,777 

 

 

1,622 

Unrealized foreign currency exchange losses

 

150 

 

 

1,075 

Provision for bad debts

 

(21)

 

 

(120)

Changes in assets and liabilities:

 

 

 

 

 

Trade accounts receivable

 

217 

 

 

6,357 

Inventories

 

(1,459)

 

 

(2,876)

Other assets

 

3,219 

 

 

1,070 

Accounts payable and accrued liabilities

 

(3,994)

 

 

203 

Accrued payroll and related expenses

 

(1,500)

 

 

(7,194)

Income taxes payable

 

(492)

 

 

2,619 

Other long-term liabilities

 

(81)

 

 

(45)

Net cash provided by operating activities

 

12,579 

 

 

15,630 



 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(1,009)

 

 

(11,603)

Proceeds from sales of property and equipment

 

116 

 

 

162 

Purchase of intangible assets

 

(175)

 

 

 -

Purchases of short-term investments

 

(103)

 

 

(16,997)

Maturities of short-term investments

 

 -

 

 

4,548 

Net cash used in investing activities

 

(1,171)

 

 

(23,890)



 

 

 

 

 

Financing activities:

 

 

 

 

 

Treasury stock purchases

 

(3,893)

 

 

(12,156)

Dividends paid

 

(6,888)

 

 

(5,998)

Proceeds from issuance of common stock

 

215 

 

 

197 

Proceeds from issuance of long-term senior notes

 

20,000 

 

 

 -

Net (repayments) proceeds from revolving credit facility

 

(10,000)

 

 

12,354 

Shares withheld to cover taxes upon conversions of equity awards

 

(1,763)

 

 

(1,692)

 Net cash used in financing activities

 

(2,329)

 

 

(7,295)

Effect of exchange rate changes on cash and cash equivalents

 

771 

 

 

(1,854)

Net increase (decrease) in cash and cash equivalents

 

9,850 

 

 

(17,409)

Cash and cash equivalents at beginning of period

 

37,082 

 

 

50,891 

Cash and cash equivalents at end of period

$

46,932 

 

$

33,482 



 

 

 

 

 

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 that solve problems in workshops, factories and homes around the world. The Company markets its maintenance products and our 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, 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, online retailers 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, 2017 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, 2017, which was filed with the SEC on October 23, 2017.



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 to net asset balances held in non-functional currencies, specifically 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 November 30, 2017, the Company had a notional amount of $13.7 million outstanding in foreign currency forward contracts, which mature in January 2018. Unrealized net gains and losses related to foreign currency forward contracts were not significant at November 30, 2017, while unrealized net losses related to foreign currency forward contracts were $0.6 million at August 31, 2017.  Realized net gains related to foreign currency forward contracts were $0.3 million for three months ended November 30, 2017, while realized net losses were $0.4 million for three months ended November 30, 2016.



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 November 30, 2017, 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. In addition, the carrying value of long-term borrowings on the Company’s consolidated balance sheets approximate fair value and is also classified as Level 2 within the fair value hierarchy. During the three months ended November 30, 2017, 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 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 those related to the income tax consequences, classification of awards as either equity or liabilities, accounting for forfeitures, minimum statutory withholding requirements and classification of certain items on the statement of cash flows. Certain of these changes are required to be applied retrospectively while other changes are required to be applied prospectively. This guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Early adoption was permitted. The Company did not adopt this updated guidance early and therefore this guidance became effective for the Company during the first quarter of its fiscal year 2018. The impacts of the adoption by the Company of ASU No. 2016-09 were as follows:

·

The Company recorded an excess tax benefit of $0.8 million within the provision for income taxes for the three months ended November 30, 2017 from settlements of stock-based equity awards. Prior to the adoption of this new guidance, this amount would have been recorded as an increase to additional paid-in capital.

·

The Company elected to change its policy related to forfeitures of stock-based equity awards upon adoption of this new guidance such that it will now recognize the impacts of forfeitures as they occur rather than recognizing them based on an estimated forfeiture rate. As a result, the Company recorded a cumulative-effect adjustment to retained earnings. This adjustment to retained earnings and the impact of this change in policy for forfeitures on the Company’s consolidated financial statements were not material.

9

 


 

·

The Company elected to apply the presentation requirements for the statement of cash flows related to excess tax benefits from settlements of stock-based equity awards retrospectively for all periods presented which resulted in an increase of $0.4 million to both net cash provided by operating activities and net cash used in financing activities for the three months ended November 30, 2016.

