10-Q 1 wdfc-20181130x10q.htm 10-Q 5 Q1 FY19 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, 2018

 



 

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, every Interactive Data File required to be submitted 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 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, 2019 was 13,824,339.

1

 


 



WD-40 COMPANY

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended November 30, 2018



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

23 

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,



2018

 

2018

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

$

31,574 

 

$

48,866 

Short-term investments

 

216 

 

 

219 

Trade accounts receivable, less allowance for doubtful

 

 

 

 

 

accounts of $282 and $340 at November 30, 2018

 

 

 

 

 

and August 31, 2018, respectively

 

69,850 

 

 

69,025 

Inventories

 

39,339 

 

 

36,536 

Other current assets

 

5,253 

 

 

13,337 

Total current assets

 

146,232 

 

 

167,983 

Property and equipment, net

 

36,412 

 

 

36,357 

Goodwill

 

95,547 

 

 

95,621 

Other intangible assets, net

 

12,735 

 

 

13,513 

Deferred tax assets, net

 

508 

 

 

511 

Other assets

 

3,066 

 

 

3,074 

Total assets

$

294,500 

 

$

317,059 



 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Accounts payable

$

19,730 

 

$

19,115 

Accrued liabilities

 

17,382 

 

 

26,240 

Accrued payroll and related expenses

 

11,443 

 

 

14,823 

Short-term borrowings

 

16,662 

 

 

23,600 

Income taxes payable

 

1,670 

 

 

2,125 

Total current liabilities

 

66,887 

 

 

85,903 

Long-term borrowings

 

62,400 

 

 

62,800 

Deferred tax liabilities, net

 

11,447 

 

 

11,050 

Other long-term liabilities

 

1,798 

 

 

1,817 

Total liabilities

 

142,532 

 

 

161,570 



 

 

 

 

 

Commitments and Contingencies (Note 12)

 

 

 

 

 



 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

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

 

 

 

 

 

19,753,836 and 19,729,774 shares issued at November 30, 2018 and

 

 

 

 

 

August 31, 2018, respectively; and 13,833,291 and 13,850,413 shares

 

 

 

 

 

outstanding at November 30, 2018 and August 31, 2018, respectively

 

20 

 

 

20 

Additional paid-in capital

 

153,009 

 

 

153,469 

Retained earnings

 

356,699 

 

 

351,266 

Accumulated other comprehensive loss

 

(29,267)

 

 

(27,636)

Common stock held in treasury, at cost ― 5,920,545 and 5,879,361

 

 

 

 

 

shares at November 30, 2018 and August 31, 2018, respectively

 

(328,493)

 

 

(321,630)

Total shareholders' equity

 

151,968 

 

 

155,489 

Total liabilities and shareholders' equity

$

294,500 

 

$

317,059 



 

 

 

 

 

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,



 

2018

 

 

2017



 

 

 

 

 

Net sales

$

101,282 

 

$

97,597 

Cost of products sold

 

45,451 

 

 

43,400 

Gross profit

 

55,831 

 

 

54,197 



 

 

 

 

 

Operating expenses:

 

 

 

 

 

Selling, general and administrative

 

32,731 

 

 

31,217 

Advertising and sales promotion

 

5,966 

 

 

5,115 

Amortization of definite-lived intangible assets

 

733 

 

 

729 

Total operating expenses

 

39,430 

 

 

37,061 



 

 

 

 

 

Income from operations

 

16,401 

 

 

17,136 



 

 

 

 

 

Other income (expense):

 

 

 

 

 

Interest income

 

51 

 

 

133 

Interest expense

 

(710)

 

 

(841)

Other income

 

376 

 

 

128 

Income before income taxes

 

16,118 

 

 

16,556 

Provision for income taxes

 

2,839 

 

 

3,926 

Net income

$

13,279 

 

$

12,630 



 

 

 

 

 

Earnings per common share:

 

 

 

 

 

Basic

$

0.95 

 

$

0.90 

Diluted

$

0.95 

 

$

0.90 



 

 

 

 

 

Shares used in per share calculations:

 

 

 

 

 

Basic

 

13,846 

 

 

13,976 

Diluted

 

13,882 

 

 

14,011 



 

 

 

 

 



 

 

 

 

 

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,



 

2018

 

 

2017



 

 

 

 

 

Net income

$

13,279 

 

$

12,630 

Other comprehensive (loss) income:

 

 

 

 

 

Foreign currency translation adjustment

 

(1,631)

 

 

3,827 

Total comprehensive income

$

11,648 

 

$

16,457 



 

 

 

 

 

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, 2018

19,729,774 

 

