What changed in this filing

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Item 9A. Controls and Procedures

2020-10-21 compared with 2019-10-22 · 339 added, 283 removed, 829 unchanged (43% of the section changed)

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There were no changes to the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter ended August 31, 2020, that materially affected, or would be reasonably likely to materially affect, the Company’s internal control over financial reporting.

Enhancements were made to the Company’s internal controls over financial reporting, effective beginning on September 1, 2018, due to the implementation of the new revenue guidance under ASC 606.

Although the new revenue standard did not have a material impact on the Company’s consolidated financial statements, the Company did implement changes to its processes related to revenue recognition and the control activities within them.

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 Information

Directors, Executive Officers and Corporate Governance

Certain information required by this item is set forth under the headings “Security Ownership of Directors and Executive Officers,” “Nominees for Election as Directors,” “Corporate Governance – Committee Nomination Policies and Procedures,” “Audit Committee – Related Party Transactions Review and Oversight” and “Section 16(a) Beneficial Ownership Reporting Compliance” in the Company’s Proxy Statement to be filed with the Securities and Exchange Commission in connection with the 2019 Annual Meeting of Stockholders on December 10, 2019 (“Proxy Statement”), which information is incorporated by reference herein.

Certain information required by this item is set forth in sections under the headings “Security Ownership of Directors and Executive Officers,” “Nominees for Election as Directors,” and “Audit Committee – Related Party Transactions Review and Oversight” in the Company’s Proxy Statement to be filed with the Securities and Exchange Commission in connection with the 2020 Annual Meeting of Stockholders on December 8, 2020 (“Proxy Statement”), which information is incorporated by reference herein.

Additional information concerning executive officers of the Registrant required by this item is included in this report following Item 4 of Part I under the heading, "Executive Officers of the Registrant."

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Executive Compensation

Information required by this item is incorporated by reference to the Proxy Statement under the headings “Board of Directors Compensation,” “Compensation Committee - Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation,” “Supplemental Death Benefit Plans and Supplemental Insurance Benefits,” “Change of Control Severance Agreements” and “CEO Pay Ratio.”

Information required by this item is incorporated by reference to sections of the Proxy Statement under the headings “Board of Directors Compensation” (and the table following such section), “Compensation Committee - Compensation Committee Interlocks and Insider Participation,” “Compensation Discussion and Analysis,” “Compensation Committee Report,” “Executive Compensation” (and the compensation tables following such section), “Supplemental Death Benefit Plans and Supplemental Insurance Benefits,” “Change of Control Severance Agreements” and “CEO Pay Ratio.”

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

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Material Contracts.

Executive Compensation Plans and Arrangements (Exhibits 10(a) through 10(q) are management contracts and compensatory plans or arrangements required to be filed as exhibits pursuant to Item 15(b)).

Executive Compensation Plans and Arrangements (Exhibits 10(a) through 10(s) are management contracts and compensatory plans or arrangements required to be filed as exhibits pursuant to Item 15(b)).

WD-40 Company 2016 Stock Incentive Plan, incorporated by reference from the Registrant’s Proxy Statement filed November 3, 2016, Appendix A thereto.

WD-40 Directors’ Compensation Policy and Election Plan dated October 7, 2019 .

WD-40 Directors’ Compensation Policy and Election Plan dated October 7, 2019, incorporated by reference from the Registrant’s Form 10-K filed October 22, 2019, Exhibit 10(b) thereto .

Form of Indemnity Agreement between the Registrant and its executive officers and directors, incorporated by reference from the Registrant’s Form 10-K filed October 22, 2013, Exhibit 10(d) thereto.

Form of Restricted Stock Unit Agreement for grants of Restricted Stock Units to Executive Officers in fiscal years 2017, 2018 and 2019, incorporated by reference from the Registrant’s Form 10-K filed October 23, 2017, Exhibit 10(g) thereto.

Form of Market Share Unit Award Agreement for grants of Market Share Units to Executive Officers in fiscal years 2017, 2018 and 2019, incorporated by reference from the Registrant’s Form 10-K filed October 23, 2017, Exhibit 10(i) thereto.

Form of Deferred Performance Unit Award Agreement for grants of Deferred Performance Units to Executive Officers, incorporated by reference from Registrant’s Form 10-K filed October 22, 2018, Exhibit 10(j) thereto.

Form of Restricted Stock Unit Agreement for grants of Restricted Stock Units to Executive Officers in fiscal years 2018, 2019 and 2020.

Form of Market Share Unit Award Agreement for grants of Market Share Units to Executive Officers in fiscal years 2018, 2019 and 2020.

Form of Deferred Performance Unit Award Agreement for grants of Deferred Performance Units to Executive Officers.

Form of Restricted Stock Unit Agreement for grants of Restricted Stock Units to Executive Officers in fiscal year 2021.

Form of Market Share Unit Award Agreement for grants of Market Share Units to Executive Officers in fiscal year 2021.

Form of Performance Share Unit Restricted Stock Award Agreement for grants of Performance Share Units to Executive Officers in fiscal year 2021.

WD-40 Company 2017 Performance Incentive Compensation Plan, incorporated by reference from the Registrant’s Proxy Statement filed November 2, 2017, Appendix A thereto.

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Ridge dated February 14, 2006, incorporated by reference from the Registrant’s Form 10-K filed October 23, 2017, Exhibit 10(p) thereto.

Change of Control Severance Agreement between WD-40 Company and Michael L.

Freeman dated February 14, 2006, incorporated by reference from the Registrant’s Form 10-K filed October 23, 2017, Exhibit 10(q) thereto.

Contract for Services between WD-40 Company and Michael L.

Freeman dated February 1, 2019, incorporated by reference from the Registrant’s Form 10-Q filed July 9, 2019, Exhibit 10(b) thereto .

Change of Control Severance Agreement between WD-40 Company and Geoffrey J.

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Change of Control Severance Agreement between WD-40 Company and Steven Brass dated June 22, 2016, incorporated by reference from the Registrant’s Form 10-Q filed January 9, 2017, Exhibit 10(c) thereto .

Change of Control Severance Agreement between WD-40 Company and Patricia Q.

Olsem dated October 8, 2019, incorporated by reference from the Registrant’s Form 10-Q filed January 9, 2020, Exhibit 10(a) thereto .

Credit Agreement dated June 17, 2011 among WD-40 Company and Bank of America, N.A., incorporated by reference from the Registrant’s Form 10-K filed October 23, 2017, Exhibit 10(u) thereto.

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Fourth Amendment to Credit Agreement dated September 1, 2016 among WD-40 Company and Bank of America, N.A., incorporated by reference from the Registrant’s Form 8-K filed September 2, 2016, Exhibit 10(a) thereto.

Fifth Amendment to Credit Agreement dated November 15, 2017 by and between WD-40 Company and Bank of America, N.A., incorporated by reference from the Registrant’s Form 8-K filed November 17, 2018, Exhibit 10(b) thereto.

Sixth Amendment to Credit Agreement dated February 23, 2018 by and between WD-40 Company and Bank of America, N.A., incorporated by reference from the Registrant’s Form 8-K filed February 27, 2018, Exhibit 10(c) thereto .

Fifth Amendment to Credit Agreement dated November 15, 2017 among WD-40 Company and Bank of America, N.A., incorporated by reference from the Registrant’s Form 8-K filed November 17, 2018, Exhibit 10(b) thereto.

Sixth Amendment to Credit Agreement dated February 23, 2018 among WD-40 Company and Bank of America, N.A., incorporated by reference from the Registrant’s Form 8-K filed February 27, 2018, Exhibit 10(c) thereto .

Seventh Amendment to Credit Agreement dated January 22, 2019 among WD-40 Company and Bank of America, N.A., incorporated by reference from the Registrant’s Form 8-K filed January 25, 2019, Exhibit 10(a) thereto.

Note Purchase and Private Shelf Agreement dated November 15, 2017 by and between WD-40 Company and Prudential and the Note Purchasers, incorporated by reference from the Registrant’s Form 8-K filed November 17, 2017, Exhibit 10(a) thereto.

First Amendment to Note Purchase Agreement dated February 23, 2018 by and between WD-40 Company and Prudential and the Note Purchasers, incorporated by reference from the Registrant’s Form 8-K filed February 27, 2018, Exhibit 10(b) thereto.

Credit Agreement dated March 16, 2020 among WD-40 Company and Bank of America, incorporated by reference from the Registrant’s Form 8-K filed March 20, 2020, Exhibit 10(a) thereto .

Form of Acknowledgement Letter Agreement dated April 8, 2020 among WD-40 Company and Bank of America, incorporated by reference from the Registrant’s Form 10-Q filed April 9, 2020, Exhibit 10(d) thereto .

