WD 40 CO - Quarter Report: 2019 November (Form 10-Q)

wdfc-20191130x10q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


þ	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended November 30, 2019


¨	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

Commission Company Name: WD 40 CO

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 þ 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 þ 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 þ 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.¨

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of exchange on which registered
Common stock, par value $0.001 per share	WDFC	NASDAQ

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

Yes ¨ No þ

The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of January 3, 2020 was 13,706,715.

WD-40 COMPANY

QUARTERLY REPORT ON FORM 10-Q

For the Quarter Ended November 30, 2019

TABLE OF CONTENTS



PART I — FINANCIAL INFORMATION
		Page
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Income	5
	Condensed Consolidated Statement of Shareholders’ Equity	6
	Condensed Consolidated Statements of Cash Flows	7
	Notes to Condensed Consolidated Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	35

PART II — OTHER INFORMATION

Item 1.	Legal Proceedings	36
Item 1A.	Risk Factors	36
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 6.	Exhibits	37



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,
	2019		2019
Assets
Current assets:
Cash and cash equivalents	$	28,680	$	27,233
Trade accounts receivable, less allowance for doubtful
accounts of $320 and $300 at November 30, 2019
and August 31, 2019, respectively		70,058		72,864
Inventories		43,703		40,682
Other current assets		6,783		7,216
Total current assets		149,224		147,995
Property and equipment, net		50,103		45,076
Goodwill		95,573		95,347
Other intangible assets, net		10,124		10,652
Operating lease right-of-use assets		8,734		-
Deferred tax assets, net		428		403
Other assets		3,305		3,189
Total assets	$	317,491	$	302,662

Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable	$	18,457	$	18,727
Accrued liabilities		20,041		18,513
Accrued payroll and related expenses		13,361		15,301
Short-term borrowings		29,088		21,205
Income taxes payable		73		844
Total current liabilities		81,020		74,590
Long-term borrowings		61,152		60,221
Deferred tax liabilities, net		11,784		11,688
Long-term operating lease liabilities		7,084		-
Other long-term liabilities		10,459		10,688
Total liabilities		171,499		157,187

Commitments and Contingencies (Note 13)

Shareholders' equity:
Common stock ― authorized 36,000,000 shares, $0.001 par value;
19,796,319 and 19,773,977 shares issued at November 30, 2019 and
August 31, 2019, respectively; and 13,714,203 and 13,718,661 shares
outstanding at November 30, 2019 and August 31, 2019, respectively		20		20
Additional paid-in capital		154,706		155,132
Retained earnings		377,848		374,060
Accumulated other comprehensive loss		(30,370)		(32,482)
Common stock held in treasury, at cost ― 6,082,116 and 6,055,316
shares at November 30, 2019 and August 31, 2019, respectively		(356,212)		(351,255)
Total shareholders' equity		145,992		145,475
Total liabilities and shareholders' equity	$	317,491	$	302,662

See accompanying notes to condensed consolidated financial statements.


WD-40 COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited and in thousands, except per share amounts)

	Three Months Ended November 30,
		2019		2018

Net sales	$	98,556	$	101,282
Cost of products sold		45,013		45,451
Gross profit		53,543		55,831

Operating expenses:
Selling, general and administrative		32,599		32,731
Advertising and sales promotion		5,590		5,966
Amortization of definite-lived intangible assets		650		733
Total operating expenses		38,839		39,430

Income from operations		14,704		16,401

Other income (expense):
Interest income		25		51
Interest expense		(442)		(710)
Other income (expense), net		5		376
Income before income taxes		14,292		16,118
Provision for income taxes		2,098		2,839
Net income	$	12,194	$	13,279

Earnings per common share:
Basic	$	0.88	$	0.95
Diluted	$	0.88	$	0.95

Shares used in per share calculations:
Basic		13,714		13,846
Diluted		13,746		13,882


See accompanying notes to condensed consolidated financial statements.

‎



WD-40 COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited and in thousands)

	Three Months Ended November 30,
		2019		2018

Net income	$	12,194	$	13,279
Other comprehensive (loss) income:
Foreign currency translation adjustment		2,112		(1,631)
Total comprehensive income	$	14,306	$	11,648

See accompanying notes to condensed consolidated financial statements.



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, 2019	19,773,977	$	20	$	155,132	$	374,060	$	(32,482)	6,055,316	$	(351,255)	$	145,475
Issuance of common stock under share-based
compensation plan, net of shares withheld for taxes	22,342				(2,640)									(2,640)
Stock-based compensation					2,214									2,214
Cash dividends ($0.61 per share)							(8,406)							(8,406)
Acquisition of treasury stock										26,800		(4,957)		(4,957)
Foreign currency translation adjustment									2,112					2,112
Net income							12,194							12,194
Balance at November 30, 2019	19,796,319	$	20	$	154,706	$	377,848	$	(30,370)	6,082,116	$	(356,212)	$	145,992


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



See accompanying notes to condensed consolidated financial statements.



WD-40 COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited and in thousands)

	Three Months Ended November 30,
	2019		2018
Operating activities:
Net income	$	12,194	$	13,279
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization		1,957		1,925
Net gains on sales and disposals of property and equipment		(64)		(3)
Deferred income taxes		57		569
Stock-based compensation		2,214		1,965
Unrealized foreign currency exchange gains		394		210
Provision for bad debts		6		10
Changes in assets and liabilities:
Trade accounts receivable		3,630		(2,302)
Inventories		(2,358)		(2,851)
Other assets		462		8,037
Operating lease assets and liabilities, net		195		-
Accounts payable and accrued liabilities		(332)		(8,089)
Accrued payroll and related expenses		(2,234)		(3,310)
Other long-term liabilities and income taxes payable		(915)		(431)
Net cash provided by operating activities		15,206		9,009

Investing activities:
Purchases of property and equipment		(5,965)		(1,292)
Proceeds from sales of property and equipment		195		58
Net cash used in investing activities		(5,770)		(1,234)

Financing activities:
Treasury stock purchases		(4,957)		(6,863)
Dividends paid		(8,406)		(7,522)
Repayments of long-term senior notes		(400)		(400)
Net proceeds (repayments) of revolving credit facility		7,883		(6,938)
Shares withheld to cover taxes upon conversions of equity awards		(2,640)		(2,425)
Net cash used in financing activities		(8,520)		(24,148)
Effect of exchange rate changes on cash and cash equivalents		531		(919)
Net increase (decrease) in cash and cash equivalents		1,447		(17,292)
Cash and cash equivalents at beginning of period		27,233		48,866
Cash and cash equivalents at end of period	$	28,680	$	31,574

See accompanying notes to condensed consolidated financial statements.

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, 2019 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, 2019, which was filed with the SEC on October 22, 2019.

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.

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, 2019, the Company had a notional amount of $9.6 million outstanding in foreign currency forward contracts, which will mature on February 28, 2020. Unrealized net gains and losses related to foreign currency forward contracts were not significant at November 30, 2019 and November 30, 2018. Realized net gains and losses related to foreign currency forward contracts were not significant for both the three months ended November 30, 2019 and November 30, 2018. Both unrealized and realized net gains and losses are recorded in other income on the Company’s consolidated statements of operations.