$

20 

 

$

153,469 

 

$

351,266 

 

$

(27,636)

 

5,879,361 

 

$

(321,630)

 

$

155,489 

Issuance of common stock under share-based

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

compensation plan, net of shares withheld for taxes

24,062 

 

 

 -

 

 

(2,425)

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,425)

Stock-based compensation

 

 

 

 

 

 

1,965 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,965 

Cash dividends ($0.54 per share)

 

 

 

 

 

 

 

 

 

(7,522)

 

 

 

 

 

 

 

 

 

 

(7,522)

Acquisition of treasury stock

 

 

 

 

 

 

 

 

 

 

 

 

 

 

41,184 

 

 

(6,863)

 

 

(6,863)

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

(1,631)

 

 

 

 

 

 

 

(1,631)

Cumulative effect of change in accounting principle

 

 

 

 

 

 

 

 

 

(324)

 

 

 

 

 

 

 

 

 

 

(324)

Net income

 

 

 

 

 

 

 

 

 

13,279 

 

 

 

 

 

 

 

 

 

 

13,279 

Balance at November 30, 2018

19,753,836 

 

$

20 

 

$

153,009 

 

$

356,699 

 

$

(29,267)

 

5,920,545 

 

$

(328,493)

 

$

151,968 



 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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,



2018

 

2017

Operating activities:

 

 

 

 

 

Net income

$

13,279 

 

$

12,630 

Adjustments to reconcile net income to net cash provided by

 

 

 

 

 

operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,925 

 

 

1,917 

Net gains on sales and disposals of property and equipment

 

(3)

 

 

(45)

Deferred income taxes

 

569 

 

 

261 

Stock-based compensation

 

1,965 

 

 

1,777 

Unrealized foreign currency exchange losses

 

210 

 

 

150 

Provision for bad debts

 

10 

 

 

(21)

Changes in assets and liabilities:

 

 

 

 

 

Trade accounts receivable

 

(2,302)

 

 

217 

Inventories

 

(2,851)

 

 

(1,459)

Other assets

 

8,037 

 

 

3,219 

Accounts payable and accrued liabilities

 

(8,089)

 

 

(3,994)

Accrued payroll and related expenses

 

(3,310)

 

 

(1,500)

Other long-term liabilities and income taxes payable

 

(431)

 

 

(573)

Net cash provided by operating activities

 

9,009 

 

 

12,579 



 

 

 

 

 

Investing activities:

 

 

 

 

 

Purchases of property and equipment

 

(1,292)

 

 

(1,009)

Proceeds from sales of property and equipment

 

58 

 

 

116 

Purchase of intangible assets

 

 -

 

 

(175)

Purchases of short-term investments

 

 -

 

 

(103)

Net cash used in investing activities

 

(1,234)

 

 

(1,171)



 

 

 

 

 

Financing activities:

 

 

 

 

 

Treasury stock purchases

 

(6,863)

 

 

(3,893)

Dividends paid

 

(7,522)

 

 

(6,888)

Proceeds from issuance of common stock

 

 -

 

 

215 

Proceeds from issuance of long-term senior notes

 

 -

 

 

20,000 

Repayments of long-term senior notes

 

(400)

 

 

 -

Net repayments of revolving credit facility

 

(6,938)

 

 

(10,000)

Shares withheld to cover taxes upon conversions of equity awards

 

(2,425)

 

 

(1,763)

 Net cash used in financing activities

 

(24,148)

 

 

(2,329)

Effect of exchange rate changes on cash and cash equivalents

 

(919)

 

 

771 

Net (decrease) increase in cash and cash equivalents

 

(17,292)

 

 

9,850 

Cash and cash equivalents at beginning of period

 

48,866 

 

 

37,082 

Cash and cash equivalents at end of period

$

31,574 

 

$

46,932 



 

 

 

 

 

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 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, 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, sports 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, 2018 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, 2018, which was filed with the SEC on October 22,  2018.



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, 2018, the Company had a notional amount of $24.9 million outstanding in foreign currency forward contracts, which matured in December 2018. Unrealized net gains and losses related to foreign currency forward contracts were not significant at November 30, 2018 and 2017. Realized net gains and losses related to foreign currency forward contracts were not significant for three months ended November 30, 2018, while realized net gains were $0.3 million for three months ended November 30, 2017. Both unrealized and realized net gains and losses are recorded in other income on the Company’s consolidated statements of operations.