First Amendment to Credit Agreement dated September 30, 2020 among WD-40 Company and Bank of America, N.A., incorporated by reference from the Registrant’s Form 8-K filed October 6, 2020, Exhibit 10(a) thereto.

Note Purchase and Private Shelf Agreement dated November 15, 2017 among WD-40 Company and Prudential and certain Note Purchasers, incorporated by reference from the Registrant’s Form 8-K filed November 17, 2017, Exhibit 10(a) thereto.

First Amendment to Note Purchase Agreement dated February 23, 2018 among WD-40 Company and Prudential and certain Note Purchasers, incorporated by reference from the Registrant’s Form 8-K filed February 27, 2018, Exhibit 10(b) thereto.

Second Amendment to Note Purchase and Private Shelf Agreement dated March 16, 2020 among WD-40 Company and Prudential and certain Note Purchasers, incorporated by reference from the Registrant’s Form 8-K filed March 20, 2020, Exhibit 10(b) thereto .

Form of Limited Consent Letter Agreement dated April 8, 2020 among WD-40 Company and Prudential and certain Note Purchasers, incorporated by reference from the Registrant’s Form 10-Q filed April 9, 2020, Exhibit 10(e) thereto .

Third Amendment to Note Purchase and Private Shelf Agreement dated September 30, 2020 among WD-40 Company and Prudential and certain Note Purchasers, incorporated by reference from the Registrant’s Form 8-K filed October 6, 2020, Exhibit 10(e) thereto .

Series B Senior Notes dated September 30, 2020, incorporated by reference from the Registrant’s Form 8-K filed October 6, 2020, Exhibit 10(f) thereto .

Series C Senior Notes dated September 30, 2020, incorporated by reference from the Registrant’s Form 8-K filed October 6, 2020, Exhibit 10(g) thereto .

Subsidiaries of the Registrant .

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

XBRL Instance Document

XBRL Taxonomy Extension Schema Document

XBRL Taxonomy Extension Calculation Linkbase Document

XBRL Taxonomy Extension Definition Linkbase Document

XBRL Taxonomy Extension Labels Linkbase Document

XBRL Taxonomy Extension Presentation Linkbase Document

The following materials from WD-40 Company’s Annual report on Form 10-K for the fiscal year ended August 31, 2020 formatted in iXBRL (Inline eXtensible Business Reporting Language):

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October 21, 2020

/s/ RAE ANN PARTLO

RAE ANN PARTLO

Vice President and Corporate Controller

Principal Accounting Officer

October 21, 2020

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.

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October 21, 2020

LANG, Director

/s/ TREVOR I.

MIHALIK, Director

October 21, 2020

/s/ GRACIELA I.

MONTEAGUDO, Director

October 21, 2020

PENDARVIS, Director

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October 21, 2020

SCHMALE, Director

October 22, 2019

SAUNDERS, Director

October 21, 2020

Report of Independent Registered Public Accounting Firm

SCHMALE, Director

October 21, 2020

Report of Independent Reg istered Public Accounting Firm

To the Board of Directors and Shareholders of WD-40 Company

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of WD-40 Company and its subsidiaries (the “Company”) as of August 31, 2019 and 2018, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended August 31, 2019, including the related notes, of WD-40 Company and its subsidiaries (the “Company”) (collectively referred to as the “consolidated financial statements”).

We have audited the accompanying consolidated balance sheets of WD-40 Company and its subsidiaries as of August 31, 2020 and 2019, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended August 31, 2020, including the related notes (collectively referred to as the “consolidated financial statements”).

We also have audited the Company's internal control over financial reporting as of August 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

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Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO.

Changes in Accounting Principles

As discussed in Note 1 to the consolidated financial statements, the Company changed the manner in which it accounts for leases in 2020.

Basis for Opinions

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(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company;

and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

and (iii) provide

reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.

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Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that (i) relate to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Rebates - Cooperative Marketing Program Accruals

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In determining the transaction price, management 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 records estimates of variable consideration, which primarily includes rebates/other discounts (cooperative marketing programs, volume-based discounts, shelf price reductions and allowances for shelf space, charges from customers for services they provide to the Company related to the sale and penalties/fines charged to the Company by customers associated with failing to adhere to contractual obligations), 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 expected value 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.

Management reviews its assumptions and adjusts these estimates accordingly on a quarterly basis.

As of August 31, 2019, the Company had a $7.5 million balance in rebate liabilities, which are included in accrued liabilities on the Company’s consolidated balance sheet, and recorded approximately $18.2 million in rebates as a reduction to sales during fiscal year 2019.

The principal considerations for our determination that performing procedures relating to the cooperative marketing program accruals is a critical audit matter are (i) there was significant judgment by management to estimate the cooperative marketing program accruals, which in turn led to a high degree of auditor judgment in performing procedures to evaluate the status of trade promotion activities within the cooperative marketing program accruals, and (ii) there was a high level of audit effort and subjectivity in performing procedures to evaluate the current and past trade promotion spending patterns and the status of trade promotion activities used to determine the cooperative marketing program accruals.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the estimation of cooperative marketing program accruals, which included controls over the current and past trade promotion spending patterns and the status of trade promotion activities used in management’s estimate.

These procedures also included, among others, (i) testing management’s process to estimate the cooperative marketing program accruals, including evaluating the appropriateness of the most likely outcome method, testing the completeness, accuracy and relevance of underlying data used, including the current and past trade promotion spending patterns, and evaluating the reasonableness of the status of trade promotion activities assumption considering the overall business environment, and (ii) evaluating the completeness of offers made to customers for potential promotional activities, which may require accrual as of period end.

Income Taxes – Uncertain Tax Position – Toll Tax

As described in Note 13 to the consolidated financial statements, on December 20, 2017, the United States House of Representatives and the Senate passed the “Tax Cuts and Jobs Act” (Tax Act), which was signed into law on December 22, 2017 and became effective beginning January 1, 2018.

In November 2018, subsequent to the filing of the Company’s federal income tax return, the U.S.

Treasury released proposed regulations that were subsequently finalized in June 2019.

These regulations specifically address, and are inconsistent with, the Company’s position regarding the availability of the dividends received deduction for deemed foreign dividends recorded in fiscal 2018 associated with the Tax Act’s mandatory one-time “toll tax” on unremitted foreign earnings.

During July 2019, management completed its assessment of these final regulations.

Due to the uncertainty created by these regulations, the Company recorded a reserve for an uncertain tax position in the fourth quarter of its fiscal year 2019 in the amount of $8.7 million, inclusive of accrued interest of approximately $0.4 million.

As described in Note 13, this uncertain tax position represents the estimated tax liability that would be imposed if these final regulations are enforced.

The principal considerations for our determination that performing procedures relating to the uncertain tax position related to the toll tax is a critical audit matter are (i) there was significant judgment by management when determining the uncertain tax position, which in turn led to a high level of audit effort and judgment to evaluate management’s assessment, (ii) there was a high degree of auditor subjectivity relative to the interpretation and application of the Tax Act’s mandatory one-time “toll tax” on unremitted foreign earnings, and (iii) the audit effort involved the use of professionals with specialized skill and knowledge to assist in performing these procedures and evaluating the audit evidence obtained.

As of August 31, 2020, the Company had a $7.5 million balance in rebate/other discount liabilities, which are included in accrued liabilities on the Company’s consolidated balance sheet, and recorded approximately $20.7 million in rebates/other discounts as a reduction to sales during fiscal year 2020.

The principal considerations for our determination that performing procedures relating to the cooperative marketing program accruals is a critical audit matter are (i) the significant judgment by management to estimate the cooperative marketing program accruals, which in turn led to a high degree of auditor judgment in performing procedures to evaluate the status of trade promotion activities within the cooperative marketing program accruals, and (ii) the high level of audit effort and subjectivity in performing procedures to evaluate the current and past trade promotion spending patterns and the status of trade promotion activities used to determine the cooperative marketing program accruals.

Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.

These procedures included testing the effectiveness of controls relating to the identification, recognition, and measurement of the uncertain tax position.

These procedures also included, among others, (i) testing the information used in the calculation of the liability for the uncertain tax position, including the filed federal tax return, (ii) testing the calculation of the liability for the uncertain tax position, and (iii) evaluating management’s assessment of the technical merits and estimate of the tax position expected to be sustained.

Professionals with specialized skill and knowledge were used to assist in the evaluation of the recognition and measurement of the Company’s uncertain tax position, including evaluating the reasonableness of management’s assessment of whether the tax position is more-likely-than-not of being sustained and the amount of potential benefit to be realized, the application of relevant tax laws and regulations, and estimated interest and penalties.