Fair Value of Financial Instruments

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, 2019, 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, based on Level 2 inputs, primarily due to their short-term maturities. In addition, the carrying value of borrowings held under the Company’s revolving credit facility approximates fair value, based on Level 2 inputs, due to the variable nature of underlying interest rates, which generally reflect market conditions. 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, based on Level 2 inputs, was approximately $19.2 million as of November 30, 2019, 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 $18.4 million. During the three months ended November 30, 2019, 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 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 leases with fixed payment obligations and terms longer than twelve months. Leases are 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. The Company adopted this new guidance on September 1, 2019 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, entities shall 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 only apply for periods presented that are after the date of adoption and does not affect comparative periods.

‎

Upon adoption, the Company elected practical expedients to: (i) not separate lease components from nonlease components for real estate – office buildings, machinery and equipment, lab equipment, office equipment, furniture and fixtures, and IT equipment; and (ii) exclude leases with an initial term of 12 months or less from the consolidated balance sheets and will recognize related lease payments in the consolidate statements of operations on a straight-line basis over the lease term. The Company did not elect the hindsight practical expedient and also did not elect the package of practical expedients that would allow the Company to retain its conclusions under prior guidance for lease classification and initial direct costs for leases that commenced before the September 1, 2019 implementation date.

During the implementation of this new standard, management was focused principally on, but not limited to, developing a complete inventory of the Company’s lease contracts and the terms and conditions contained within these contracts to appropriately account for them under the new lease model. Additionally, the Company has implemented updates to its accounting policies, business processes, systems and internal controls in support of adopting this new standard. Upon adoption on September 1, 2019, the Company’s total assets increased by $9.0 million and total liabilities increased by $9.2 million in the Company’s consolidated balance sheets. The standard did not have a material impact on the consolidated statements of operations or cash flows. Upon adoption, the cumulative effect of initially applying the guidance was insignificant and therefore no adjustment to the opening balance of retained earnings was made on September 1, 2019. See Note 6 – Leases for additional information and incremental disclosures related to the adoption of this standard.

Recently Issued Accounting Standards

Recent accounting pronouncements pending adoption are either not applicable or are not expected to have a material impact on the Company’s consolidated balance sheets, statement of operations or cash flows.

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,
	2019		2019
Product held at third-party contract manufacturers	$	3,564	$	3,175
Raw materials and components		5,772		4,367
Work-in-process		452		257
Finished goods		33,915		32,883
Total	$	43,703	$	40,682

‎

Note 4. Property and Equipment

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



	November 30,		August 31,
	2019		2019
Machinery, equipment and vehicles	$	19,668	$	19,356
Buildings and improvements		27,902		17,391
Computer and office equipment		5,528		5,328
Software		10,365		10,189
Furniture and fixtures		2,596		2,039
Capital in progress		9,801		16,747
Land		4,335		3,444
Subtotal		80,195		74,494
Less: accumulated depreciation and amortization		(30,092)		(29,418)
Total	$	50,103	$	45,076

At August 31, 2019, capital in progress on the balance sheet included £9.0 million Pound Sterling ($10.9 million in U.S. Dollars as converted at exchange rates as of August 31, 2019) associated with capital costs related to the purchase of the Company’s new office building and related land in Milton Keynes, England. Upon completion of the buildout and relocation of employees based in the United Kingdom to this new office building in the first quarter of fiscal year 2020, the Company placed these assets into service and reclassified 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.

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, 2019	$	85,420	$	8,717	$	1,210	$	95,347
Translation adjustments		24		202		-		226
Balance as of November 30, 2019	$	85,444	$	8,919	$	1,210	$	95,573

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, 2019, 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,
	2019		2019
Gross carrying amount	$	36,020	$	35,531
Accumulated amortization		(25,896)		(24,879)
Net carrying amount	$	10,124	$	10,652

There has been no impairment charge for the three months ended November 30, 2019 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, 2019 are summarized below (in thousands):



	Americas		EMEA		Asia-Pacific		Total
Balance as of August 31, 2019	$	8,401	$	2,251	$	-	$	10,652
Amortization expense		(561)		(89)		-		(650)
Translation adjustments		-		122		-		122
Balance as of November 30, 2019	$	7,840	$	2,284	$	-	$	10,124

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 2020	$	1,442	$	123
Fiscal year 2021		1,264		165
Fiscal year 2022		1,264		165
Fiscal year 2023		1,018		-
Fiscal year 2024		1,012		-
Thereafter		3,671		-
Total	$	9,671	$	453

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. Leases

The Company leases real estate for its regional sales offices, a research and development facility, and offices located at its international subsidiaries and branch locations. In addition, the Company leases an automobile fleet in the United States. The Company has also identified warehouse leases within certain third-party distribution center service contracts. All other leases are insignificant to the Company’s consolidated financial statements. To determine if a contract contains a lease, the Company assesses its contracts and determines if there is an identified asset for which the Company has obtained the right to control, as defined in ASC 842.

The Company records right-of-use assets and lease liabilities on its consolidated balance sheets for leases with an expected term greater than one year. The lease term includes the committed lease term, also taking into account early termination and renewal options that management is reasonably certain to exercise. For leases that do not have a readily determinable implicit rate, the Company uses its estimated secured incremental borrowing rate based on the information available at the lease commencement date to determine the present value of lease payments. The Company’s estimated secured incremental borrowing rate is determined using a portfolio approach based on the rate of interest the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The Company uses the unsecured borrowing rate and risk-adjusts that rate to approximate a collateralized rate in the currency of the lease. As of November 30, 2019, finance leases were not significant and all leases recorded on the Company’s consolidated balances sheets were operating leases. Residual value guarantees, restrictions, covenants, sublease income, net gains or losses from sale and leaseback transactions, and transactions with related parties associated with leases are also not significant. The Company has made the accounting policy election to use certain ongoing practical expedients made available by ASC 842 to: (i) not separate lease components from nonlease components for real estate – office buildings, machinery and equipment, lab equipment, office equipment, furniture and fixtures, and IT equipment; and (ii) exclude leases with an initial term of 12 months or less (“short-term” leases) from the consolidated balance sheets and will recognize related lease payments in the consolidated statements of operations on a straight-line basis over the lease term. However, the Company had no significant short-term leases as of November 30, 2019.

Upon adoption of ASC 842 on September 1, 2019, the Company’s total assets increased by $9.0 million and total liabilities increased $9.2 million in the Company’s consolidated balance sheets. The adoption of this standard did not have a material impact on retained earnings, the consolidated statements of operations or cash flows. The Company obtained no significant additional right-of-use assets in exchange for lease obligations during the three months ended November 30, 2019.

The Company recorded $0.5 million in lease expense included in selling, general and administrative expenses, and an insignificant amount of lease expense classified within cost of products sold for the three months ended November 30, 2019. During the three months ended November 30, 2019, the Company paid cash of $0.5 million related to lease liabilities. Variable lease expense under the Company’s lease agreements were not significant for the three months ended November 30, 2019. As of November 30, 2019, the weighted-average remaining lease term was 7.39 years and the weighted-average discount rate was 3.1% for the Company’s operating leases. There were no leases that had not yet commenced as of November 30, 2019 that will create additional significant rights and obligations for the Company.