·

The Company’s presentation in the statement of cash flows of employee taxes paid upon settlement of certain stock-based equity awards via shares withheld by the Company for tax-withholding purposes also changed as a result of the adoption of this new guidance since the Company previously reported such activity as an operating activity rather than a financing activity. As required, the Company applied this change in presentation for the statement of cash flows retrospectively for all periods presented which resulted in an increase of $1.7 million to both net cash provided by operating activities and net cash used in financing activities for the three months ended November 30, 2016.

·

The Company excluded the excess tax benefits from the assumed proceeds available to repurchase shares in the computation of its diluted earnings per share for the quarter ended November 30, 2017. The resulting increase in the Company’s diluted weighted average common shares outstanding was not material.



Recently Issued Accounting Standards



In August 2017, the FASB issued ASU No. 2017-12, “Targeted Improvements to Accounting for Hedging Activities”, to better align risk management activities and financial reporting for hedging relationships through changes to both the designation and measurement guidance for qualifying hedging relationships and the presentation of hedge results. This updated guidance, among other things, expands component and fair value hedging, provides specific presentation guidance on the effects of hedging instruments, and eliminates the separate measurement and presentation of portions of hedges deemed to be ineffective.  This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. Currently, although the Company engages in foreign currency hedging activity to reduce its risk, none of its foreign currency forward contracts are designated as hedges for accounting purposes. As such, the adoption of this guidance will not have an impact on the Company’s consolidated financial statements and related disclosures.



In January 2017, the FASB issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment”. This updated guidance eliminates Step 2 from the current two-step quantitative model for goodwill impairment tests. Step 2 required an entity to calculate an implied fair value, which included a hypothetical purchase price allocation requirement, for reporting units that failed Step 1. Per this updated guidance, a goodwill impairment will instead be measured as the amount by which a reporting unit’s carrying value exceeds its fair value as identified in Step 1. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. 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. The Company plans to early adopt this new guidance during the second quarter of fiscal year 2018, when the Company performs its annual goodwill impairment test.



In October 2016, the FASB issued ASU No. 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory”, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted in the first interim period of an entity's annual financial statements. 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 August 2016, the FASB issued ASU No. 2016-15, “Classification of Certain Cash Receipts and Cash Payments”. The amendments in this updated guidance address eight specific cash flow issues to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted and should be applied using a retrospective approach. The Company is in the process of evaluating the potential impacts of this new guidance on its consolidated financial statements.



In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments”, which requires entities to estimate all expected credit losses for certain types of financial instruments, including trade receivables, held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. The updated

10

 


 

guidance also expands the disclosure requirements to enable users of financial statements to understand the entity’s assumptions, models and methods for estimating expected credit losses. This guidance is effective for fiscal years beginning after December 15, 2019, 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 impacts of this new guidance 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 and related amendments 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. This new guidance requires an entity to recognize revenue for product sales at the point in time in which control of goods transfers to the Company’s customers which, as defined, could be different than the point in time in which revenue had been recognized by the Company under existing U.S. GAAP, which was based on when title and the risks and rewards of ownership were transferred to the customer. The new guidance 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.  Although early adoption is permitted, the Company has concluded that it will not adopt this guidance early and it will become effective for the Company on September 1, 2018. The Company will adopt this new guidance following the modified retrospective approach and will recognize the cumulative effect of initially applying the guidance as an adjustment to the opening balance of retained earnings on September 1, 2018. Management is in the process of a detailed review of the Company’s customer contracts which is focused principally on, but not limited to, identifying the point in time at which the control of goods transfers to customers. Management is nearing the completion of this review and is still in the process of determining the impacts that this new guidance will have on the Company's consolidated financial statements and related disclosures.