These procedures included testing the effectiveness of controls relating to the estimation of cooperative marketing program accruals, which related to controls over the current and past trade promotion spending patterns and the status of trade promotion activities used in management’s estimate.

These procedures also included, among others, (i) testing management’s process to estimate the cooperative marketing program accruals, including evaluating the appropriateness of the expected value method, testing the completeness, accuracy and relevance of underlying data used, including the current and past trade promotion spending patterns, and evaluating the reasonableness of the status of the trade promotion activities assumption considering the overall business environment, and (ii) evaluating the completeness of offers made to customers for potential promotional activities, which may require accrual as of period end.

/s/ PricewaterhouseCoopers LLP

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Cash and cash equivalents

Short-term investments

Trade accounts receivable, less allowance for doubtful

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Other intangible assets, net

Operating lease right-of-use assets

Deferred tax assets, net

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Deferred tax liabilities, net

Long-term operating lease liabilities

Other long-term liabilities

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See accompanying notes to consolidated financial statements.

WD-40 COM PANY

CONSOLIDATED STATEME NTS OF OPERATIONS

WD-40 COMPANY

CONSOLIDATED STATEM ENTS OF OPERATIONS

(In thousands, except per share amounts)

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Income from operations

Other income (expense):

Other (expense) income:

Interest income

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See accompanying notes to consolidated financial statements.

WD-40 COM PANY

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

WD-40 COMPANY

CONSOLIDATED STATEMENTS O F COMPREHENSIVE INCOME

(In thousands)

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See accompanying notes to consolidated financial statements.

WD-40 CO MPANY

WD-40 COMPANY

CONSOLIDATED STATEMENTS OF SHAREHOLDERS'

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Stock-based compensation

Tax benefits from settlements of

stock-based equity awards

Cash dividends ($ 2.11 per share)

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Foreign currency translation adjustment

Cumulative effect of change in accounting principle

Balance at August 31, 2018

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Foreign currency translation adjustment

Cumulative effect of change in accounting principle

Balance at August 31, 2020

See accompanying notes to consolidated financial statements.

WD-40 CO MPANY

WD-40 COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

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Trade accounts receivable

Operating lease assets and liabilities, net

Accounts payable and accrued liabilities

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Repayments of long-term senior notes

Net (repayments) proceeds from revolving credit facility

Net proceeds (repayments) from revolving credit facility

Shares withheld to cover taxes upon conversion of equity awards

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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 .

The Company’s products are sold primarily through warehouse club stores, hardware stores, automotive parts outlets, industrial distributors and suppliers, mass retail and home center stores, value retailers, grocery stores, online retailers, farm supply, sport retailers, and independent bike dealers.

Basis of Presentation and Summary of Significant Accounting Policies

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Actual results could differ from those estimates.

COVID-19 Considerations

The COVID-19 pandemic has adversely impacted global economic conditions and has contributed to significant volatility in financial markets beginning in early calendar year 2020, as described in the “ Significant Developments ” section included in Part II – Item 7.

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

Although the Company’s current estimates contemplate current conditions, the inputs into certain of the Company’s significant and critical accounting estimates include judgments and assumptions about the economic implications of the COVID-19 pandemic and how management expects them to change in the future, as appropriate.

It is reasonably possible that actual results experienced may differ materially from the Company’s estimates in future periods, which could materially affect our results of operations and financial condition.

Supplier Risk

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Trade accounts receivable are charged against the allowance when the Company believes it is probable that the trade accounts receivable will not be recovered.

The Company does not have any off-balance sheet credit exposure related to its customers.

The Company does not have any off-balance sheet credit exposure related to its

Allowance for doubtful accounts related to the Company’s trade accounts receivable were not significant at August 31, 2020 and 2019.

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Property and equipment is stated at cost.

Depreciation is computed using the straight-line method based upon estimated useful lives of ten to forty year s for buildings and improvements, three to fifteen year s for machinery and equipment, three to five year s for vehicles, three to ten year s for furniture and fixtures and three to five year s for software and computer equipment.

Depreciation is computed using the straight-line method based upon estimated useful lives of ten to forty years for buildings and improvements, three to fifteen years for machinery and equipment, three to five years for vehicles, three to ten years for furniture and fixtures, three to seven years for R&D lab equipment and office equipment and three to five years for software and computer equipment.

The useful lives of major on-premises information system installations such as implementations of enterprise resource planning (“ERP”) systems are determined on an individual basis.

Depreciation expense totaled $ 5.5 million, $ 4.9 million and $ 4.8 million for fiscal years 2020, 2019 and 2018, respectively.

These amounts include factory depreciation expense which is recognized as cost of products sold and totaled $ 1.1 million for the fiscal years 2019, 2018 and 2017.

These amounts include equipment depreciation expense which is recognized as cost of products sold and totaled $ 1.4 million in fiscal year 2020, and $ 1.1 million for the fiscal years 2019 and 2018, respectively.

The Company capitalizes costs related to computer software obtained or developed for internal use.

Software obtained for internal use has generally been enterprise-level business and finance software that the Company customizes to meet its specific operational needs.

Costs incurred in the application development phase are capitalized and amortized over their useful lives, which are generally three to five year s.

Costs incurred in the application development phase are capitalized and amortized over their useful lives, which are generally three to five years .

In fiscal year 2020, the Company adopted Accounting Standards Update (ASU) No.

2016-02, Leases (Topic 842 or “ASC 842”).

Prior period amounts have not been restated and continue to be reported in accordance with the Company’s historical accounting policies.

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 a fleet of automobiles.

The Company has also identified warehouse leases within certain third-party distribution center service contracts.

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.

Right-of-use (“ROU”) assets and lease liabilities are recognized based on the present value of lease payments over the lease term with lease expense recognized over the term of the lease.

As the Company’s leases typically do not contain a readily determinable implicit rate, the Company determines the present value of the lease liability using its estimated secured incremental borrowing rate at the lease commencement date based on the lease term and the currency of the lease on a collateralized basis.

Lease agreements may contain rent escalation clauses, renewal or termination options, and rent holidays, amongst other features.

ROU assets include amounts for scheduled rent increases.

The lease term includes the non-cancelable period of the lease and options to extend or terminate the lease when it is reasonably certain the Company will exercise those options, and is reviewed in subsequent periods if a triggering event occurs.

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.

Goodwill represents the excess of the purchase price over the fair value of tangible and intangible assets acquired.

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Otherwise, a quantitative test is performed to identify the potential impairment and to measure the amount of goodwill impairment, if any.

The Company also performs a quantitative assessment periodically, regardless of the results of the qualitative assessments.

Any required impairment losses are recorded as a reduction in the carrying amount of the related asset and charged to results of operations.

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Long-lived assets are depreciated or amortized, as applicable, on a straight-line basis over their estimated useful lives.

The Company assesses potential impairments to its long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and/or its remaining useful life may no longer be appropriate.

The Company assesses for potential impairments to its long-lived assets when there is evidence that events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable and/or its remaining useful life may no longer be appropriate.

Any required impairment loss would be measured as the amount by which the asset’s carrying amount exceeds its fair value, which is the amount at which the asset could be bought or sold in a current transaction between willing market participants and would be recorded as a reduction in the carrying amount of the related asset and a charge to results of operations.

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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 August 31, 2019, the Company had no asset s or liabilitie s 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.

As of August 31, 2020, 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.

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The Company estimates that the fair value of its senior notes, based on Level 2 inputs, was approximately $ 20.9 million as of August 31, 2020, 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 $ 18.0 million.

During the fiscal years ended August 31, 2019, 2018 and 2017, the Company did not record any significant nonrecurring fair value measurements for asset s or liabilitie s in periods subsequent to their initial recognition.

During the fiscal years ended August 31, 2020, 2019 and 2018, the Company did no t record any significant nonrecurring fair value measurements for assets or liabilities in periods subsequent to their initial recognition.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash and cash equivalents and trade accounts receivable.

The Company’s policy is to place its cash in high credit quality financial institutions, in investments that include demand deposits, term deposits and callable time deposits.

The Company’s policy is to place its cash in high credit quality financial

institutions, in investments that include demand deposits, term deposits and callable time deposits.

The Company’s trade accounts receivable are derived from customers located in North America, South America, Asia-Pacific, Europe, the Middle East, Africa and India.

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The Company does not maintain self-insurance with respect to its material risks;

therefore, the Company has not provided for self-insurance reserves as of August 31, 2019 and 2018.

therefore, the Company has no t provided for self-insurance reserves as of August 31, 2020 and 2019.