Right-of-use assets and lease liabilities consisted of the following (in thousands):


	November 30,
	2019
Assets:
Operating lease right-of-use assets	$	8,734

Liabilities:
Current operating lease liabilities⁽¹⁾		1,714
Long-term operating lease liabilities		7,084
Total operating lease liabilities	$	8,798

(1)Current operating lease liabilities are classified in accrued liabilities on the Company’s consolidated balance sheets.

The Company’s maturities of its operating lease liabilities, including early termination and renewal options that management is reasonably certain to exercise, are as follows:


	Operating
(Dollars in thousands)	Leases
Remainder of fiscal year 2020	$	1,516
Fiscal year 2021		1,705
Fiscal year 2022		1,291
Fiscal year 2023		1,137
Fiscal year 2024		1,104
Thereafter		3,235
Total undiscounted future cash flows	$	9,988
Less: Interest		(1,190)
Present value of lease liabilities	$	8,798

Future fiscal year minimum payments under non-cancelable operating leases in accordance with ASC 840 as of August 31, 2019 were as follows:


	Operating
(Dollars in thousands)	Leases
Fiscal year 2020	$	1,988
Fiscal year 2021		1,470
Fiscal year 2022		827
Fiscal year 2023		348
Fiscal year 2024		975
Thereafter		932
Total undiscounted future cash flows	$	6,540

Note 7. Accrued and Other Liabilities

Accrued liabilities consisted of the following (in thousands):



	November 30,		August 31,
	2019		2019
Accrued advertising and sales promotion expenses	$	10,248	$	10,438
Accrued professional services fees		1,505		1,744
Accrued sales taxes and other taxes		1,401		1,418
Current operating lease liabilities		1,714		-
Other ⁽¹⁾		5,173		4,913
Total	$	20,041	$	18,513

(1)At August 31, 2019, other accrued liabilities on the balance sheet included £1.4 million Pound Sterling ($1.7 million in U.S. Dollars as converted at exchange rates as of August 31, 2019) associated with capital costs related to buildout costs of the Company’s new office building in Milton Keynes, England. This new office building was completed in the first quarter of fiscal year 2020 and it currently houses employees of the Company’s EMEA segment that are based in the United Kingdom.

‎

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



	November 30,		August 31,
	2019		2019
Accrued incentive compensation	$	2,683	$	7,259
Accrued payroll		3,481		3,454
Accrued profit sharing		3,311		2,503
Accrued payroll taxes		3,163		1,566
Other		723		519
Total	$	13,361	$	15,301

Note 8. Debt

As of November 30, 2019, 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 in May and November of each year 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 in May and November of each year. During the three months ended November 30, 2019, 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 15.5 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 seven times, most recently on January 22, 2019, (the “Seventh Amendment”) which extended the maturity date of the revolving credit facility from May 13, 2020 to January 22, 2024 and amended the Credit Agreement to add the Company’s U.K. subsidiary as a designated borrower and permit borrowings in both Euros and Pound Sterling. The Seventh Amendment also reduced the revolving commitment from $175.0 million to $125.0 million until March 22, 2019 and to $100.0 million thereafter, as well as established a sublimit for the revolving commitment for borrowing by the Company’s U.K. operating subsidiary in the amount of $50.0 million.

Per the terms of the amended agreement, the aggregate amount of the Company’s capital stock that it may repurchase may not exceed $150.0 million during the period from January 22, 2019 to the maturity date of the agreement so long as no default exists immediately prior and after giving effect thereto. In addition, the Credit Agreement features 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. Per the terms of the amended agreement, the Company’s outstanding balance on the autoborrow agreement cannot exceed an aggregate amount of $30.0 million. 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 $13.3 million in net borrowings outstanding under the autoborrow agreement as of November 30, 2019.

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, 2019, the Company repaid $5.0 million in short-term borrowings outstanding under the line of credit. The Company maintains a balance of outstanding draws in U.S. Dollars in the Americas segment, as well as in Euros and Pounds Sterling in the EMEA segment. Euro and Pound Sterling denominated draws will fluctuate in U.S. Dollars from period to period due to changes in foreign currency exchange rates. As of November 30, 2019, the Company had a balance of $58.6 million of outstanding draws on the line of credit. Based on the Company’s ability and intent assessment, $43.6 million of this $58.6 million was classified as long-term and the remaining $15.0 million as short-term as of November 30, 2019.

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



	November 30,		August 31,
	2019		2019
Short-term borrowings:
Revolving credit facility, short-term	$	15,000	$	20,000
Revolving credit facility, autoborrow feature		13,288		405
Series A Notes, current portion of long-term debt		800		800
Total short-term borrowings		29,088		21,205

Long-term borrowings:
Revolving credit facility		43,552		42,221
Series A Notes		17,600		18,000
Total long-term borrowings		61,152		60,221
Total	$	90,240	$	81,426

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, 2019 the Company was in compliance with all debt covenants under both the Note Agreement and the Credit Agreement.

Note 9. 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 and will remain in effect through August 31, 2020, the Company is authorized to acquire up to $75.0 million of its outstanding shares. 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, 2019, the Company repurchased 202,755 shares at a total cost of $34.6 million under this $75.0 million plan. During the three months ended November 30, 2019, the Company repurchased 26,800 shares at an average price of $184.92 per share, for a total cost of $5.0 million under this $75.0 million plan.

Note 10. Earnings per Common Share

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



	Three Months Ended November 30,
	2019		2018
Net income	$	12,194	$	13,279
Less: Net income allocated to
participating securities		(67)		(87)
Net income available to common shareholders	$	12,127	$	13,192

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,
	2019		2018
Weighted-average common
shares outstanding, basic		13,714		13,846
Weighted-average dilutive securities		32		36
Weighted-average common
shares outstanding, diluted		13,746		13,882

For the three months ended November 30, 2019 and 2018, weighted-average stock-based equity awards outstanding that are non-participating securities in the amount of 5,729 and 4,328, respectively, were excluded from the calculation of diluted EPS under the treasury stock method as they were anti-dilutive.

Note 11. Revenue Recognition

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 these estimates 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, 2019, the Company had a $7.7 million balance in rebate liabilities, which are included in accrued liabilities on the Company’s condensed consolidated balance sheets, and recorded approximately $5.0 million in rebates as a reduction to sales during the first quarter of fiscal year 2020.

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. Coupon redemption liabilities, which are included in accrued liabilities on the Company’s condensed consolidated balance sheets, were not significant at November 30, 2019. Coupons recorded as a reduction to sales during the first quarter of fiscal year 2020 were also not significant.

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, 2019, the Company did not have a significant balance in the allowance for cash discounts. The Company recorded approximately $1.0 million in cash discounts as a reduction to sales during the first quarter of fiscal year 2020.