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, 2018, 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 borrowings held under the Company’s revolving credit facility approximates fair value due to the variable nature of underlying interest rates, which generally reflect market conditions and such borrowings are classified as Level 2 within the fair value hierarchy. The Company’s fixed rate long-term borrowings consist of senior notes which are also classified as Level 2 within the fair value hierarchy and are recorded at carrying value. The Company estimates that the fair value of its senior notes was approximately $18.0 million as of November 30, 2018, which was determined based on a discounted cash flow analysis using current market interest rates for instruments with similar terms, compared to its carrying value of $19.2 million. During the three months ended November 30, 2018, 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 May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASC 606”), 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. The new standard requires additional disclosures to enable users of the financial statements to better understand the nature, amount, timing, risks, and judgments related to revenue recognition from contracts with customers. On September 1, 2018, the Company adopted ASC 606 on a modified retrospective basis and the Company recognized a reduction of $0.3 million to opening retained earnings as the cumulative effect of adopting the new revenue standard. This adjustment did not have a material impact on the Company’s consolidated financial statements.  See Note 10 – Revenue Recognition for additional information and incremental disclosures related to the adoption of this standard.



9

 


 

Recently Issued Accounting Standards



In August 2018, the FASB issued ASU No. 2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The updated guidance also requires an entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement and includes expanded disclosure requirements for such costs. This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted and the guidance may be applied either retrospectively or 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 and related disclosures. The Company plans to early adopt this new guidance on a prospective basis during fiscal year 2019.



In February 2018, the FASB issued ASU No. 2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, to optionally allow entities to reclassify stranded tax effects, resulting from the Tax Act, from accumulated other comprehensive income to retained earnings. Since the amendments within this guidance only relate to the reclassification of the income tax effects associated with the Tax Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected. This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. Early adoption is permitted. The amendments in this updated guidance should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S. corporate federal income tax rate in the Tax Act is recognized. 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, as such stranded tax effects are immaterial. The Company plans to early adopt this guidance during fiscal year 2019 and will  reclassify these stranded tax effects from accumulated other comprehensive income to retained earnings on March 1, 2018.



In February 2016, the FASB issued ASU No. 2016-02, “Leases” under ASC 842, which supersedes lease accounting and disclosure requirements in ASC 840. 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. 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, 2019. The Company will adopt this new guidance following the optional transition method described in ASU No. 2018-11, “Leases – Targeted Improvements” which was issued in July 2018, rather than the original modified retrospective approach that requires entities to apply the guidance at the beginning of the earliest period presented in the financial statements. Under the optional transition method, the Company will recognize the cumulative effect of initially applying the guidance as an adjustment to the opening balance of retained earnings on September 1, 2019. Therefore, the requirements of this guidance will apply only for periods presented that are after the date of adoption and will not affect comparative periods. Management is in the process of a detailed review of the Company’s lease contracts. This review is focused principally on, but not limited to, developing a complete inventory of the Company’s lease contacts and the terms and conditions contained within these contracts to appropriately account for them under the new lease model. Additionally, the Company is in the process of reviewing current accounting policies, business processes, systems and controls in order to determine updates that will be needed in support of adopting this new standard.  Management expects the adoption of this guidance will have a material impact on the Company's consolidated balance sheets and related disclosures, although it has not yet quantified the impact. Management is currently assessing whether the adoption of this guidance will have a material impact on the consolidated statements of operations and cash flows.









10

 


 

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,



2018

 

2018

Product held at third-party contract manufacturers

$

2,877 

 

$

2,841 

Raw materials and components

 

4,381 

 

 

3,692 

Work-in-process

 

496 

 

 

448 

Finished goods

 

31,585 

 

 

29,555 

Total

$

39,339 

 

$

36,536 



 

 

 

 

 











Note 4.  Property and Equipment



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





 

 

 

 

 



 

 

 

 

 



November 30,

 

August 31,



2018

 

2018

Machinery, equipment and vehicles

$

17,902 

 

$

17,848 

Buildings and improvements

 

17,038 

 

 

17,100 

Computer and office equipment

 

5,108 

 

 

5,046 

Software

 

9,674 

 

 

9,481 

Furniture and fixtures

 

1,777 

 

 

1,820 

Capital in progress

 

8,731 

 

 

8,042 

Land

 

3,451 

 

 

3,453 

Subtotal

 

63,681 

 

 

62,790 

Less: accumulated depreciation and amortization

 

(27,269)

 

 

(26,433)

Total

$

36,412 

 

$

36,357 



 

 

 

 

 



At November 30, 2018, capital in progress on the balance sheet included £5.7 million Pound Sterling ($7.3 million in U.S. Dollars as converted at exchange rates as of November 30, 2018) associated with capital costs related to the purchase of the Company’s new office building and related land in Milton Keynes, England, which will house employees of the Company’s EMEA segment that are based in the United Kingdom. The Company expects to incur additional capital costs related to the buildout of the acquired building and for the purchase of new furniture, fixtures and equipment. Upon completion of the buildout, the Company will place these assets into service and reclassify the amounts recorded in capital in progress to the respective fixed asset categories, which includes amounts attributable to the land. Since all assets associated with this new office building are denominated in Pound Sterling, amounts will fluctuate in U.S. Dollars from period to period due to changes in foreign currency exchange rates. For further information, see the Liquidity and Capital Resources section in Part I—Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”.