Revenue Recognition

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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/other discounts (cooperative marketing programs, volume-based discounts, shelf price reductions and allowances for shelf space, charges from customers for services they provided to us related to the sale and penalties/fines charged to us by customers associated with failing to adhere to contractual obligations), coupon offers, cash discount allowances, and sales returns, as a reduction of sales in its consolidated statements of operations.

The Company reviews its assumptions and adjusts these estimates accordingly on a quarterly basis.

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Advertising and sales promotion expenses include costs associated with promotional activities that the Company pays to third parties, which include costs for advertising (television, print media and internet), administration of coupon programs, consumer promotions, product demonstrations, public relations, agency costs, package design expenses and market research costs.

Advertising and sales promotion expenses also include product samples which are given to customers and are initiated by the Company and costs associated with shared marketing fund programs that the Company has in place with its marketing distributor customers.

Total advertising and sales promotion expenses were $ 21.6 million, $ 23.3 million and $ 22.3 million for fiscal years 2020, 2019 and 2018, respectively.

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Current income tax expense is the amount of income taxes expected to be payable for the current year.

A deferred income tax liability or asset is established for the expected future tax consequences resulting from the differences in financial reporting and tax bases of assets and liabilities.

A deferred income tax liability or asset is established for the expected future tax consequences resulting from the differences in financial reporting and tax basis of assets and liabilities.

A valuation allowance is provided if it is more likely than not that some or all of the deferred tax assets will not be realized.

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The Company recognizes accrued interest and penalties related to uncertain tax positions as a component of income tax expense.

As a result of the “Tax Cuts and Jobs Act” (the “Tax Act”) which became effective beginning January 1, 2018, the U.S.

has transitioned from a worldwide tax system to a modified territorial tax system, under which corporations are primarily taxed on income earned within the country’s borders, rather than on a worldwide basis.

The Company is still required to make assertions on whether its foreign subsidiaries will invest their undistributed earnings indefinitely and these assertions are based on the capital needs of the foreign subsidiaries.

Due to the passage of the Tax Act, the Company reevaluated its indefinite reinvestment

assertion for its foreign subsidiaries in May 2018 and changed its assertion for certain of its foreign subsidiaries.

As a result, the Company no longer considers unremitted earnings of any of its foreign subsidiaries to be indefinitely reinvested.

The costs associated with repatriating unremitted foreign earnings, including U.S.

The Company is required to make assertions on whether its foreign subsidiaries will invest their undistributed earnings indefinitely and these assertions are based on the capital needs of the foreign subsidiaries.

Generally, unremitted earnings of the Company’s foreign subsidiaries are not considered to be indefinitely reinvested.

However, there are exceptions regarding the Company’s newly formed subsidiary in Mexico as well as specific statutory remittance restrictions imposed on the Company’s China subsidiary.

Costs associated with repatriating unremitted foreign earnings, including U.S.

state income taxes and foreign withholding taxes, are immaterial to the Company’s consolidated financial statements.

For additional information on the Tax Act, see Note 13 — Income Taxes, included in this report.

For additional information on income tax matters, see Part IV—Item 15, “Exhibits, Financial Statement Schedules” Note 14 — Income Taxes, included in this report.

Foreign Currency

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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.

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.

The Company regularly monitors its foreign currency exchange rate exposures to ensure the overall effectiveness of its foreign currency hedge positions.

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At August 31, 2020, the Company had a notional amount of $ 12.8 million outstanding in foreign currency forward contracts, which matured in September 2020 .

Unrealized net gains and losses related to foreign currency forward contracts were not significant at August 31, 2019 or 2018.

Realized net losses related to foreign currency forward contracts were $ 0.4 million for the fiscal year ended August 31, 2019, while realized net losses were not significant for the fiscal year ended August 31, 2018.

Unrealized net gains and losses related to foreign currency forward contracts were

no t significant at August 31, 2020 or 2019.

Realized net losses related to foreign currency forward contracts were no t significant for the fiscal years ended August 31, 2020 and 2019, respectively.

Both unrealized and realized net gains and losses are recorded in other income on the Company’s consolidated statements of operations.

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Stock-based equity awards are measured at the grant date, based on the estimated fair value of the award, and are recognized as stock-based compensation expense on a straight-line basis over the requisite service period of the entire award, net of the impacts of award forfeitures as they occur.

The requisite service period is

generally the maximum vesting period of the award.

The requisite service period is generally the maximum vesting period of the award.

Compensation expense related to the Company’s stock-based equity awards is recorded as selling, general and administrative expenses in the Company’s consolidated statements of operations.

The fair value of stock options is determined using a Black-Scholes option pricing model.

Fiscal year 2008 was the last fiscal period in which the Company granted stock options, and the last of such stock options were settled in the first quarter of fiscal year 2018.

The Company does not currently grant stock options and the last outstanding stock options were settled in the first quarter of fiscal year 2018.

The fair values of restricted stock unit awards and deferred performance unit awards are based on the fair value of the Company’s common stock on the date that such awards are granted.

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Recently Adopted Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2014-09, “Revenue from Contracts with Customers” (“ASC 606”), which supersedes the revenue recognition requirements in ASC 605, “Revenue Recognition”.

The core principle of this updated guidance and related amendments is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The new standard requires additional disclosures to enable users of the financial statements to better understand the nature, amount, timing, risks, and judgments related to revenue recognition from contracts with customers.

On September 1, 2018, the Company adopted ASC 606 on a modified retrospective basis and the Company recognized a reduction of $ 0.3 million to opening retained earnings as the cumulative effect of adopting the new revenue standard.

This adjustment did not have a material impact on the Company’s consolidated financial statements.

See Note 10 – Revenue Recognition for additional information and incremental disclosures related to the adoption of this standard.

In August 2018, the FASB issued ASU No.

2018-15, “Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract” to align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

The updated guidance also requires an entity to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement and includes expanded disclosure requirements for such costs.

This guidance is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.

Early adoption is permitted and the guidance may be applied either retrospectively or prospectively.

The Company early adopted this guidance on a prospective basis during the third quarter of fiscal year 2019.

The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements and related disclosures.

In February 2018, the FASB issued ASU No.

2018-02, “Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income”, to optionally allow entities to reclassify stranded tax effects, resulting from the Tax Act, from accumulated other comprehensive income to retained earnings.

Since the amendments within this guidance only relate to the reclassification of the income tax effects associated with the Tax Act, the underlying guidance that requires that the effect of a change in tax laws or rates be included in income from continuing operations is not affected.

This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period.

Early adoption is permitted.

The amendments in this updated guidance should be applied either in the period of adoption or retrospectively to each period in which the effect of the change in the U.S.

corporate federal income tax rate in the Tax Act is recognized.

The Company early adopted this guidance during the third quarter of fiscal year 2019 and reclassified $ 0.1 million of accumulated other comprehensive income to retained earnings in the period of adoption.

This adjustment did not have a material impact on the Company’s consolidated financial statements.

Recently Issued Accounting Standards

In February 2016, the FASB issued ASU No.

In February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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 will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

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.

Although early adoption is permitted, the Company has elected not to adopt this guidance early and it will become effective for the Company on September 1, 2019.

The Company will adopt this new guidance following the optional transition method described in ASU No.

2018-11, “ Leases – Targeted Improvements” which was issued in July 2018 , rather than the original modified retrospective approach that requires entities to apply the guidance at the beginning of the earliest period presented in the financial statements.

Under the optional transition method, the Company will recognize any cumulative effect of initially applying the guidance as an adjustment to the opening balance of retained earnings on September 1, 2019.

Therefore, the requirements of this guidance will apply only for periods presented that are after the date of adoption and will not affect comparative periods.

Upon adoption, the Company will elect practical expedients to:

(i) not separate lease components from nonlease components for Real Estate – Office Buildings, Machinery & Equipment, R&D/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.

In preparation for adopting 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 beginning on September 1, 2019.

Upon adoption on September 1, 2019, the Company’s total assets and total liabilities will increase by approximately $ 9.0 million in the Company’s consolidated balance sheets.

The standard will not have a material impact on the consolidated statements of operations or cash flows.

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 required 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 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 condensed consolidated 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 recorded operating lease assets of $ 9.0 million and lease liabilities of $ 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.

In March 2020, the FASB issued ASU No.

2020-04, “ Reference Rate Reform ” under ASC 848, intended to provide temporary optional expedients and exceptions to U.S.

GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens related to the expected market transition from the London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates.

This guidance was effective beginning on March 12, 2020, and the Company may apply the amendments prospectively to contract modifications made or relationships entered into or evaluated through December 31, 2022.

The adoption of this guidance did not have an impact on the Company’s consolidated financial statements in the current period, but we will continue to evaluate the impacts of this guidance on future contract modifications.