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 current revenue accounting standard, ASC 606, the Company is required to present its provision for sales returns on a gross basis as a liability. The Company’s refund liability for sales returns, which is included in accrued liabilities and represents the amount expected to be owed to the customers for product returns, was not significant at November 30, 2019. 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 not significant at November 30, 2019.

Disaggregation of Revenue

The Company's revenue is presented on a disaggregated basis in Note 15 – 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 consists 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 $1.6 million as of November 30, 2019. Contract liabilities were not significant as of August 31, 2019. 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 November 30, 2019.

Note 12. 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 $0.6 million for the three months ended November 30, 2019. Sales to Tractor Supply were not significant for the three months ended November 30, 2018. Accounts receivable from Tractor Supply were not significant at both November 30, 2019 and August 31, 2019.

Note 13. 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, 2019, 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, 2019, there were no unasserted claims or pending proceedings for claims against the Company that the Company believes will result in a probable loss for the Company and, as to claims 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.

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, 2019, which was filed with the SEC on October 22, 2019.

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, 2019.

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, 2019.

Note 14. 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 14.7% and 17.6% of income before income taxes for the three months ended November 30, 2019 and 2018, respectively. The decrease in the effective income tax rate from period to period was primarily due to an increase in excess tax benefits from settlements of stock-based equity awards that are recognized in the provision for income taxes, as well as a nonrecurring benefit from the release of liabilities associated with unrecognized tax benefits that resulted from the expiration of statutes.

The Company is subject to taxation in the U.S. and in various state and foreign jurisdictions. Due to expired statutes, the Company’s federal income tax returns for years prior to fiscal year 2017 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 2016 are no longer subject to examination. Estimated 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 were not significant. Audit outcomes and the timing of settlements are subject to significant uncertainty.

Note 15. 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 business 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, 2019:
Net sales	$	46,736	$	39,245	$	12,575	$	-	$	98,556
Income from operations	$	10,580	$	8,592	$	3,202	$	(7,670)	$	14,704
Depreciation and
amortization expense	$	1,172	$	634	$	74	$	77	$	1,957
Interest income	$	4	$	1	$	20	$	-	$	25
Interest expense	$	342	$	99	$	1	$	-	$	442

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	$	6	$	18	$	27	$	-	$	51
Interest expense	$	708	$	-	$	2	$	-	$	710

(1)Unallocated corporate expenses are general corporate overhead expenses not directly attributable to any one of the business 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,
	2019		2018
Maintenance products	$	89,670	$	92,468
Homecare and cleaning products		8,886		8,814
Total	$	98,556	$	101,282

Note 16. Subsequent Events

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 I―Item 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, 2019, which was filed with the Securities and Exchange Commission (“SEC”) on October 22, 2019.

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; anticipated input costs for manufacturing and the costs associated with distribution of our products; 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; expected tax rates and the impact of tax legislation and regulatory action; 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,” “target,” “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 I―Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2019, 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.

Highlights

The following summarizes the financial and operational highlights for our business during the three months ended November 30, 2019:

Consolidated net sales decreased $2.7 million for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact of $2.2 million on consolidated net sales for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Thus, on a constant currency basis, net sales would have decreased by $0.5 million from period to period. This unfavorable impact from changes in foreign currency exchange rates mainly came from our EMEA segment, which accounted for 40% of our consolidated sales for the three months ended November 30, 2019.

Consolidated net sales for the WD-40 Specialist product line were $8.4 million for the three months ended November 30, 2019 which is relatively constant 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 54.3% for the three months ended November 30, 2019 compared to 55.1% for the corresponding period of the prior fiscal year.

Consolidated net income decreased $1.1 million, or 8%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact of $0.5 million on consolidated net income for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Thus, on a constant currency basis, net income would have decreased $0.6 million.

Diluted earnings per common share for the three months ended November 30, 2019 were $0.88 versus $0.95 in the prior fiscal year period.

Share repurchases were executed under our current $75.0 million share buy-back plan, which was approved by the Company’s Board of Directors in June 2018 and became effective on September 1, 2018. During the period from September 1, 2019 through November 30, 2019, the Company repurchased 26,800 shares at an average price of $184.92 per share, for a total cost of $5.0 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.

‎

Results of Operations

Three Months Ended November 30, 2019 Compared to Three Months Ended November 30, 2018

Operating Items

The following table summarizes operating data for our consolidated operations (in thousands, except percentages and per share amounts):



	Three Months Ended November 30,
					Change from ‎Prior Year
	2019		2018		Dollars		Percent
Net sales:
Maintenance products	$	89,670	$	92,468	$	(2,798)		(3)%
Homecare and cleaning products		8,886		8,814		72		1%
Total net sales		98,556		101,282		(2,726)		(3)%
Cost of products sold		45,013		45,451		(438)		(1)%
Gross profit		53,543		55,831		(2,288)		(4)%
Operating expenses		38,839		39,430		(591)		(1)%
Income from operations	$	14,704	$	16,401	$	(1,697)		(10)%
Net income	$	12,194	$	13,279	$	(1,085)		(8)%
Earnings per common share - diluted	$	0.88	$	0.95	$	(0.07)		(7)%
Shares used in per share calculations - diluted		13,746		13,882		(136)		(1)%

Net Sales by Segment

The following table summarizes net sales by segment (in thousands, except percentages):



	Three Months Ended November 30,
					Change from ‎Prior Year
	2019		2018		Dollars		Percent
Americas	$	46,736	$	47,791	$	(1,055)		(2)%
EMEA		39,245		38,745		500		1%
Asia-Pacific		12,575		14,746		(2,171)		(15)%
Total	$	98,556	$	101,282	$	(2,726)		(3)%

‎

Americas

The following table summarizes net sales by product line for the Americas segment (in thousands, except percentages):



	Three Months Ended November 30,
					Change from ‎Prior Year
	2019		2018		Dollars		Percent
Maintenance products	$	41,690	$	42,418	$	(728)		(2)%
Homecare and cleaning products		5,046		5,373		(327)		(6)%
Total	$	46,736	$	47,791	$	(1,055)		(2)%
% of consolidated net sales		47%		47%

Sales in the Americas segment, which includes the U.S., Canada and Latin America, decreased to $46.7 million, down $1.1 million, or 2%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates did not have a significant impact on sales for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year.

Sales of maintenance products in the Americas segment decreased $0.7 million, or 2%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. This sales decrease was mainly driven by lower sales of WD-40 Specialist in the U.S., which was down $0.9 million, or 19% from period to period primarily due to a holiday gift pack promotion that was executed in the first quarter of fiscal year 2019 but was not repeated in the first quarter of fiscal year 2020. Sales of maintenance products in Canada and Latin America remained relatively constant from period to period.

Sales of homecare and cleaning products in the Americas decreased $0.3 million, or 6%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. This sales decrease was driven primarily by a decrease in sales of the Spot Shot and Lava brand products in the U.S., which were down 17% and 8%, respectively, from period to period. While each of our homecare and cleaning products continue to generate positive cash flows, we have continued to experience decreased or flat sales for many of these products primarily due to lost distribution, reduced product offerings, competition, category declines and the volatility of orders from promotional programs with certain of our customers, particularly those in the warehouse club and mass retail channels.