Note 3.  Inventories



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



 

 

 

 

 



 

 

 

 

 



November 30,

 

August 31,



2017

 

2017

Product held at third-party contract manufacturers

$

3,724 

 

$

3,021 

Raw materials and components

 

3,235 

 

 

3,021 

Work-in-process

 

418 

 

 

215 

Finished goods

 

29,668 

 

 

29,083 

Total

$

37,045 

 

$

35,340 



 

 

 

 

 





11

 


 





Note 4.  Property and Equipment 



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





 

 

 

 

 



 

 

 

 

 



November 30,

 

August 31,



2017

 

2017

Machinery, equipment and vehicles

$

17,646 

 

$

17,491 

Buildings and improvements

 

17,038 

 

 

16,953 

Computer and office equipment

 

4,950 

 

 

4,552 

Software

 

8,046 

 

 

7,947 

Furniture and fixtures

 

1,673 

 

 

1,608 

Capital in progress

 

1,023 

 

 

861 

Land

 

3,457 

 

 

3,453 

Subtotal

 

53,833 

 

 

52,865 

Less: accumulated depreciation and amortization

 

(24,474)

 

 

(23,426)

Total

$

29,359 

 

$

29,439 



 

 

 

 

 











    

Note 5.  Goodwill and Other Intangible Assets



Acquisitions



During the first quarter of fiscal year 2018, the Company entered into a confidential settlement agreement with FirstPower Group, LLC (“FirstPower”) for dismissal of FirstPower’s trademark infringement complaint against the Company relating to use of the words, “EZ-REACH” for the Company’s WD-40 EZ-REACH Flexible Straw product.  The settlement agreement provided for the Company’s acquisition of FirstPower’s trademark rights associated with the words “EZ REACH” for lubricating oil products for a purchase consideration of $0.2 million. The Company has used the words “EZ-REACH” since the introduction of the WD-40 EZ-REACH Flexible Straw product in fiscal year 2015.  



The entire purchase consideration of $0.2 million was paid in cash upon execution of the settlement agreement and was allocated to the trade name-related intangible assets category. The Company began to amortize this definite-lived intangible asset on a straight-line basis over an estimated useful life of five years in the first quarter of fiscal year 2018. This acquisition did not have a material impact on the Company’s condensed consolidated financial statements.



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, 2017

$

85,448 

 

$

8,939 

 

$

1,210 

 

$

95,597 

Translation adjustments

 

12 

 

 

112 

 

 

 -

 

 

124 

Balance as of November 30, 2017

$

85,460 

 

$

9,051 

 

$

1,210 

 

$

95,721 



 

 

 

 

 

 

 

 

 

 

 

There were no indicators of impairment identified as a result of the Company’s review of events and circumstances related to its goodwill subsequent to February 28, 2017, the date of its most recent annual goodwill impairment test. To date, there have been no impairment losses identified and recorded related to the Company’s goodwill.

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Definite-lived Intangible Assets



The Company’s definite-lived intangible assets, which include the 2000 Flushes, Spot Shot, Carpet Fresh, 1001, EZ REACH 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):





 

 

 

 

 



 

 

 

 

 



November 30,

 

August 31,



2017

 

2017

Gross carrying amount

$

36,336 

 

$

35,891 

Accumulated amortization

 

(20,546)

 

 

(19,647)

Net carrying amount

$

15,790 

 

$

16,244 



 

 

 

 

 

There has been no impairment charge for the three months ended November 30, 2017 as a result of the Company’s review of events and circumstances related to its existing definite-lived intangible assets.



Changes in the carrying amounts of definite-lived intangible assets by segment for the three months ended November 30, 2017 are summarized below (in thousands):





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Americas

 

EMEA

 

Asia-Pacific

 

Total

Balance as of August 31, 2017

$

12,706 

 

$

3,538 

 

$

 -

 

$

16,244 

Amortization expense

 

(555)

 

 

(174)

 

 

 -

 

 

(729)

EZ REACH trade name

 

175 

 

 

 -

 

 

 -

 

 

175 

Translation adjustments

 

 -

 

 

100 

 

 

 -

 

 

100 

Balance as of November 30, 2017

$

12,326 

 

$

3,464 

 

$

 -

 

$

15,790 



 

 

 

 

 

 

 

 

 

 

 



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 2018

$

1,846 

 

$

344 

 

$

26 

Fiscal year 2019

 

2,455 

 

 

267 

 

 

 -

Fiscal year 2020

 

2,060 

 

 

170 

 

 

 -

Fiscal year 2021

 

1,270 

 

 

170 

 

 

 -

Fiscal year 2022

 

1,270 

 

 

170 

 

 

 -

Thereafter

 

5,742 

 

 

 -

 

 

 -

Total

$

14,643 

 

$

1,121 

 

$

26 



 

 

 

 

 

 

 

 

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.