Recently Issued Accounting Standards

In December 2019, the FASB issued ASU No.

2019-12, “ Simplifying the Accounting for Income Taxes ” under ASC 740, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application.

This guidance is effective for fiscal years beginning after December 15, 2021, including interim periods within that fiscal year.

Early adoption is permitted.

The Company is in the process of evaluating the impacts of this guidance on its consolidated financial statements and related disclosures .

Inventories consisted of the following (in thousands):

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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, as well as buildout costs in Milton Keynes, England.

This new office building will house

employees of the Company’s EMEA segment that are based in the United Kingdom.

The Company has continued to incur additional capital costs related to the buildout of the acquired building and for the purchase of new furniture, fixtures and equipment.

Upon completion of the buildout, which is expected to occur early in fiscal year 2020, the Company will place these assets into service and reclassify the amounts recorded in capital in progress to the respective fixed asset categories, which includes amounts attributable to the land.

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.

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The annual goodwill impairment test was performed at the reporting unit level as required by the authoritative guidance as of the Company’s most recent goodwill impairment testing date, December 1, 2019.

During the fiscal year 2019 annual goodwill impairment test, the Company performed a qualitative assessment of each reporting unit to determine whether it was more likely than not that the fair value of a reporting unit was less than its carrying amount.

In performing this qualitative assessment, the Company assessed relevant events and circumstances that may impact the fair value and the carrying amount of each of its reporting units.

Factors that were considered included, but were not limited to, the following:

(1) macroeconomic conditions;

(2) industry and market conditions;

(3) historical financial performance and expected financial performance , including the continued impacts of the “ Tax Cuts and Jobs Act ”, which was signed into law on December 22, 2017 and became effective beginning January 1, 2018 ;

(4) other entity specific events, such as changes in management or key personnel;

and (5) events affecting the Company’s reporting units, such as a change in the composition of net assets or any expected dispositions.

Based on the results of this qualitative assessment, the Company determined that it is more likely than not that the carrying value of each of its reporting units is less than its fair value as of the goodwill impairment testing date and, thus, a quantitative analysis was not required.

As a result, the Company concluded that no impairment of its goodwill existed as of February 28, 2019 .

In addition, there were no indicators of impairment identified as a result of the Company’s review of events and circumstances related to its goodwill subsequent to February 28, 2019, t he date of its most recent annual goodwill impairment test.

The Company performed a quantitative assessment for each of its reporting units to determine whether the fair value of any of the reporting units were less than their carrying amounts.

The Company determined the fair value of its reporting units in the analysis by following the income approach which uses a discounted cash flow methodology.

When using the discounted cash flow methodology, the fair value of each of the reporting units is based on the present value of the estimated future cash flows of each of the respective reporting units.

The discounted cash flow methodology also requires management to make assumptions about certain key inputs in the estimated cash flows, including long-term sales forecasts or growth rates, terminal growth rates and discount rates, all of which are inherently uncertain.

The Company determined that a discount rate of 7 % and a terminal growth rate of 2 % was appropriate to use in the analysis for all of its reporting units.

The forecast of future cash flows was based on historical data and management’s best estimates of sales growth rates and operating margins for each reporting unit for the next five fiscal years.

The discount rate used was based on the current weighted-average cost of capital for the Company.

As these assumptions are largely unobservable, the estimate of fair value analysis falls within Level 3 of the fair value hierarchy.

Based on the results of the quantitative analysis, the Company determined that the estimated fair value of each of its reporting units significantly exceeded their respective carrying values.

As a result, the Company concluded that no impairment of its goodwill existed as of December 1, 2019.

The estimated fair value of each of the Company’s reporting units exceeded their respective carrying values so significantly that an impairment charge to the Company’s goodwill balances is remote, even in the event that the impacts of the novel coronavirus (“COVID-19”) pandemic significantly lower results in future periods.

As a result, the Company concluded that 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 December 1, 2019 through August 31, 2020.

To date, there have been no impairment losses identified and recorded related to the Company’s goodwill .

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There has been no impairment charge for the period ended August 31, 2020 as a result of the Company’s review of events and circumstances related to its existing definite-lived intangible assets.

The Company’s review of events and circumstances included consideration of the ongoing COVID-19 pandemic.

Changes in the carrying amounts of definite-lived intangible assets by segment are summarized below (in thousands):

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Amortization expense

EZ REACH trade name

Translation adjustments

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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.

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.

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 August 31, 2020, 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;

However, the Company had no significant short-term leases as of August 31, 2020.

Upon adoption of ASC 842 on September 1, 2019, the Company recorded operating lease assets of $ 9.0 million and lease liabilities of $ 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 fiscal year ended August 31, 2020.

The Company recorded $ 2.0 million in lease expense during the fiscal year ended August 31, 2020.

This lease expense was included in selling, general and administrative expenses.

An insignificant amount of lease expense was classified within cost of products sold for the fiscal year ended August 31, 2020.

During the fiscal year ended August 31, 2020, the Company paid cash of $ 1.9 million related to lease liabilities.

Variable lease expense under the Company’s lease agreements was not significant for the fiscal year ended August 31, 2020.

As of August 31, 2020, the weighted-average remaining lease term was 6.8 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 August 31, 2020 that will create additional significant rights and obligations for the Company.

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

Operating lease right-of-use assets

Current operating lease liabilities (1)

Long-term operating lease liabilities

Total operating lease liabilities

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

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 as of August 31, 2020 (in thousands):

Fiscal year 2021

Fiscal year 2022

Fiscal year 2023

Fiscal year 2024

Fiscal year 2025

Total undiscounted future cash flows

Present value of lease liabilities

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

Fiscal year 2020

Fiscal year 2021

Fiscal year 2022

Fiscal year 2023

Fiscal year 2024

Total undiscounted future cash flows

Accrued and Other Liabilities

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Accrued sales taxes and other taxes

Accrued liability forward contract (1)

(1) This accrued liability relates to a foreign currency forward contract that the Company’s U.K.

subsidiary entered into with Bank of America to sell U.S.

Dollars and receive Pound Sterling.

This foreign currency forward contract matured on August 30, 2018, but the settlement of the currencies in the amount of $ 6.9 million did not occur until September 4, 2018.

As a result, as of August 31, 2018, the Company owed Bank of America $ 6.9 million which was recorded in accrued and other liabilities.

Bank of America also owed the Company $ 6.9 million equivalent in Pound Sterling and this was recorded in other current assets as of August 31, 2018.

Short-term operating lease liability

(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 will house employees of the Company’s EMEA segment that are based in the United Kingdom.

This new office building 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):

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(“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.

Since November 15, 2017, this note agreement has been amended two times, most recently on March 16, 2020 (the “Second Amendment”).

The Second Amendment amended the Note Agreement to permit the Company (inclusive of its subsidiaries) to enter into an amended and restated credit agreement with Bank of America N.A.

(“Bank of America”) .

In addition, the Second Amendment includes certain conforming amendments to the Note Agreement consistent with the Company’s credit agreement with Bank of America, including a schedule of permitted consolidated capital expenditures and related carryforward provisions for unused portions each fiscal year.

The Series A Notes bear interest at 3.39 % per annum and will mature on November 15, 2032 , unless earlier paid by the Company.

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Interest is also payable semi-annually in May and November of each year.

During fiscal year 2019, the Company repaid $ 0.8 million in principal on the Series A Notes pursuant to its semi-annual principal payment requirements .

During the fiscal year ended August 31, 2020, the Company repaid $ 0.8 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.

1 unchanged sentence

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.

As of August 31, 2020, the Company had no t issued 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.

On September 30, 2020, the Company entered into an amendment to the Note Agreement and issued $ 52.0 million in Shelf Notes.

See Note 18 – Subsequent Events for additional information on this agreement.

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.

On March 16, 2020, the Company entered into an Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America.

The Credit Agreement modified the Company’s previously existing agreement dated June 17, 2011 (as amended on January 7, 2013, May 13, 2015, November 16, 2015, September 1, 2016, November 15, 2017, February 23, 2018 and January 22, 2019).

The Credit Agreement increased the revolving commitment from $ 100.0 million to $ 150.0 million and increased the sublimit for the revolving commitment for borrowing by WD-40 Company Limited, a wholly owned operating subsidiary of the Company for Europe, the Middle East, Africa and India, from $ 50.0 million to $ 100.0 million.

In addition to other non-material and technical amendments, the Credit Agreement also modified certain restrictive covenants.