For the Americas segment, 80% of sales came from the U.S., and 20% of sales came from Canada and Latin America combined for the three months ended November 30, 2019 compared to the distribution for the three months ended November 30, 2018 when 81% of sales came from the U.S., and 19% of sales came from Canada and Latin America.

‎

EMEA

The following table summarizes net sales by product line for the EMEA segment (in thousands, except percentages):



	Three Months Ended November 30,
					Change from ‎Prior Year
	2019		2018		Dollars		Percent
Maintenance products	$	36,900	$	36,945	$	(45)		-
Homecare and cleaning products		2,345		1,800		545		30%
Total	$	39,245	$	38,745	$	500		1%
% of consolidated net sales		40%		38%

(1)While the Company’s reporting currency is the U.S. Dollar, the functional currency of our U.K. subsidiary, the entity in which the EMEA results are generated, is Pound Sterling. Although the functional currency of this subsidiary is Pound Sterling, approximately 50% of its sales are generated in Euro and 20% are generated in U.S. Dollar. As a result, the Pound Sterling sales and earnings for the EMEA segment can be negatively or positively impacted from period to period upon translation from these currencies depending on whether the Euro and U.S. Dollar are weakening or strengthening against the Pound Sterling.

Sales in the EMEA segment, which includes Europe, the Middle East, Africa and India, increased to $39.2 million, up $0.5 million, or 1%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact on sales for the EMEA segment from period to period. Sales for the three months ended November 30, 2019 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $41.1 million in the EMEA segment. Thus, on a constant currency basis, sales would have increased by $2.4 million, or 6%, from period to period.

The countries in Europe where we sell through a direct sales force include the U.K., Italy, France, Iberia (which includes Spain and Portugal) and the Germanics sales region (which includes Germany, Austria, Denmark, Switzerland, Belgium and the Netherlands). Although sales in the direct markets remained constant from period to period, sales of 1001 Carpet Fresh in the U.K. increased $0.5 million, or 30%, as a result of the favorable impacts of digital marketing associated with this brand. This increase was completely offset by the overall sales decrease in other European direct markets, primarily due to the unfavorable impacts of changes in foreign currency exchange rates and the timing of customer orders from period to period. Sales from direct markets accounted for 63% of the EMEA segment’s sales for the three months ended November 30, 2019 compared to 64% of the EMEA segment’s sales for the corresponding period of the prior fiscal year.

The regions in the EMEA segment where we sell through local distributors include the Middle East, Africa, India, Eastern and Northern Europe. Sales in the distributor markets increased $0.5 million, or 3%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year, primarily due to higher sales of the WD-40 Multi-Use Product in the Middle East, which were up 15%, as a result of the timing of customer orders from period to period. The distributor markets accounted for 37% of the EMEA segment’s total sales for the three months ended November 30, 2019, compared to 36% for the corresponding period of the prior fiscal year.

‎

Asia-Pacific

The following table summarizes net sales by product line for the Asia-Pacific segment (in thousands, except percentages):



	Three Months Ended November 30,
					Change from ‎Prior Year
	2019		2018		Dollars		Percent
Maintenance products	$	11,081	$	13,105	$	(2,024)		(15)%
Homecare and cleaning products		1,494		1,641		(147)		(9)%
Total	$	12,575	$	14,746	$	(2,171)		(15)%
% of consolidated net sales		13%		15%

Sales in the Asia-Pacific segment, which includes Australia, China and other countries in the Asia region, decreased to $12.6 million, down $2.2 million, or 15%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact on sales for the Asia-Pacific segment from period to period. Sales for the three months ended November 30, 2019 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $12.9 million in the Asia-Pacific segment. Thus, on a constant currency basis, sales would have decreased by $1.9 million, or 13%, from period to period.

Sales in Asia, which represented 68% of the total sales in the Asia-Pacific segment, decreased $2.4 million, or 22%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Sales in the Asia distributor markets decreased $1.7 million, or 21%, primarily attributable to the timing of customer orders from period to period, particularly in South Korea, Indonesia and Malaysia. Sales in China decreased $0.7 million, or 23%, for the three months ended November 30, 2018 compared to the corresponding period of the prior fiscal year, primarily due to the timing of customer orders, particularly in the Southern region of China. In addition, sales were negatively impacted from period to period due to activities in the first quarter of fiscal year 2020 associated with the 70^th Anniversary National Day in China which resulted in slowed market conditions.

Sales in Australia increased $0.2 million, or 5%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact on Australian sales. On a constant currency basis, sales would have increased by $0.4 million, or 11%, due to a higher level of promotional activities as well as continued growth of our business from period to period.

Gross Profit

Gross profit decreased to $53.5 million for the three months ended November 30, 2019 compared to $55.8 million for the corresponding period of the prior fiscal year. As a percentage of net sales, gross profit decreased to 54.3% for the three months ended November 30, 2019 compared to 55.1% for the corresponding period of the prior fiscal year.

Gross margin was negatively impacted by the unfavorable impacts of changes to the sales mix from period to period of 0.7 percentage points. These changes in sales mix were primarily in the EMEA segment and were due to higher sales in the first quarter of fiscal year 2020 to the lower margin distributor markets as well as to lower margin customers, particularly those in the France and DACH markets. Gross margin was also negatively impacted by 0.7 percentage points from period to period due to higher warehousing and in-bound freight costs, primarily in the EMEA segment. In addition, advertising, promotional and other discounts that we give to our customers increased from period to period negatively impacting gross margin by 0.4 percentage points. In general, the timing of advertising, promotional and other discounts may cause fluctuations in gross margin from period to period. The costs associated with certain promotional activities are recorded as a reduction to sales while others are recorded as advertising and sales promotion expenses. Advertising, promotional and other discounts that are given to our customers are recorded as a reduction to sales, whereas advertising and sales promotional costs associated with promotional activities that we pay to third parties are recorded as advertising and sales promotion expenses. Gross margin was also negatively impacted by 0.2 percentage points from period to period due to unfavorable changes in the costs of aerosol cans, primarily in the Americas segment.

These favorable impacts to gross margin were partially offset by sales price increases in the EMEA segment over the last twelve months positively impacting gross margin by 0.8 percentage points from period to period. In addition, gross margin was positively affected by 0.3 percentage points from period to period due to favorable changes in the costs of petroleum-based specialty chemicals in the Americas and EMEA segments. Gross margin was also positively impacted by 0.1 percentage points due to changes in foreign currency exchange rates from period to period in the EMEA segment.

Note that our gross profit and gross margin may not be comparable to those of other consumer product companies, since some of these companies include all costs related to distribution of their products in cost of products sold, whereas we exclude the portion associated with amounts paid to third parties for shipment to our customers from our distribution centers and contract manufacturers and include these costs in selling, general and administrative expenses. These costs totaled $3.0 million and $4.1 million for the three months ended November 30, 2019 and 2018, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative (“SG&A”) expenses for the three months ended November 30, 2019 decreased $0.1 million to $32.6 million from $32.7 million for the corresponding period of the prior fiscal year. As a percentage of net sales, SG&A expenses increased to 33.1% for the three months ended November 30, 2019 compared to 32.3% for the corresponding period of the prior fiscal year. Employee-related costs, which include salaries, incentive compensation, profit sharing, stock-based compensation and other fringe benefits, increased by $1.5 million. This increase was primarily due to increased headcount and annual compensation increases, which take effect in the first quarter of the fiscal year, as well as higher stock-based compensation expense from period to period. These increases were more than offset by the combination of changes in foreign currency exchange rates, which had a favorable impact of $0.5 million, and decreases in other miscellaneous expenses from period to period.