    



11

 


 

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, 2018

$

85,449 

 

$

8,962 

 

$

1,210 

 

$

95,621 

Translation adjustments

 

(8)

 

 

(66)

 

 

 -

 

 

(74)

Balance as of November 30, 2018

$

85,441 

 

$

8,896 

 

$

1,210 

 

$

95,547 



 

 

 

 

 

 

 

 

 

 

 

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, 2018, the date of its most recent annual goodwill impairment test. To date, there have been no impairment losses identified and recorded related to the Company’s goodwill.



Definite-lived Intangible Assets



The Company’s definite-lived intangible assets, which include the 2000 Flushes, Spot Shot, Carpet Fresh, 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 (in thousands):





 

 

 

 

 



 

 

 

 

 



November 30,

 

August 31,



2018

 

2018

Gross carrying amount

$

35,964 

 

$

36,122 

Accumulated amortization

 

(23,229)

 

 

(22,609)

Net carrying amount

$

12,735 

 

$

13,513 



 

 

 

 

 

There has been no impairment charge for the three months ended November 30, 2018 and there were no indicators of impairment identified 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, 2018 are summarized below (in thousands):





 

 

 

 

 

 

 

 

 

 

 



 

 

 

 

 

 

 

 

 

 

 



Americas

 

EMEA

 

Asia-Pacific

 

Total

Balance as of August 31, 2018

$

10,644 

 

$

2,869 

 

$

 -

 

$

13,513 

Amortization expense

 

(561)

 

 

(172)

 

 

 -

 

 

(733)

Translation adjustments

 

 

 

 

(45)

 

 

 -

 

 

(45)

Balance as of November 30, 2018

$

10,083 

 

$

2,652 

 

$

 -

 

$

12,735 



 

 

 

 

 

 

 

 

 

 

 



12

 


 

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



 

 

 

 

 



 

 

 

 

 



Trade Names

 

Customer-Based

Remainder of fiscal year 2019

$

1,840 

 

$

138 

Fiscal year 2020

 

2,052 

 

 

163 

Fiscal year 2021

 

1,262 

 

 

163 

Fiscal year 2022

 

1,262 

 

 

163 

Fiscal year 2023

 

1,016 

 

 

 -

Thereafter

 

4,676 

 

 

 -

Total

$

12,108 

 

$

627 



 

 

 

 

 

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.







Note 6.  Accrued and Other Liabilities



Accrued liabilities consisted of the following (in thousands): 



 

 

 

 

 



 

 

 

 

 



November 30,

 

August 31,



2018

 

2018

Accrued advertising and sales promotion expenses

$

10,474 

 

$

11,972 

Accrued professional services fees

 

1,363 

 

 

1,712 

Accrued sales taxes and other taxes

 

904 

 

 

1,642 

Accrued liability forward contract (1)

 

 -

 

 

6,893 

Other

 

4,641 

 

 

4,021 

Total

$

17,382 

 

$

26,240 



 

 

 

 

 

(1)

This accrued liability as of August 31, 2018 relates to a foreign currency forward contract that the Company’s U.K. subsidiary entered into with Bank of America to sell U.S. Dollars and receive Pound Sterling. This foreign currency forward contract matured on August 30, 2018, but the settlement of the currencies in the amount of $6.9 million did not occur until September 4, 2018. As a result, as of August 31, 2018, the Company owed Bank of America $6.9 million which was recorded in accrued and other liabilities. Bank of America also owed the Company $6.9 million equivalent in Pound Sterling and this was recorded in other current assets as of August 31, 2018.

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





 

 

 

 

 



 

 

 

 

 



November 30,

 

August 31,



2018

 

2018

Accrued incentive compensation

$

2,219 

 

$

6,719 

Accrued payroll

 

3,517 

 

 

3,792 

Accrued profit sharing

 

3,373 

 

 

2,561 

Accrued payroll taxes

 

1,732 

 

 

1,236 

Other

 

602 

 

 

515 

Total

$

11,443 

 

$

14,823 



 

 

 

 

 









13

 


 

Note 7.  Debt



As of November 30, 2018, 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. Since November 15, 2017, this note agreement has been amended once on February 23, 2018. The Series A Notes 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. During the three months ended November 30, 2018, the Company repaid $0.4 million in principal on the Series A Notes pursuant to its semi-annual principal payment requirements.