The Credit Agreement also includes a new schedule of permitted consolidated capital expenditures to permit the Company to make contemplated capital investments in the current and future fiscal years of up to $ 30.5 million in fiscal year 2020, $ 19.0 million in fiscal year 2021, and $ 15.0 million for fiscal years 2022, 2023, 2024 and 2025.

The Credit Agreement also increased the carryforward from one fiscal year

to the next fiscal year of unused Permitted Consolidated Capital Expenditures from $ 2.5 million to $ 5.0 million.

The new maturity date for the revolving credit facility per the Credit Agreement is March 16, 2025 .

Per the terms of the Credit 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 Company may not declare or pay cash dividends in the current fiscal quarter that, when added to dividends paid in the prior three fiscal quarters, will exceed 75 % of the Company’s consolidated net income for the then most recently ended four quarters for which financial statements are delivered to Bank of America as required by the Credit Agreement (the “Dividend Covenant”).

The Company’s Note Agreement with Prudential also has a conforming dividend covenant with identical terms.

On April 8, 2020, the Company signed letters from Bank and America and Prudential acknowledging an agreement between the Company and both lenders to permit the Company to add back to its net income for the quarter ended August 31, 2019 a one-time, non-cash charge for an uncertain tax position associated with the Tax Cuts and Jobs Act “toll tax” in the amount of $ 8.7 million solely for the purpose of the Dividend Covenant.

The Credit Agreement also 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.

Per the terms of the Credit 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 $ 0.4 million in net borrowings outstanding under the autoborrow agreement as of August 31, 2019.

The Company had no outstanding balance under the autoborrow agreement as of August 31, 2020.

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 fiscal year 2019, the Company repaid $ 20.0 million in short-term borrowings outstanding under the line of credit and drew an additional $ 20.0 million in short-term borrowings in U.S.

In January 2019, the Company paid its entire $ 44.0 million U.S.

Dollar balance of long-term outstanding draws in the United States and replaced them with an equivalent amount of draws in Euros and Pound Sterling at its U.K.

The Company has the ability to refinance any draw under the line of credit with successive short-term borrowings through the March 16, 2025 maturity date.

Outstanding draws for which management has both 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 first three quarters of fiscal year 2020, the Company repaid $ 5.0 million in short-term borrowings outstanding under the line of credit and drew an additional $ 90.0 million in U.S.

Dollars, which included an $ 80.0 million draw in U.S.

Dollars in March 2020 in response to the COVID-19 pandemic.

Although the Company did not have any anticipated need for this additional liquidity, the Company decided to draw this additional amount to ensure future liquidity given the recent significant impact on global financial markets and the economy as a result of the COVID-19 pandemic.

The Company repaid $ 55.0 million of these outstanding draws in the fourth quarter of fiscal year 2020 in anticipation of the changes that it made to its debt structure in September 2020 to include more long-term debt.

See Note 18 – Subsequent Events for additional information.

The Company maintains a balance of outstanding draws in U.S.

Dollars in the Americas segment, as well as in Euros and Pound Sterling in the EMEA segment.

Euro and Pound Sterling denominated draws will fluctuate in U.S.

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As of August 31, 2020, the Company had a balance of $ 95.9 million of outstanding draws on the line of credit.

Based on the Company’s ability and intent assessment, $ 42.2 million of this $ 62.2 million was classified as long-term and the remaining $ 20.0 million as short-term as of August 31, 2019.

Based on the Company’s ability and intent assessment as well as considerations related to debt structure changes and refinancing discussed in detail in Note 18 – Subsequent Events, the Company has classified this entire amount as long-term as of August 31, 2020.

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

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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.

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, declare, make or incur obligations to make certain restricted payments, including the payment of dividends and payments for the repurchase shares of the Company’s capital stock and enter into certain merger or consolidation transactions.

Each agreement also includes a most favored lender provision which requires that any time any other lender has the benefit of one or more financial or operational covenants that is different than, or similar to, but more restrictive than those contained in its own agreement, those covenants shall be immediately and automatically incorporated by reference in the other lender’s agreement.

The Credit Agreement includes, among other limitations on indebtedness, a $ 35.0 million limit on other unsecured indebtedness, including indebtedness incurred under the Series A Notes and any Shelf Notes to be offered for sale under the Note Agreement.

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

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As of August 31, 2020, the Company was in compliance with all debt covenants under both the Note Agreement and the Credit Agreement .

On September 30, 2020, the Company entered into the first amendment to the Credit agreement and a third amendment to the Note Agreement.

See Note 18 – Subsequent Events for additional information on these agreements.

Share Repurchase Plans

On June 19, 2018, the Company’s Board of Directors approved a new 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 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 thereto.

During the period from September 1, 2018 through August 31, 2019, the Company repurchased 175,955 shares at an average price of $ 168.34 per share, for a total cost of $ 29.6 million under this $ 75.0 million 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 remained in effect through August 31, 2020, the Company was authorized to acquire up to $ 75.0 million of its outstanding shares on terms and conditions that were acceptable to the Company’s Chief Executive Officer and Chief Financial Officer and in compliance with all laws and regulations thereto.

During the period from September 1, 2018 through August 31, 2020, the Company repurchased 268,538 shares at a total cost of $ 46.4 million under this $ 75.0 million plan.

During fiscal year 2020, the Company repurchased 92,583 shares at an average price of $ 181.71 per share, for a total cost of $ 16.8 million under this $ 75.0 million plan.

On April 8, 2020, the Company elected to temporarily suspend repurchases under this share buy-back plan which expired on August 31, 2020.

The Company made this election in order to preserve cash while it continued to monitor the impacts of the COVID-19 pandemic.

Therefore, no repurchase transactions were made between April 8, 2020 and August 31, 2020.

Earnings per Common Share

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Weighted-average common shares outstanding, diluted

For the fiscal year ended August 31, 2019, weighted-average stock-based equity awards outstanding that are non-participating securities in the amount of 1,082 were excluded from the calculation of diluted EPS under the treasury stock method as they were anti-dilutive.

There were no anti-dilutive stock-based equity awards outstanding for the fiscal years ended August 31, 2018 and 2017.

For the fiscal years ended August 31, 2020 and 2019,weighted-average stock-based equity awards outstanding that are non-participating securities in the amount of 6,172 and 1,082 , respectively, were excluded from the calculation of diluted EPS under the treasury stock method as they were anti-dilutive.

There were no anti-dilutive stock-based equity awards outstanding for the fiscal year ended August 31, 2018.

Revenue Recognition

On September 1, 2018, the Company adopted ASC 606 using the modified retrospective method and recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening retained earnings.

As a result, the Company recognized a reduction of $ 0.3 million to opening retained earnings as the cumulative effect of adopting this new revenue standard.

This adjustment did not have a material impact on the Company ’ s consolidated financial statements.

Results for reporting periods beginning after September 1, 2018 are presented under ASC 606, while prior period amounts are presented under the accounting standards in effect for those respective periods.

As a result of the adoption of ASC 606 and management ’ s consideration of the factors in the five-step approach, the timing for recognizing revenue has been delayed for certain customers and accelerated for others, particularly for customers in the Company ’ s Americas segment.

Under ASC 606, the timing of revenue recognition is determined when control transfers to our customers, while under the prior revenue recognition guidance, timing of revenue was focused more on the transfer of the risks and rewards.

Under the prior revenue recognition guidance, the Company effectively retained the risk of loss until the goods reached the customer as if those customers had designated shipping terms.

Under ASC 606, transfer of risks and rewards is just one indicator of whether control has transferred.

Management determined that revenue, after considering all indicators, is recognized for those customers when goods are shipped or picked up from the Company ’ s warehouses.

The Company assessed the financial line items impacted by adopting this standard compared to the previous revenue guidance, and management concluded that any differences in financial statement line items are inconsequential to the Company ’ s consolidated financial statements for fiscal year 2019.

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.

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The Company records estimates of variable consideration, which primarily includes rebates/other discounts (cooperative marketing programs, volume-based discounts, shelf price reductions and allowances for shelf space, charges from customers for services they provided to us related to the sale and penalties/fines charged to us by customers associated with failing to adhere to contractual obligations), , coupon offers, cash discount allowances, and sales returns, as a reduction of sales in its consolidated statements of operations.

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.

Rebates/Other Discounts — The Company offers various on-going trade promotion programs with customers and provides other discounts to customers that require management to estimate and accrue for the expected costs of such programs or discounts.

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 August 31, 2019, the Company had a $ 7.5 million balance in rebate liabilities, which are included in accrued liabilities on the Company ’ s consolidated balance sheets, and recorded approximately $ 18.2 million in rebates as a reduction to sales during fiscal year 2019.