We continued our research and development investment, the majority of which is associated with our maintenance products, in support of our focus on innovation and renovation of our products. Research and development costs were $1.7 million and $1.8 million for the three months ended November 30, 2019 and 2018, respectively. Our research and development team engages in consumer research, product development, current product improvement and testing activities. This team leverages its development capabilities by partnering with a network of outside resources including our current and prospective third-party contract manufacturers. The level and types of expenses incurred within research and development can vary from period to period depending upon the types of activities being performed.

Advertising and Sales Promotion Expenses

Advertising and sales promotion expenses for the three months ended November 30, 2019 decreased $0.4 million, or 6%, to $5.6 million from $6.0 million for the corresponding period of the prior fiscal year. As a percentage of net sales, these expenses decreased to 5.7% for the three months ended November 30, 2019 from 5.9% for the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had a favorable impact on such expenses of $0.2 million from period to period. Thus, on a constant currency basis, advertising and sales promotion expenses for the first quarter of fiscal year 2020 would have decreased by $0.2 million, primarily due to a lower level of promotional programs and marketing support in the Americas segment. Investment in global advertising and sales promotion expenses for fiscal year 2020 is expected to be between 5.5% and 6.0% of net sales.

As a percentage of net sales, advertising and sales promotion expenses may fluctuate period to period based upon the type of marketing activities we employ and the period in which the costs are incurred. Total promotional costs recorded as a reduction to sales for the three months ended November 30, 2019 were $5.0 million compared to $4.3 million for the corresponding period of the prior fiscal year. Therefore, our total investment in advertising and sales promotion activities totaled $10.6 million and $10.3 million for the three months ended November 30, 2019 and 2018, respectively.

Amortization of Definite-lived Intangible Assets Expense

Amortization of our definite-lived intangible assets remained constant at $0.7 million for both the three months ended November 30, 2019 and 2018.

‎

Income from Operations by Segment

The following table summarizes income from operations by segment (in thousands, except percentages):



	Three Months Ended November 30,
					Change from ‎Prior Year
	2019		2018		Dollars		Percent
Americas	$	10,580	$	11,302	$	(722)		(6)%
EMEA		8,592		8,375		217		3%
Asia-Pacific		3,202		3,741		(539)		(14)%
Unallocated corporate		(7,670)		(7,017)		(653)		(9)%
Total	$	14,704	$	16,401	$	(1,697)		(10)%

(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.

Americas

Income from operations for the Americas decreased to $10.6 million, down $0.7 million, or 6%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year, primarily due to a $1.1 million decrease in sales and a lower gross margin, which were partially offset by lower operating expenses. As a percentage of net sales, gross profit for the Americas segment decreased from 54.2% to 53.1% period over period primarily due to higher discounts that we gave to our customers, increases in the price of aerosol cans, and unfavorable changes in sales mix. These unfavorable impacts were slightly offset by the decreased costs of petroleum-based specialty chemicals from period to period. The lower sales were accompanied by a $0.3 million decrease in total operating expenses period over period, primarily due to a lower level of advertising and sales promotion expenses and lower accruals for earned incentive compensation. These decreases in operating expenses were partially offset by increased employee-related expenses. Operating income as a percentage of net sales decreased from 23.6% to 22.6% period over period.

EMEA

Income from operations for the EMEA segment increased to $8.6 million, up $0.2 million, or 3%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year, primarily due to a $0.5 million increase in sales, which was offset by a lower gross margin. As a percentage of net sales, gross profit for the EMEA segment decreased from 56.7% to 55.9% period over period primarily due to increased warehousing, distribution and freight costs as well as unfavorable changes in sales mix, primarily due to a higher proportion of sales to the lower margin distributor markets as well as to lower margin customers from period to period. These unfavorable impacts were partially offset by sales price increases, decreased costs of petroleum-based specialty chemicals, and favorable changes in foreign currency exchange rates from period to period. Operating income as a percentage of net sales increased from 21.6% to 21.9% period over period.

Asia-Pacific

Income from operations for the Asia-Pacific segment decreased to $3.2 million, down $0.5 million, or 14%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year, primarily due to a $2.2 million decrease in sales and a slightly lower gross margin, which were partially offset by lower operating expenses. As a percentage of net sales, gross profit for the Asia-Pacific segment decreased from 54.2% to 54.0% period over period primarily due to increases in warehousing, distribution and freight costs and a higher level of advertising, promotional and other discounts that we gave to our customers from period to period. These unfavorable impacts were significantly offset by lower manufacturing costs. The lower sales were accompanied by a $0.6 million decrease in total operating expenses period over period, primarily due to decreased outbound freight costs and miscellaneous expenses during the period. Operating income as a percentage of net sales increased from 25.4% to 25.5% period over period.

Non-Operating Items

The following table summarizes non-operating income and expenses for our consolidated operations (in thousands):



	Three Months Ended November 30,
	2019		2018		Change
Interest income	$	25	$	51	$	(26)
Interest expense	$	442	$	710	$	(268)
Other income (expense), net	$	5	$	376	$	(371)
Provision for income taxes	$	2,098	$	2,839	$	(741)

Interest Income

Interest income was insignificant for both the three months ended November 30, 2019 and 2018.

Interest Expense

Interest expense decreased $0.3 million for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year primarily due to lower interest rates related to draws on our credit facilities that are denominated in Euros and Pounds Sterling at our U.K. subsidiary.

Other Income (Expense), Net

Other income decreased by $0.4 million for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year primarily due to foreign currency exchange gains of $0.4 million in the corresponding period of the prior fiscal year as a result of fluctuations in the foreign currency exchange rates for both the U.S Dollar and the Euro against the Pound Sterling.

Provision for Income Taxes

Net Income

Net income was $12.2 million, or $0.88 per common share on a fully diluted basis, for the three months ended November 30, 2019 compared to $13.3 million, or $0.95 per common share on a fully diluted basis, for the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact of $0.5 million on net income for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. On a constant currency basis, net income would have decreased by $0.6 million from period to period.

‎

Performance Measures and Non-GAAP Reconciliations

In managing our business operations and assessing our financial performance, we supplement the information provided by our financial statements with certain non-GAAP performance measures. These performance measures are part of our current 55/30/25 business model, which includes gross margin, cost of doing business, and earnings before interest, income taxes, depreciation and amortization (“EBITDA”), the latter two of which are non-GAAP performance measures. Cost of doing business is defined as total operating expenses less amortization of definite-lived intangible assets, impairment charges related to intangible assets and depreciation in operating departments, and EBITDA is defined as net income (loss) before interest, income taxes, depreciation and amortization. We target our gross margin to be at or above 55% of net sales, our cost of doing business to be at 30% of net sales, and our EBITDA to be above 25% of net sales. Results for these performance measures may vary from period to period depending on various factors, including economic conditions and our level of investment in activities for the future such as those related to quality assurance, regulatory compliance, and intellectual property protection in order to safeguard our WD-40 brand. The targets for these performance measures are long-term in nature, particularly those for cost of doing business and EBITDA, and we expect to make progress towards achieving them over time as our revenues increase.