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 as agreed upon amongst the Company and the purchasing parties 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.



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 six times, most recently on February 23, 2018. 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 autoborrow 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 $15.9 million in net borrowings outstanding under the autoborrow agreement as of November 30, 2018.



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, 2018, the Company had no new borrowings under the revolving credit facility and repaid $20.0 million in short-term borrowings outstanding under the line of credit during the first quarter of fiscal year 2019. As of November 30, 2018, the Company had a balance of $44.0 million of outstanding draws on the line of credit, which was classified as long-term based on management’s ability and intent to refinance with successive short-term borrowings for a period of at least twelve months.



14

 


 

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









 

 

 

 

 



 

 

 

 

 



November 30,

 

August 31,



2018

 

2018

Short-term borrowings:

 

 

 

 

 

Revolving credit facility, short-term

$

 -

 

$

20,000 

Revolving credit facility, autoborrow feature

 

15,862 

 

 

2,800 

Series A Notes, current portion of long-term debt

 

800 

 

 

800 

Total short-term borrowings

 

16,662 

 

 

23,600 



 

 

 

 

 

Long-term borrowings:

 

 

 

 

 

Revolving credit facility

 

44,000 

 

 

44,000 

Series A Notes

 

18,400 

 

 

18,800 

Total long-term borrowings

 

62,400 

 

 

62,800 

Total

$

79,062 

 

$

86,400 



 

 

 

 

 

Both the Note Agreement and the 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 to the other lender’s agreement.



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, 2018 the Company was in compliance with all debt covenants under both the Note Agreement and the Credit Agreement.



Note 8.  Share Repurchase Plan



On June 19,  2018, the Company’s Board of Directors approved a share buy-back plan. Under the plan, which became effective on September 1, 2018, the Company is authorized to acquire up to $75.0 million of its outstanding shares through August 31, 2020. 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, 2018 through November 30, 2018, the Company repurchased 41,184 shares at an average price of $166.60 per share, for a total cost of $6.9 million under this $75.0 million plan.

15

 


 



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,



2018

 

2017

Net income

$

13,279 

 

$

12,630 

Less: Net income allocated to

 

 

 

 

 

participating securities

 

(87)

 

 

(82)

Net income available to common shareholders

$

13,192 

 

$

12,548 



 

 

 

 

 

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,



2018

 

2017

Weighted-average common

 

 

 

 

 

shares outstanding, basic

 

13,846 

 

 

13,976 

Weighted-average dilutive securities

 

36 

 

 

35 

Weighted-average common

 

 

 

 

 

shares outstanding, diluted

 

13,882 

 

 

14,011 



 

 

 

 

 

For the three months ended November 30, 2018, weighted-average stock-based equity awards outstanding that are non-participating securities in the amount of 4,328 were excluded from the calculation of diluted EPS under the treasury stock method as they were anti-dilutive. For the three months ended November 30, 2017, there were no anti-dilutive stock-based equity awards outstanding.







Note 10.  Revenue Recognition



On September 1, 2018, the Company adopted ASC 606 using the modified retrospective method and recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening retained earnings. As a result, the Company recognized a reduction of $0.3 million to opening retained earnings as the cumulative effect of adopting this new revenue standard. This adjustment did not have a material impact on the Company’s consolidated financial statements. Results for reporting periods beginning after September 1, 2018 are presented under ASC 606, while prior period amounts are presented under the accounting standards in effect for those respective periods.



As a result of the adoption of ASC 606 and management’s consideration of the factors in the five-step approach, the timing for recognizing revenue has been delayed for certain customers and accelerated for others, particularly for customers in the Company’s Americas segment. Under ASC 606, the timing of revenue recognition is determined when control transfers to our customers, while under the prior revenue recognition guidance, timing of revenue was focused more on the transfer of the risks and rewards. Under the prior revenue recognition guidance, the Company effectively retained the risk of loss until the goods reached the customer as if those customers had designated shipping terms. Under ASC 606, transfer of risks and rewards is just one indicator of whether control has transferred and management determined that revenue, after considering all indicators, is recognized for those customers when goods are shipped or picked up from the Company’s warehouses. The Company assessed the financial line items impacted by adopting this standard compared to the previous revenue guidance, and management concluded that any differences in financial statement line items are inconsequential to the Company’s consolidated financial statements for the three months ended November 30, 2018.