Other discounts include items such as charges from customers for services they provide related to the sale of WD-40 Company products and penalties/fees associated with WD-40 Company failing to adhere to contractual obligations (e.g., errors on purchase orders, errors on shipment, late deliveries, etc.).

Costs related to rebates, cooperative advertising and other promotional activities and other discounts are recorded as a reduction to sales upon delivery of the Company ’ s products to its customers.

The Company had a $ 7.5 million balance in rebate/other discount liabilities as of both August 31, 2020 and 2019, which are included in accrued liabilities on the Company ’ s consolidated balance sheets.

The Company recorded approximately $ 20.7 million and $ 18.2 million in rebates/other discounts as a reduction to sales during fiscal years 2020 and 2019, respectively.

Coupons — Coupon costs are based upon historical redemption rates and are recorded as a reduction to sales as incurred, which is when the coupons are circulated.

As of August 31, 2019, the Company had a $ 0.2 million balance in coupon redemption liabilities, which are included in accrued liabilities on the Company ’ s consolidated balance sheets, and recorded approximately $ 0.4 million in coupons as a reduction to sales during fiscal year 2019.

Coupon redemption liabilities, which are included in accrued liabilities on the Company’s consolidated balance sheets, were not significant at August 31, 2020 and 2019.

Coupons recorded as a reduction to sales were not significant during fiscal years 2020 and 2019, respectively.

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 August 31, 2019, the Company had a $ 0.5 million balance in the allowance for cash discounts and recorded approximately $ 4.2 million in cash discounts as a reduction to sales during fiscal year 2019.

The Company had $ 0.5 million balance in the allowance for cash discounts at both August 31, 2020 and 2019.

The Company recorded approximately $ 4.4 million and $ 4.2 million in cash discounts as a reduction to sales during fiscal year 2020 and 2019, respectively .

Sales returns — The Company recognizes revenue net of allowances for estimated returns, which is based on historical return rates, with a corresponding reduction to cost of products sold.

Although the Company typically does not have definitive sales return provisions included in the contract terms with its customers, when such provisions have been included, they have not been significant.

Under the provisions of ASC 606, the Company is now required to present its provision for sales returns on a gross basis as a liability.

The Company ’ s refund liability for sales returns was $ 0.4 million at August 31, 2019, which is included in accrued liabilities and represents the amount expected to be owed to the customers for product returns.

Under the current revenue accounting standard, ASC 606, the Company is now required to present its provision for sales returns on a gross basis as a liability.

The Company ’ s refund liability for sales returns is included in accrued liabilities and represents the amount expected to be owed to the customers for product returns.

The Company’s refund liability for sales returns was not significant at August 31, 2020 and 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 $ 0.1 million at August 31, 2019.

In prior periods, the Company recognized a provision for estimated sales returns on a net basis, and as allowed under the modified retrospective approach, the comparative prior period information has not been restated for this change.

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 August 31, 2020 and August 31, 2019.

Disaggregation of Revenue

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Revenue is subsequently recognized when revenue recognition criteria are met, generally when control of the product transfers to the customer.

The Company had contract liabilities of $ 1.1 million and $ 0.3 million as of September 1, 2018 and August 31, 2019, respectively.

All of the $ 1.1 million that was included in contract liabilities as of September 1, 2018 was recognized to revenue during fiscal year 2019.

The Company had contract liabilities of $ 1.4 million and $ 0.3 million as of August 31, 2020 and 2019, respectively.

All of the $ 0.3 million that was included in contract liabilities as of August 31, 2019 was recognized to revenue during fiscal year 2020.

These contract liabilities are recorded in accrued liabilities on the Company ’ s consolidated balance sheets.

The Company did not have any contract assets as of September 1, 2018 and August 31, 2019

The Company did no t have any contract assets as of August 31, 2020 and August 31, 2019

Related Parties

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Sandfort as a director of WD-40 Company.

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 consolidated financial statements include sales to Tractor Supply of $ 1.9 million for fiscal year 2019 and $ 1.4 million and $ 1.2 million for fiscal years 2018 and 2017, respectively.

Accounts receivable from Tractor Supply were $ 0.3 million as of August 31, 2019 and $ 0.5 million as of August 31, 2018.

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, until January 13, 2020 when he retired as Chief Executive Officer.

Sandfort served as an executive officer of Tractor Supply during the Company’s first two quarters of fiscal year 2020, Tractor Supply is treated as a related party to the Company through January 13, 2020.

The consolidated financial statements include sales to Tractor Supply of $ 0.9 million and $ 1.9 million for fiscal years 2020 and 2019, respectively.

Accounts receivable from Tractor Supply were not significant at both August 31, 2020 and August 31, 2019.

Commitments and Contingencies

The Company was committed under certain non-cancellable capital and operating leases at August 31, 2019.

The Company's capital leases were not significant as of August 31, 2019.

The Company’s leases provide for the following future fiscal year minimum payments (in thousands):

Rent expense was $ 1.8 million, $ 2.0 million, and $ 2.1 million for the fiscal years ended August 31, 2019, 2018 and 2017, respectively.

Purchase Commitments

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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.

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 six months .

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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.

Except as disclosed herein, there are 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.

On or about July 31, 2018, claims for damages were asserted against the Company in an “Amended Statement of Claim” filed in a civil proceeding in Malaysia before the High Court of Malaya at Shah Alam in the State of Selangor Darul Ehsan, Civil Suit No.

BA-22NCvC-531-09/2017 (the “Malay Litigation”).

The Malay Litigation was first filed in September 2017 by Sunway Winstar Sdn.

(“Sunway”) against a former employee of Sunway and the former employee’s new employer, Ekotrends Capital Sdn.

Bdh (“Ekotrends”).

Sunway was a marketing distributor for the Company for the country of Malaysia from 2004 until 2017.

Ekotrends is an affiliate of Bun Seng Hardware Sdn.

(“Bun Seng”), the Company’s current marketing distributor for Malaysia.

The Malay Litigation asserted that the former employee and Ekotrends misappropriated confidential information, including customer lists, associated with Sunway’s terminated relationship as the Company’s exclusive marketing distributor.

By order of the court following the Company’s motion to intervene in order to protect and assert its right to ownership of the customer lists and other confidential information associated with the Company’s business in Malaysia, Sunway filed its Amended Statement of Claim to add Bun Seng as a defendant and to assert new and separate claims against the Company alleging conspiracy with Ekotrends and Bun Seng to injure the business and reputation of Sunway.

The Company denies the allegations asserted by Sunway and will vigorously defend itself in the Malay Litigation.

The Company believes that an unfavorable outcome in the Malay Litigation is not probable, but that an award of damages is reasonably possible.

Due to uncertainty as to the theories for recovery of damages asserted by Sunway against the Company and as to results in proceedings under Malaysian law, the Company is unable to estimate the possible loss or range of loss.

As of August 31, 2020, 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.

Indemnifications

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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 August 31, 2020.

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Stock-based compensation expense

Lease Accounting

Uniform capitalization

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Amortization of tax goodwill and intangible assets

Investments in partnerships

Lease Accounting

Total deferred tax liabilities

Net deferred tax liabilities

The Company had state net operating loss (“NOL”) carryforwards of $ 4.8 million and $ 3.0 million as of August 31, 2019 and 2018, respectively, which generated a net deferred tax asset of $ 0.2 million as of both August 31, 2019 and 2018.

The Company had state net operating loss (“NOL”) carryforwards of $ 3.9 million and $ 4.8 million as of August 31, 2020 and 2019, respectively, which generated a net deferred tax asset of $ 0.3 million and $ 0.2 million as of August 31, 2020 and 2019, respectively.

The state NOL carryforwards, if unused, will expire between fiscal year 2021 and 2040.

The Company also had tax credit carryforwards of $ 2.8 million as of both August 31, 2019 and 2018, of which $ 2.6 million and $ 2.5 million, respectively, is attributable to U.K.

The Company also had tax credit carryforwards of $ 3.4 million and $ 2.8 million as of August 31, 2020 and 2019, respectively, of which $ 3.2 million and $ 2.6 million, respectively, is attributable to U.K.

tax credit carryforwards, which do not expire.

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Accordingly, a full valuation allowance has been recorded against the related deferred tax asset associated with the U.K.

tax credit carryforwards and certain state credit carryforwards.

tax credit carryforwards and certain state carryforwards.

A reconciliation of the statutory federal income tax rate to the Company’s effective tax rate is as follows (in thousands):

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Benefit from qualified domestic production deduction

Net benefit from GILTI/FDII

Tax Cuts and Jobs Act:

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Provision for income taxes

On December 20, 2017 the United States House of Representatives and the Senate passed the “Tax Cuts and Jobs Act” (the “Tax Act”), which was signed into law on December 22, 2017 and became effective beginning January 1, 2018.