The following table summarizes the results of these performance measures for the periods presented:



	Three Months Ended November 30,
	2019		2018
Gross margin - GAAP		54%		55%
Cost of doing business as a percentage
of net sales - non-GAAP		38%		37%
EBITDA as a percentage of net sales - non-GAAP ⁽¹⁾		17%		18%

(1)Percentages may not aggregate to EBITDA percentage due to rounding and because amounts recorded in other income (expense), net on the Company’s consolidated statement of operations are not included as an adjustment to earnings in the EBITDA calculation.

We use the performance measures above to establish financial goals and to gain an understanding of the comparative performance of the Company from period to period. We believe that these measures provide our shareholders with additional insights into the Company’s results of operations and how we run our business. The non-GAAP financial measures are supplemental in nature and should not be considered in isolation or as alternatives to net income, income from operations or other financial information prepared in accordance with GAAP as indicators of the Company’s performance or operations. The use of any non-GAAP measure may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies. Reconciliations of these non-GAAP financial measures to our financial statements as prepared in accordance with GAAP are as follows:

Cost of Doing Business (in thousands, except percentages)



	Three Months Ended November 30,
	2019		2018
Total operating expenses - GAAP	$	38,839	$	39,430
Amortization of definite-lived intangible assets		(650)		(733)
Depreciation (in operating departments)		(947)		(936)
Cost of doing business	$	37,242	$	37,761
Net sales	$	98,556	$	101,282
Cost of doing business as a percentage
of net sales - non-GAAP		38%		37%

‎

EBITDA (in thousands, except percentages)



	Three Months Ended November 30,
	2019		2018
Net income - GAAP	$	12,194	$	13,279
Provision for income taxes		2,098		2,839
Interest income		(25)		(51)
Interest expense		442		710
Amortization of definite-lived intangible assets		650		733
Depreciation		1,307		1,192
EBITDA	$	16,666	$	18,702
Net sales	$	98,556	$	101,282
EBITDA as a percentage of net sales - non-GAAP		17%		18%

Liquidity and Capital Resources

Overview

The Company’s financial condition and liquidity remain strong. Net cash provided by operations was $15.2 million for the three months ended November 30, 2019 compared to $9.0 million for the corresponding period of the prior fiscal year. We believe we continue to be well positioned to weather any uncertainty in the capital markets and global economy due to our strong balance sheet and efficient business model, along with our growing and diversified global revenues. We continue to manage all aspects of our business including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, implementing gross margin enhancement strategies and developing new opportunities for growth.

Our principal sources of liquidity are our existing cash and cash equivalents, as well as cash generated from operations and cash currently available from our existing $100.0 million unsecured Credit Agreement with Bank of America, which expires on January 22, 2024. We use proceeds of the revolving credit facility primarily for our general working capital needs. The Company also holds borrowings under a Note Purchase and Private Shelf Agreement. See Note 8 – Debt for additional information on these agreements.

The Company maintains a balance of outstanding draws in U.S. Dollars in the Americas segment, as well as in Euros and Pounds Sterling in the EMEA segment. Euro and Pound Sterling denominated draws will fluctuate in U.S. Dollars from period to period due to changes in foreign currency exchange rates. During the three months ended November 30, 2019, the Company repaid $5.0 million in short-term borrowings outstanding under the line of credit. We regularly convert many of our draws on our line of credit to new draws with new maturity dates and interest rates. As of November 30, 2019, we had a $58.6 million balance of outstanding draws on the revolving credit facility, of which $43.6 was classified as long-term and the remaining $15.0 was classified as short-term. In addition, net borrowings under the auto-borrow agreement in the United States were $12.9 million and we paid $0.4 million in principal payments on our Series A Notes during the first quarter of fiscal year 2020. There were no other letters of credit outstanding or restrictions on the amount available on this line of credit or the Series A Notes. Per the terms of both the Note Agreement and the Credit Agreement, our consolidated leverage ratio cannot be greater than three to one and our consolidated interest coverage ratio cannot be less than three to one. See Note 8 – Debt for additional information on these financial covenants. At November 30, 2019, we were in compliance with all debt covenants and believe it is unlikely we will fail to comply with any of these covenants over the next twelve months. We would need to have a significant decrease in sales and/or a significant increase in expenses in order for us to not comply with the debt covenants.

We believe that our future cash from domestic and international operations, together with our access to funds available under our unsecured revolving credit facility, will provide adequate resources to fund both short-term and long-term operating requirements, capital expenditures, share repurchases, dividend payments, acquisitions and new business development activities in the United States. At November 30, 2019, we had a total of $28.7 million in cash and cash equivalents. We do not foresee any ongoing issues with repaying our borrowings and we closely monitor the use of this credit facility.

Cash Flows

The following table summarizes our cash flows by category for the periods presented (in thousands):



	Three Months Ended November 30,
	2019		2018		Change
Net cash provided by operating activities	$	15,206	$	9,009	$	6,197
Net cash used in investing activities		(5,770)		(1,234)		(4,536)
Net cash used in financing activities		(8,520)		(24,148)		15,628
Effect of exchange rate changes on cash and cash equivalents		531		(919)		1,450
Net increase (decrease) in cash and cash equivalents	$	1,447	$	(17,292)	$	18,739

Operating Activities

Net cash provided by operating activities increased $6.2 million to $15.2 million for the three months ended November 30, 2019 from $9.0 million for the corresponding period of the prior fiscal year. Cash flows from operating activities depend heavily on operating performance and changes in working capital. Our primary source of operating cash flows for the three months ended November 30, 2019 was net income of $12.2 million, which decreased $1.1 million from period to period. The changes in our working capital from period to period were primarily attributable to a decrease in the trade accounts receivable balance and the timing of payments received from customers from period to period. In the first quarter of fiscal year 2019, trade accounts receivable increased due to higher sales compared to the first quarter of fiscal year 2018, whereas trade accounts receivable decreased in the first quarter of fiscal year 2020 due to lower sales.

Investing Activities

Net cash used in investing activities increased $4.5 million to $5.8 million for the three months ended November 30, 2019 from $1.2 million for the corresponding period of the prior fiscal year, primarily due to increased capital expenditures. Capital expenditures increased by $4.7 million primarily due to the renovations and equipping of the Company’s new office building in Milton Keynes, England. The renovations to this new office building were completed and employees located in the U.K. were relocated to it during the first quarter of 2020.