13

 


 





Note 6. Accrued and Other Liabilities



Accrued liabilities consisted of the following (in thousands): 



 

 

 

 

 



 

 

 

 

 



November 30,

 

August 31,



2017

 

2017

Accrued advertising and sales promotion expenses

$

11,373 

 

$

10,889 

Accrued professional services fees

 

1,152 

 

 

1,456 

Accrued sales taxes and other taxes

 

1,036 

 

 

1,701 

Other

 

4,259 

 

 

4,951 

Total

$

17,820 

 

$

18,997 



 

 

 

 

 

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





 

 

 

 

 



 

 

 

 

 



November 30,

 

August 31,



2017

 

2017

Accrued incentive compensation

$

2,325 

 

$

6,554 

Accrued payroll

 

3,931 

 

 

3,338 

Accrued profit sharing

 

3,031 

 

 

2,257 

Accrued payroll taxes

 

2,851 

 

 

1,503 

Other

 

690 

 

 

570 

Total

$

12,828 

 

$

14,222 



 

 

 

 

 





Note 7. Debt



As of November 30, 2017, the Company held borrowings under two separate agreements as detailed below.



Note Purchase and Private Shelf Agreement



On November 15, 2017, the Company entered into the Note Purchase and Private Shelf Agreement (the “Note Agreement”) by and among the Company, PGIM, Inc. (“Prudential”), and certain affiliates and managed accounts of Prudential (the “Note Purchasers”), pursuant to which the Company agreed to sell $20.0 million aggregate principal amount of senior notes (the “Series A Notes”) to certain of the Note Purchasers. The Series A Notes will bear interest at 3.39% per annum and will mature on November 15, 2032, unless earlier paid by the Company. Principal payments are required semi-annually beginning on May 15, 2018 in equal installments of $0.4 million through May 15, 2032, and the remaining outstanding principal in the amount of $8.4 million will become due on November 15, 2032. Interest is also payable semi-annually beginning on May 15, 2018. The Company used the proceeds to pay down $20.0 million of short-term borrowings under the Company’s existing $175.0 million unsecured Credit Agreement, of which $10.0 million was paid in November 2017 and the remaining $10.0 million was paid in December 2017.



Pursuant to the Note Agreement, the Company may from time to time offer for sale, in one or a series of transactions, additional senior notes of the Company (the “Shelf Notes”) in an aggregate principal amount of up to $105.0 million. The Shelf Notes will have a maturity date of no more than 15½ years after the date of original issuance and may be issued no later than November 15, 2020. The Shelf Notes, if issued, would bear interest at a rate per annum and would have such other particular terms, as would be set forth in a confirmation of acceptance executed by the purchasing parties prior to the closing of each purchase and sale transaction. To date, the Company has issued no Shelf Notes. Pursuant to the Note Agreement, the Series A Notes and any Shelf Notes (collectively, the "Notes") can be prepaid at the Company’s sole discretion, in whole at any time or in part from time to time, at 100% of the principal amount of the Notes being prepaid, together with accrued and unpaid interest thereon as well as an additional make-whole payment with respect to such Notes.

14

 


 

Credit Agreement



On June 17, 2011, the Company entered into an unsecured Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. (“Bank of America”). Since June 17, 2011, this unsecured credit agreement has been amended five times, most recently on November 15, 2017, (the “Fifth Amendment”). The Fifth Amendment amended certain provisions and covenants in the Credit Agreement to generally conform them to the corresponding provisions and covenants contained in the Note Agreement and permits the Company to incur indebtedness arising under the Note Agreement in an aggregate principal amount not to exceed the $20.0 million, the amount of the Series A Notes sold pursuant to the Note Agreement in November 2017.



Per the terms of the amended agreement, the revolving commitment may not exceed $175.0 million and the aggregate amount of the Company’s capital stock that it may repurchase may not exceed $150.0 million during the period from November 16, 2015 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.  In addition, as allowed per the terms of the Credit Agreement, the Company and Bank of America entered into an autoborrow agreement providing for the automatic advance of revolving loans in U.S. Dollars to the Company’s designated account at Bank of America. This agreement was entered into during the second quarter of fiscal year 2016 and this agreement has been in effect since that time. 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. The Company had no balance under the autoborrow agreement as of November 30, 2017.