16

 


 

The following paragraphs detail the Company’s revenue recognition policies and provide additional information used in its determination of net sales and contract balances under ASC 606.



Revenue Recognition

The Company generates revenue from sales of its products to customers in its Americas, EMEA and Asia-Pacific segments.   Product sales for the Company include maintenance products and homecare and cleaning products. The Company recognizes revenue related to the sale of these products when it satisfies a performance obligation in an amount reflecting the consideration to which it expects to be entitled. Sales are recorded net of allowances for damaged goods and other sales returns, sales incentives, trade promotions and cash discounts. The Company applies a five-step approach in determining the amount and timing of revenue to be recognized which includes the following: (1) identifying the contract with a customer, (2) identifying the performance obligations in the contract, (3) determining the transaction price, (4) allocating the transaction price to the performance obligations in the contract and (5) recognizing revenue when the performance obligation is satisfied.

Contracts with customers are renewable periodically and contain terms and conditions with respect to payment, delivery, sales incentives, warranty and supply, but do not require mandatory purchase commitments. In the absence of a specific sales agreement with a customer, the Company’s standard terms and conditions at the time of acceptance of purchase orders apply to the sales transaction. The Company’s standard terms and conditions are either included in a standalone document or on the Company’s price lists or both, and these standard terms and conditions are provided to the customer prior to the sales transaction. The Company considers the customer purchase orders, governed by specific sales agreements or the Company’s standard terms and conditions, to be the contract with the customer. The Company considers each transaction to sell products as separate and distinct, with no additional promises made, and as a result, all of the Company's sales are single performance obligation arrangements for which the transaction price is equivalent to the stated price of the product, net of any variable consideration for items such as sales returns, discounts, rebates and other sales incentives. The Company recognizes sales at a point in time upon transferring control of its product to the customer. This typically occurs when products are shipped or delivered, depending on when risks of loss and title have passed to the customer per the terms of the contract. 

Taxes imposed by governmental authorities on the Company's revenue, such as sales taxes and value added taxes, are excluded from net sales. Sales commissions are paid to certain third-parties based upon specific sales levels achieved during a defined time period. Since the Company’s contracts related to these sales commissions do not exceed one year, the Company has elected as a practical expedient to expense these payments as incurred. The Company also elected the practical expedient related to shipping and handling fees which allows the Company to account for freight costs as fulfillment activities instead of assessing such activities as performance obligations. The Company’s freight costs are sometimes paid by the customer, while other times, the freight costs are included in the sales price. The Company does not account for freight costs as a separate performance obligation, but rather as an activity performed to transfer the products to its customers.  



Variable Consideration - Sales Incentives



In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment related to variable consideration to determine the net consideration to which the Company expects to be entitled. The Company records estimates of variable consideration, which primarily includes rebates (cooperative marketing programs and volume-based discounts), coupon offers, cash discount allowances, and sales returns, as a reduction of sales in its consolidated statements of operations. These estimates are based on the most likely outcome method considering all reasonably available information, including current and past trade promotion spending patterns, status of trade promotion activities,  the interpretation of historical spending trends by customer and category, customer agreements and/or currently known factors that arise in the normal course of business. The Company reviews its assumptions and adjusts the sales incentive allowances accordingly on a quarterly basis.



Rebates — The Company offers various on-going trade promotion programs with customers that require management to estimate and accrue for the expected costs of such programs. These programs include cooperative marketing, volume-based discounts, shelf price reductions, consideration and allowances given to retailers for shelf space and/or favorable display positions in their stores and other promotional activities. Costs related to rebates, cooperative advertising and other promotional activities are recorded as a reduction to sales upon delivery of the Company’s products to its customers. As of November 30, 2018, the Company had a $8.4 million balance in rebate liabilities, which are included in accrued liabilities on the Company’s condensed consolidated balance sheets, and recorded approximately $4.3 million in rebates as a reduction to sales during the first quarter of fiscal year 2019.

17

 


 

Coupons — Coupon costs are based upon historical redemption rates and are recorded as a reduction to sales as incurred, which is when the coupons are circulated. As of November 30, 2018, the Company had a $0.2 million balance in coupon redemption liabilities, which are included in accrued liabilities on the Company’s condensed consolidated balance sheets, and recorded approximately $0.1 million in coupons as a reduction to sales during the first quarter of fiscal year 2019.