Financing Activities

Net cash used in financing activities decreased $15.6 million to $8.5 million for the three months ended November 30, 2019 from $24.1 million for the corresponding period of the prior fiscal year primarily due to proceeds provided by the Company’s autoborrow agreement, which increased $12.9 million during the first quarter of fiscal year 2020. Also contributing to the decrease in total cash flows was a reduction in treasury stock purchases, which decreased by $1.9 million for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Slightly offsetting these decreases was an increase in dividend paid of $0.9 million period over period.

Effect of Exchange Rate Changes

All of our foreign subsidiaries currently operate in currencies other than the U.S. Dollar and a significant portion of our consolidated cash balance is denominated in these foreign functional currencies, particularly at our U.K. subsidiary which operates in Pound Sterling. As a result, our cash and cash equivalents balances are subject to the effects of the fluctuations in these functional currencies against the U.S. Dollar at the end of each reporting period. The net effect of exchange rate changes on cash and cash equivalents, when expressed in U.S. Dollar terms, was an increase in cash of $0.5 million for the three months ended November 30, 2019 as compared to a decrease in cash of $0.9 million for three months ended November 30, 2018. These changes were primarily due to fluctuations in various foreign currency exchange rates from period to period, but the majority is related to the fluctuations in the Pound Sterling against the U.S. Dollar.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as defined by Item 303(a)(4)(ii) of Regulation S-K.

Commercial Commitments

We have ongoing relationships with various suppliers (contract manufacturers) who manufacture our 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 our customers or third-party distribution centers in accordance with agreed upon shipment terms. Although we have definitive minimum purchase obligations included in the contract terms with certain of our 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, we communicate supply needs to our contract manufacturers based on orders and short-term projections, ranging from two to five months. We are committed to purchase the products produced by the contract manufacturers based on the projections provided.

Upon the termination of contracts with contract manufacturers, we obtain certain inventory control rights and are obligated to work with the contract manufacturer to sell through all product held by or manufactured by the contract manufacturer on our behalf during the termination notification period. If any inventory remains at the contract manufacturer at the termination date, we are 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, we may also enter into commitments with other manufacturers to purchase finished goods and components to support innovation initiatives and/or supply chain initiatives. As of November 30, 2019, no such commitments were outstanding.

Share Repurchase Plan

The information required by this item is incorporated by reference to Part I—Item 1, “Notes to Condensed Consolidated Financial Statements” Note 9 — Share Repurchase Plan, included in this report.

Dividends

On December 10, 2019, the Company’s Board of Directors approved a 10% increase in the regular quarterly cash dividend, increasing it from $0.61 per share to $0.67 per share. The $0.67 per share dividend declared on December 10, 2019 is payable on January 31, 2020 to shareholders of record on January 17, 2020. Our ability to pay dividends could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and loan covenants.

Critical Accounting Policies

Our discussion and analysis of our operating results and financial condition is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.

Critical accounting policies are those that involve subjective or complex judgments, often as a result of the need to make estimates. The following areas all require the use of judgments and estimates: revenue recognition, accounting for income taxes, valuation of goodwill and impairment of definite-lived intangible assets. Estimates in each of these areas are based on historical experience and various judgments and assumptions that we believe are appropriate. Actual results may differ from these estimates.

There have been no material changes in our critical accounting policies from those disclosed in Part II―Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 2 to our consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019, which was filed with the SEC on October 22, 2019.

Recently Issued Accounting Standards

Information on Recently Issued Accounting Standards that could potentially impact the Company’s consolidated financial statements and related disclosures is incorporated by reference to Part I—Item 1, “Notes to Condensed Consolidated Financial Statements” Note 2 — Basis of Presentation and Summary of Significant Accounting Policies, included in this report.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is incorporated by reference to Part II―Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019, which was filed with the SEC on October 22, 2019.

Item 4. Controls and Procedures

The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (“Exchange Act”). The term disclosure controls and procedures means controls and other procedures of a Company that are designed to ensure the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of November 30, 2019, the end of the period covered by this report (the Evaluation Date), and they have concluded that, as of the Evaluation Date, such controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in the Company’s reports filed under the Exchange Act. Although management believes the Company’s existing disclosure controls and procedures are adequate to enable the Company to comply with its disclosure obligations, management continues to review and update such controls and procedures. The Company has a disclosure committee, which consists of certain members of the Company’s senior management.

Beginning September 1, 2019, the Company implemented the new lease guidance under ASC 842. In connection with the adoption of this standard, the Company made enhancements to its internal controls over financial reporting and procedures related to lease accounting, as well as the associated control activities within them. These enhancements included the development of new policies based on the updated lease guidance, new training, ongoing contract review requirements and gathering of information provided for disclosures.

Other than the updates described above, there were no other changes in our internal control over financial reporting during the three months ended November 30, 2019 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The information required by this item is incorporated by reference to the information set forth in Part I—Item 1, “Notes to Condensed Consolidated Financial Statements” Note 13 — Commitments and Contingencies, included in this report.

Item 1A. Risk Factors

There have been no material changes in our risk factors from those disclosed in Part I—Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2019, which was filed with the SEC on October 22, 2019.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

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, 2019, the Company repurchased 202,755 shares at a total cost of $34.6 million under this $75.0 million plan.

The following table provides information with respect to all purchases made by the Company during the three months ended November 30, 2019. All purchases listed below were made in the open market at prevailing market prices. Purchase transactions between September 1, 2019 and October 14, 2019 and between November 15, 2019 and November 30, 2019 were executed pursuant to trading plans adopted by the Company pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934.



					Total Number		Maximum
					of Shares		Dollar Value of
	Total				Purchased as Part		Shares that May
	Number of		Average		of Publicly		Yet Be Purchased
	Shares		Price Paid		Announced Plans		Under the Plans
	Purchased		Per Share		or Programs		or Programs
Period
September 1 - September 30		10,000	$	183.95		10,000	$	43,535,679
October 1 - October 31		8,500	$	183.98		8,500	$	41,971,684
November 1 - November 30		8,300	$	187.07		8,300	$	40,418,875
Total		26,800	$	184.92		26,800

a

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Item 6. Exhibits




Exhibit No.		Description

3(a)		Certificate of Incorporation, incorporated by reference from the Registrant’s Form 10-K filed October 22, 2019, Exhibit 3(a) thereto.

3(b)		Amended and Restated Bylaws of WD-40 Company, incorporated by reference from the Registrant’s Form 8-K filed August 16, 2018, Exhibit 3.1 thereto.

10(a)		Change of Control Severance Agreement between WD-40 Company and Patricia Q. Olsem dated October 8, 2019.

31(a)		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31(b)		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32(a)		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32(b)		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101. INS		XBRL Instance Document

101. SCH		XBRL Taxonomy Extension Schema Document

101. CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101. DEF		XBRL Taxonomy Extension Definition Linkbase Document

101. LAB		XBRL Taxonomy Extension Labels Linkbase Document

101. PRE		XBRL Taxonomy Extension Presentation Linkbase Document

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.




	WD-40 COMPANY Registrant


Date: January 9, 2020	By:	/s/ GARRY O. RIDGE
		Garry O. Ridge Chief Executive Officer (Principal Executive Officer)


	By:	/s/ JAY W. REMBOLT
		Jay W. Rembolt Vice President, Finance Treasurer and Chief Financial Officer