The Company assesses its ability and intent to refinance the outstanding 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. Outstanding draws on the line of credit which the Company intends to repay in less than twelve months are classified as short-term. Outstanding draws for which management has the ability and intent to refinance with successive short-term borrowings for a period of at least twelve months are classified as long-term. During the three months ended November 30, 2017, the Company had no new borrowings under the revolving credit facility and repaid $10.0 million in short-term borrowings outstanding under the line of credit by utilizing proceeds from the $20.0 million in Series A Notes issued in November 2017.



Short-term and long-term borrowings consisted of the following (in thousands): 









 

 

 

 

 



 

 

 

 

 



November 30,

 

August 31,



2017

 

2017

Short-term borrowings:

 

 

 

 

 

Revolving credit facility, short-term

$

10,000 

 

$

20,000 

Series A Notes, current portion of long-term debt

 

800 

 

 

 -

Total short-term borrowings

 

10,800 

 

 

20,000 



 

 

 

 

 

Long-term borrowings:

 

 

 

 

 

Revolving credit facility

 

134,000 

 

 

134,000 

Series A Notes

 

19,200 

 

 

 -

Total long-term borrowings

 

153,200 

 

 

134,000 

Total borrowings

$

164,000 

 

$

154,000 



 

 

 

 

 

Both the Note Agreement and Credit Agreement contain representations, warranties, events of default and remedies, as well as affirmative, negative and other financial covenants customary for these types of agreements. These covenants include, among other things, certain limitations on the ability of the Company and its subsidiaries to incur indebtedness, create liens, dispose of assets, make investments, repurchase shares of the Company’s capital stock and enter into certain merger or consolidation transactions. Each agreement also includes a most favored lender provision which requires that any time any other lender has the benefit of one or more financial or operational covenants that is different than, or similar to, but more restrictive than those contained in its own agreement, those covenants shall be immediately and automatically incorporated by reference in the other lender’s agreement.

15

 


 

Both the Note Agreement and the Credit Agreement require the Company to adhere to the same financial covenants. For the financial covenants, 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

As of November 30, 2017 the Company was in compliance with all debt covenants under both the Note Agreement and the Credit Agreement.



Note 8. Share Repurchase Plans



On June 21, 2016, the Company’s Board of Directors approved a share buy-back plan. Under the plan, which became effective on September 1, 2016, the Company is authorized to acquire up to $75.0 million of its outstanding shares through August 31, 2018. The timing and amount of repurchases are 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 September 1, 2016 through November 30, 2017, the Company repurchased 325,823 shares at a total cost of $35.0 million under this $75.0 million plan. During the three months ended November 30, 2017, the Company repurchased 35,250 shares at an average price of $110.42 per share, for a total cost of $3.9 million.



Note 9.  Earnings per Common Share



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















 

 

 

 

 



 

 

 

 

 



Three Months Ended November 30,



2017

 

2016

Net income

$

12,630 

 

$

11,758 

Less: Net income allocated to

 

 

 

 

 

participating securities

 

(82)

 

 

(77)

Net income available to common shareholders

$

12,548 

 

$

11,681 



 

 

 

 

 

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













 

 

 

 

 



 

 

 

 

 



Three Months Ended November 30,



2017

 

2016

Weighted-average common

 

 

 

 

 

shares outstanding, basic

 

13,976 

 

 

14,180 

Weighted-average dilutive securities

 

35 

 

 

41 

Weighted-average common

 

 

 

 

 

shares outstanding, diluted

 

14,011 

 

 

14,221 



 

 

 

 

 

For the three months ended November 30, 2017 and 2016, there were no anti-dilutive stock-based equity awards outstanding.

16

 


 

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 the 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 for each of the three months ended November 30, 2017 and 2016. Accounts receivable from Tractor Supply were not material as of November 30, 2017 and August 31, 2017. 



Note 11.  Commitments and Contingencies



Purchase Commitments 



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



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 November 30, 2017,  no such commitments were outstanding.



Litigation    



From time to time, the Company is subject to various claims, lawsuits, investigations and proceedings arising in the ordinary course of business, including but not limited to, product liability litigation and other claims and proceedings with respect to intellectual property, breach of contract, labor and employment, tax and other matters.  As of November 30, 2017, there is no current proceeding or litigation involving the Company that management believes could have a material adverse impact on its business, financial condition and results of operations. For further information on the risks the Company faces from existing and future claims, suits, investigations and proceedings, see the Company’s risk factors disclosed in Part I―Item 1A, “Risk Factors,” in its Annual Report on Form 10-K for the fiscal year ended August 31, 2017, which was filed with the SEC on October 23, 2017.