Cash discounts — The Company offers certain of its customers a cash discount program to incentivize them to pay the invoice earlier than the normal payment date on the invoice. Although payment terms vary, most customers typically pay within 30 to 90 days of invoicing. As of November 30, 2018, the Company had a $0.4 million balance in the allowance for cash discounts and recorded approximately $1.0 million in cash discounts as a reduction to sales during the first quarter of fiscal year 2019.

 

Sales returns — The Company recognizes revenue net of allowances for estimated returns, which is based on historical return rates, with a corresponding reduction to cost of products sold. Although the Company typically does not have definitive sales return provisions included in the contract terms with its customers, when such provisions have been included, they have not been significant. Under the provisions of ASC 606, the Company is now required to present its provision for sales returns on a gross basis as a liability. The Company’s refund liability for sales returns was $0.4 million at November 30, 2018, which is included in accrued liabilities and represents the amount expected to be owed to the customers for product returns. The Company now also records an asset for the value of inventory that represents the right to recover products from customers associated with sales returns. The value of this inventory is recorded to other current assets and the balance in this account associated with product returns was $0.1 million at November 30, 2018In prior periods, the Company recognized a provision for estimated sales returns on a net basis, and as allowed under the modified retrospective approach, the comparative prior period information has not been restated for this change.  



Disaggregation of Revenue



The Company's revenue is presented on a disaggregated basis in Note 14 – Business Segments and Foreign Operations included in this report. The Company discloses certain information about its business segments, which are determined consistent with the way the Company’s Chief Operating Decision Maker organizes and evaluates financial information internally for making operating decisions and assessing performance. The Chief Operating Decision Maker assesses and measures revenue based on geographic area and product groups.



Contract Balances



Contract liabilities consisted of deferred revenue related to undelivered products. Deferred revenue is recorded when payments have been received from customers for undelivered products. Revenue is subsequently recognized when revenue recognition criteria are met, generally when control of the product transfers to the customer. The Company had contract liabilities of $1.1 million and $2.0 million as of September 1, 2018 and November 30, 2018, respectively. All of the $1.1 million that was included in contract liabilities as of September 1, 2018 was recognized to revenue during the three months ended November 30, 2018. These contract liabilities are recorded in accrued liabilities on the Company’s condensed consolidated balance sheets. The Company did not have any contract assets as of September 1, 2018 and November 30, 2018.



Note 11.  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 $0.4 million and $0.3 million for the three months ended November 30, 2018 and 2017, respectively. Accounts receivable from Tractor Supply were $0.5 million at both November 30, 2018 and August 31, 2018.  





18

 


 

Note 12.  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 has definitive minimum purchase obligations included in the contract terms with certain of its contract manufacturers, when such obligations have been included, they have either been immaterial or the minimum amounts have been such that they are well below the volume of goods that the Company has historically purchased. 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, 2018,  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 mattersExcept as disclosed herein, there are no unasserted claims or pending proceedings for claims against the Company that the Company believes may result in a reasonably possible loss, the Company believes that no reasonably possible outcome of any such claim will have a materially adverse impact on the Company’s financial condition, results of operations or cash flows.



On or about July 31, 2018, claims for damages were asserted against the Company in an “Amended Statement of Claim” filed in a civil proceeding in Malaysia before the High Court of Malaya at Shah Alam in the State of Selangor Darul Ehsan, Civil Suit No. BA-22NCvC-531-09/2017 (the “Malay Litigation”). The Malay Litigation was first filed in September 2017 by Sunway Winstar Sdn. Bhd. (“Sunway”) against a former employee of Sunway and the former employee’s new employer, Ekotrends Capital Sdn. Bdh (“Ekotrends”). Sunway was a marketing distributor for the Company for the country of Malaysia from 2004 until 2017. Ekotrends is an affiliate of Bun Seng Hardware Sdn. Bdh. (“Bun Seng”), the Company’s current marketing distributor for Malaysia. The Malay Litigation asserted that the former employee and Ekotrends misappropriated confidential information, including customer lists, associated with Sunway’s terminated relationship as the Company’s exclusive marketing distributor. By order of the court following the Company’s motion to intervene in order to protect and assert its right to ownership of the customer lists and other confidential information associated with the Company’s business in Malaysia, Sunway filed its Amended Statement of Claim to add Bun Seng as a defendant and to assert new and separate claims against the Company alleging conspiracy with Ekotrends and Bun Seng to injure the business and reputation of Sunway.



The Company denies the allegations asserted by Sunway and will vigorously defend itself in the Malay Litigation. The Company believes that an unfavorable outcome in the Malay Litigation is not probable, but that an award of damages is reasonably possible. Due to uncertainty as to the theories for recovery of damages asserted by Sunway against the Company and as to results in proceedings under Malaysian law, the Company is unable to estimate the possible loss or range of loss. 