Indemnifications



As permitted under Delaware law, the Company has agreements whereby it indemnifies senior officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company maintains Director and Officer insurance coverage that mitigates the Company’s exposure with respect to such obligations. As a result of the Company’s insurance coverage, management believes that the estimated fair value of these indemnification agreements is minimal. Thus, no liabilities have been recorded for these agreements as of November 30, 2017.



17

 


 

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 November 30, 2017.



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 23.7% and 28.3% of income before income taxes for the three months ended November 30, 2017 and 2016, respectively. The decrease in the effective income tax rate from period to period was driven by the adoption of ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” which resulted in excess tax benefits from settlements of stock-based equity awards being recognized in the provision for income taxes, whereas such benefits were recognized as an increase to additional paid-in capital in prior periods. See “Recently Adopted Accounting Standards” within Note 2Basis of Presentation and Summary of Significant Accounting Policies, included in this report, for additional information on the impact of this accounting change on the Company’s consolidated financial statements and related disclosures.



The Company is subject to taxation in the U.S. and in various state and foreign jurisdictions. Due to expired statutes and prior audit examinations, the Company’s federal income tax returns for years prior to fiscal year 2016 are not subject to examination by the U.S. Internal Revenue Service. The Company is also currently under audit in various state and international jurisdictions for fiscal years 2013 through 2016. Generally, for the majority of state and foreign jurisdictions where the Company does business, periods prior to fiscal year 2014 are no longer subject to examination. The Company has estimated that up to $0.3 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.

18

 


 

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

November 30, 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

46,163 

 

$

35,028 

 

$

16,406 

 

$

 -

 

$

97,597 

Income from operations

$

11,030 

 

$

7,836 

 

$

4,620 

 

$

(6,350)

 

$

17,136 

Depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization expense

$

1,094 

 

$

559 

 

$

72 

 

$

192 

 

$

1,917 

Interest income

$

 

$

119 

 

$

13 

 

$

 -

 

$

133 

Interest expense

$

839 

 

$

 -

 

$

 

$

 -

 

$

841 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

November 30, 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

42,840 

 

$

30,257 

 

$

16,151 

 

$

 -

 

$

89,248 

Income from operations

$

10,749 

 

$

7,178 

 

$

4,986 

 

$

(6,397)

 

$

16,516 

Depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization expense

$

1,049 

 

$

501 

 

$

62 

 

$

 

$

1,620 

Interest income

$

 

$

80 

 

$

65 

 

$

 -

 

$

147 

Interest expense

$

527 

 

$

 -

 

$

 

$

 -

 

$

531 



 

 

 

 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

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





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



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





 

 

 

 

 



 

 

 

 

 



Three Months Ended November 30,



2017

 

2016

Maintenance products

$

88,030 

 

$

79,159 

Homecare and cleaning products

 

9,567 

 

 

10,089 

Total

$

97,597 

 

$

89,248 



 

 

 

 

 









19

 


 

Note 14. Subsequent Events



On December 12, 2017, the Company’s Board of Directors approved a 10% increase in the regular quarterly cash dividend, increasing it from $0.49 per share to $0.54 per share. The $0.54 per share dividend declared on December 12, 2017 is payable on January 31, 2018 to shareholders of record on January 19, 2018.



On December 20, 2017 the United States House of Representatives and the Senate passed the “Tax Cuts and Jobs Act”  (the “Act”), which was signed into law by President Trump on December 22, 2017.  The Act is the most significant revision of the U.S. tax code since the Tax Reform Act of 1986 and is effective beginning January 1, 2018.  The Company will be impacted in several ways as a result of the Act including, but not limited to, provisions which include a permanent reduction in the U.S. federal corporate income tax rate from 35% to 21%, the  revaluation of deferred tax assets and liabilities that will be required as a result of the tax rate change,  and the application of a mandatory one-time “toll tax on unremitted foreign earnings. Although the Company has not yet performed a comprehensive analysis of the Act and cannot determine the full extent of its impact on the Company’s consolidated financial statements and related disclosures, the Company expects that the Act will have some favorable impact on its annual effective income tax rate in fiscal year 2018. This expected favorable impact is due to the Act’s lower corporate tax rate which will be effective for a portion of the Company’s fiscal year 2018,  as well as expected net favorable impacts resulting from one-time events required by the Act in fiscal year 2018. The net favorable impacts of these one-time events are primarily driven by the anticipated favorable impacts as a result of the Company’s revaluation of deferred tax assets and liabilities, which is expected to be substantially offset by the unfavorable impacts of the toll tax.  

20

 


 

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



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



The following information is provided as a supplement to, and should be read in conjunction with, the unaudited condensed consolidated financial statements and notes thereto included in Part IItem 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2017, which was filed with the Securities and Exchange Commission (“SEC”) on October 23, 2017.



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



Forward-Looking Statements 



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



These forward-looking statements include, but are not limited to, discussions about future financial and operating results, including:  growth expectations for maintenance products; expected levels of promotional and advertising spending; plans for and success of product innovation, the impact of new product introductions on the growth of sales; anticipated results from product line extension sales; and forecasted foreign currency exchange rates and commodity prices.  These forward-looking statements are generally identified with words such as “believe,” “expect,” “intend,” “plan,” “could,” “may,” “aim,” “anticipate,” “estimate” and similar expressions. The Company undertakes no obligation to revise or update any forward looking statements.



Actual events or results may differ materially from those projected in forward-looking statements due to various factors, including, but not limited to, those identified in Part IItem 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2017, and in the Company’s Quarterly Reports on Form 10-Q, which may be updated from time to time.



Overview



The Company



WD-40 Company (“the Company”), based in San Diego, California, is a global marketing organization dedicated to creating positive lasting memories by developing and selling products that solve problems in workshops, factories and homes around the world. We market our maintenance products and our 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

 

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

21

 


 

Highlights



The following summarizes the financial and operational highlights for our business during the three months ended November 30, 2017:  



·

Consolidated net sales increased $8.3 million for the three months ended November 30, 2017 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had a favorable impact of $1.4 million on consolidated net sales for the three months ended November 30, 2017 compared to the corresponding period of the prior fiscal year. Thus, on a constant currency basis, net sales would have increased by $6.9 million from period to period. This favorable impact from changes in foreign currency exchange rates mainly came from our EMEA segment, which accounted for 36% of our consolidated sales for the three months ended November 30, 2017.



·

Consolidated net sales for the WD-40 Specialist product line were $7.5 million which is a 29% increase for the three months ended November 30, 2017 compared to the corresponding period of the prior fiscal year. Although the WD-40 Specialist product line is expected to provide the Company with long-term growth opportunities, we will see some volatility in sales levels from period to period due to the timing of promotional programs, the building of distribution, and various other factors that come with building a new product line.



·

Gross profit as a percentage of net sales decreased to 55.5% for the three months ended November 30, 2017 compared to 57.2% for the corresponding period of the prior fiscal year.



·

Consolidated net income increased $0.9 million, or 7%, for the three months ended November 30, 2017 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had a favorable impact of $0.2 million on consolidated net income for the three months ended November 30, 2017 compared to the corresponding period of the prior fiscal year. Thus, on a constant currency basis, net income would have increased $0.7 million.



·

Diluted earnings per common share for the three months ended November 30, 2017 were $0.90 versus  $0.82 in the prior fiscal year period.



·

Net income and diluted earnings per common share were favorably impacted for the three months ended November 30, 2017 as a result of the adoption of ASU No. 2016-09, “Improvements to Employee Share-Based Payment Accounting”, an accounting standard which became effective for the Company during the first quarter of its fiscal year 2018.



·

Share repurchases continued to be executed under our current $75.0 million share buy-back plan, which was approved by the Company’s Board of Directors in June 2016 and became effective on September 1, 2016. During the period from September 1, 2017 through November 30, 2017, the Company repurchased 35,250 shares at an average price of $110.42 per share, for a total cost of $3.9 million. 



Our strategic initiatives and the areas where we will continue to focus our time, talent and resources in future periods include: (i) maximizing WD-40 Multi-Use Product sales through geographic expansion, increased market penetration and the development of new and unique delivery systems; (ii) leveraging the WD-40 brand by growing the WD-40 Specialist product line; (iii) leveraging the strengths of the Company through broadened product and revenue base; (iv) attracting, developing and retaining talented people; and (v) operating with excellence.

22

 


 

Results of Operations



Three Months Ended November 30, 2017 Compared to Three Months Ended November 30, 2016



Operating Items



The following table summarizes operating data for our consolidated operations (