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, 2018, which was filed with the SEC on October 22, 2018.

19

 


 

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, 2018.



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, 2018.



Note 13.  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.



On December 20, 2017 the United States House of Representatives and the Senate passed the “Tax Cuts and Jobs Act” (the “Tax Act”), which was signed into law on December 22, 2017 and became effective beginning January 1, 2018. Due to the complexity of the Tax Act, the SEC issued guidance in SAB 118 which clarified the accounting for income taxes under ASC 740 if certain information was not yet available, prepared or analyzed in reasonable detail to complete the accounting for income tax effects of the Tax Act. SAB 118 provided for a measurement period of up to one year after the enactment of the Tax Act, during which time the required analyses and accounting must have been completed. During the measurement period, (i) income tax effects of the Tax Act must have been reported if the accounting was completed; (ii) provisional amounts must have been reported for income tax effects of the Tax Act for which the accounting was incomplete but a reasonable estimate could be determined; and (iii) provisional amounts were not required to be reported for income tax effects of the Tax Act for which a reasonable estimate could not be determined. During fiscal year 2018, the Company recorded provisional amounts for the income tax effects of the changes in tax law and tax rates, as reasonable estimates were determined by management during this period. During the first quarter of fiscal year 2019, the Company did not significantly adjust provisional amounts recorded in the prior fiscal year and the SAB 118 measurement period subsequently ended on December 22, 2018. Although the Company no longer considers these amounts to be provisional, the determination of the Tax Act’s income tax effects may change following future legislation or further interpretation of the Tax Act based on the publication of recently proposed U.S. Treasury regulations and guidance from the Internal Revenue Service and state tax authorities.



On November 28, 2018 the U.S. Treasury released proposed regulations that specifically address, and are inconsistent with, the Company’s position regarding the interpretation and application of the Tax Act’s mandatory one-time “toll tax” on unremitted foreign earnings. These newly proposed regulations are subject to the regulatory review process prior to finalization and do not take precedence over enacted law. As such, the Company’s position regarding its interpretation and application of the toll tax has not changed



Management has assessed the fiscal year 2019 impacts of the Tax Act and has determined that the Company will lose the benefit from the Domestic Production Activities Deduction. However, the Company will also acquire certain net benefits beginning in fiscal year 2019 from the favorable impacts of the Foreign Derived Intangible Income (“FDII”) section of the Tax Act, partially offset by the unfavorable impacts of the Global Intangible Low-Taxed Income (“GILTI”). Another significant section of the Tax Act, the Base Erosion Anti-Abuse Tax (“BEAT”), will not apply to the Company’s fiscal year 2019 as the Company does not meet the minimum revenue requirements under the BEAT. The Company will continue to

20

 


 

evaluate the BEAT to determine whether it will have any significant impact on the Company’s consolidated financial statements in future years.



The Tax Act requires taxpayers to elect an accounting method for expenses allocated to the GILTI calculation. As ASC 740, Income Taxes, does not directly address the accounting for GILTI, the FASB staff concluded that entities must make an accounting policy election to either: (1) treat GILTI as a period cost if and when incurred, or (2) recognize deferred taxes for basis differences that are expected to reverse as GILTI in future years. During the first quarter of fiscal year 2019, management has made the accounting policy election to account for expenses allocated to the GILTI calculation under the period cost method.



The provision for income taxes was 17.6% and 23.7% of income before income taxes for the three months ended November 30, 2018 and 2017, respectively. The decrease in the effective income tax rate from period to period was primarily due to the favorable impacts of the reduction of the U.S. corporate federal statutory tax rate from 35% to 21% resulting from the Tax Act, which became effective during the second quarter of the Company’s fiscal year 2018. The Company is subject to taxation in the U.S. and in various state and foreign jurisdictions. Due to expired statutes and closed audits, 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. Generally, for the majority of state and foreign jurisdictions where the Company does business, periods prior to fiscal year 2015 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.



Note 14.  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, 2018:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net sales

$

47,791 

 

$

38,745 

 

$

14,746 

 

$

 -

 

$

101,282 

Income from operations

$

11,302 

 

$

8,375 

 

$

3,741 

 

$

(7,017)

 

$

16,401 

Depreciation and

 

 

 

 

 

 

 

 

 

 

 

 

 

 

amortization expense

$

1,131 

 

$

672 

 

$

70 

 

$

52 

 

$

1,925 

Interest income

$

 

$

18 

 

$

27 

 

$

 -

 

$

51 

Interest expense

$

708 

 

$

 -

 

$

 

$

 -

 

$

710