Due to the complexity of the Tax Act, the SEC issued guidance in SAB 118 which clarified the accounting for income taxes under ASC 740 if certain information was not yet available, prepared or analyzed in reasonable detail to complete the accounting for income tax effects of the Tax Act.

SAB 118 provided for a measurement period of up to one year after the enactment of the Tax Act, during which time the required analyses and accounting must have been completed.

During the measurement period, provisional amounts must have been reported for income tax effects of the Tax Act for which the accounting was incomplete but a reasonable estimate could be determined.

During fiscal year 2018, the Company recorded provisional amounts for the income tax effects of the changes in tax law and tax rates during this measurement period.

The Company did not significantly adjust these provisional amounts from the beginning of fiscal year 2019 through the end of the SAB 118 measurement period which occurred during the second quarter of the Company’s fiscal year 2019.

Although the Company no longer considers these amounts to be provisional, the determination of the Tax Act’s income tax effects remains subject to change following subsequent legislation, further interpretation of the Tax Act based on the publication of U.S.

Treasury regulations, or guidance from the Internal Revenue Service and state tax authorities .

In November 2018, subsequent to the filing of the Company’s federal income tax return, the U.S.

Treasury released proposed regulations that were subsequently finalized in June 2019.

During July 2019, the Company completed its assessment of these final regulations.

Due to the uncertainty created by these regulations, the Company recorded a reserve for an uncertain tax position in the fourth quarter of its fiscal year 2019 in the amount of $ 8.7 million, inclusive of accrued interest of approximately $ 0.4 million.

This uncertain tax position represents the tax liability that would be imposed if these final regulations are enforced.

This liability reserve increased the Company’s provision for income taxes and lowered its net income for the year ending August 31, 2019.

Management has assessed other fiscal year 2019 impacts of the Tax Act and has determined that the Company has lost the benefit from the Domestic Production Activities Deduction.

However, the Company has also acquired certain net benefits beginning in fiscal year 2019 from the favorable impacts of the Foreign Derived Intangible Income (“FDII”) section of the Tax Act, partially offset by the unfavorable impacts of the Global Intangible Low-Taxed Income (“GILTI”).

Another significant section of the Tax Act, the Base Erosion Anti-Abuse Tax (“BEAT”), does not apply to the Company’s fiscal year 2019 as the Company does not meet the minimum revenue requirements under the BEAT.

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

The Tax Act requires taxpayers to elect an accounting method for expenses allocated to the GILTI calculation.

As ASC 740, Income Taxes,

does not directly address the accounting for GILTI, the FASB staff concluded that entities must make an accounting policy election to either:

(1) treat GILTI as a period cost if and when incurred, or (2) recognize deferred taxes for basis differences that are expected to reverse as GILTI in future years.

During the first quarter of fiscal year 2019, management made the accounting policy election to account for GILTI as a current period cost included in tax expense in the year incurred

The provision for income taxes was 19.6 % and 30.8 % of income before income taxes for the fiscal years ended August 31, 2020 and 2019, respectively.

The increase in the effective income tax rate from period to period was primarily due to the uncertain tax position in the amount of $ 8.7 million related to the toll tax that was recorded in the fourth quarter of fiscal year 2019.

In addition, the remeasurement of deferred income taxes related to the Tax Act, which was recorded as a provisional benefit and discrete item in fiscal year 2018, resulted in a favorable impact of $ 6.8 million to the Company’s fiscal year 2018 effective income tax rate.

These one-time impacts resulted in a significantly higher fiscal year 2019 effective income tax rate compared to the prior fiscal year.

In addition, the effective income tax rate for both fiscal years 2019 and 2018 were favorably impacted by the Tax Act’s lower statutory tax rate.

As the Company’s fiscal year ends on August 31st, the Tax Act resulted in a blended federal statutory tax rate of 25.7 % for fiscal year 2018.

For fiscal year 2019, however, the Tax Act was in effect for the Company’s full year and resulted in a federal statutory tax rate for the year of 21 %.

The tax rate was also favorably impacted in fiscal year 2019 by the net benefit received from the application of the GILTI and FDII calculations which were partially offset by the loss of the Domestic Production Activities Deduction.

The decrease in the effective income tax rate from period to period was primarily due to the one-time uncertain tax position in the amount of $ 8.7 million associated with the Tax Cuts and Jobs Act mandatory one-time “toll tax” on unremitted foreign earnings that was recorded in the fourth quarter of fiscal year 2019.

This resulted in a significantly higher fiscal year 2019 effective income tax rate compared to fiscal year 2020.

In the fourth quarter of fiscal year 2020, the U.S.

Treasury released regulations related to a High-Tax Exception for those jurisdictions subject to the Global Intangible Low Taxed Income (“GILTI”) tax.

These newly released regulations resulted in an immaterial favorable impact to the fiscal year 2020 tax provision.

Reconciliations of the beginning and ending amounts of the Company’s gross unrecognized tax benefits, excluding interest and penalties, are as follows (in thousands):

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Unrecognized tax benefits - end of fiscal year

Gross unrecognized tax benefits totaled $ 9.4 million and $ 1.0 million for the fiscal years ended August 31, 2019 and 2018, respectively, of which $ 9.2 million and $ 0.9 million, respectively, would affect the Company’s effective income tax rate if recognized.

Interest and penalties related to uncertain tax positions included in tax expense was $ 0.4 million for the fiscal year ended August 31, 2019, entirely related to the toll tax liability reserve accrued in the fourth quarter of fiscal year 2019.

There were no significant interest or penalties included in income tax expense for the fiscal year ended August 31, 2018.

The total balance of accrued interest and penalties related to uncertain tax positions was $ 0.4 million for the fiscal year ended August 31, 2019 and was not significant for the fiscal year ended August 31, 2018.

Gross unrecognized tax benefits totaled $ 9.4 million for both the fiscal years ended August 31, 2020 and 2019, of which $ 9.2 million in both fiscal years would affect the Company’s effective income tax rate if recognized.

Interest and penalties related to uncertain tax positions included in tax expense was $ 0.5 million and $ 0.4 million for fiscal year ending August 31, 2020 and 2019, respectively, primarily related to the toll tax liability reserve.

The total balance of accrued interest and penalties related to uncertain tax positions was $ 1.0 million and $ 0.5 million for the fiscal years ended August 31, 2020 and 2019, respectively.

The Company is subject to taxation in the U.S.

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Internal Revenue Service .

The Company is currently under audit in various state jurisdictions for fiscal years 2016 through 2019.

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.

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As of August 31, 2020, 627,742 shares of common stock remained available for future issuance pursuant to grants of awards under the 2016 Plan.

The shares of common stock to be

issued pursuant to awards under the 2016 Plan may be authorized shares not previously issued, or treasury shares.

The shares of common stock to be issued pursuant to awards under the 2016 Plan may be authorized shares not previously issued, or treasury shares.

The Company has historically issued new authorized shares not previously issued upon the settlement of the various stock-based equity awards under its equity incentive plans.

Vesting of the RSUs granted to directors is immediate, with shares to be issued pursuant to the vested RSUs upon termination of each director’s service as a director of the Company.

Vesting of the one-time grant of RSUs granted to certain key executives of the Company in March 2008 in settlement of these key executives’ benefits under the Company’s supplemental employee retirement plan agreements was over a period of three year s from the date of grant, with shares to be issued pursuant to the vested RSUs six months following the day after each executive officer’s termination of employment with the Company.

Vesting of the RSUs granted to certain high level employees is over a period of three years from the date of grant, subject to potential earlier vesting in the event of retirement of the holder of the award in accordance with the award agreement, with shares to be issued pursuant to the vested RSUs at the time of vest.

Vesting of the one-time grant of RSUs granted to certain key executives of the Company in March 2008 in settlement of these key executives’ benefits under the Company’s supplemental employee retirement plan agreements was over a period of three years from the date of grant, with shares to be issued pursuant to the vested RSUs six months following the day after each executive officer’s termination of employment with the Company.

pursuant to the vested RSUs at the time of vest.

The director RSU holders and the executive officer March 2008 grant date RSU holders are entitled to receive dividend equivalents with respect to their RSUs, payable in cash as and when dividends are declared by the Company’s Board of Directors.

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No unamortized compensation cost for DPUs remained as of August 31, 2020.

Stock Options

Fiscal year 2008 was the last fiscal period in which the Company granted stock options and no stock options remained outstanding as of the prior fiscal year ended August 31, 2018.

The estimated fair value of each of the Company’s stock option awards granted in and prior to fiscal year 2008 was determined on the date of grant using the Black-Scholes option pricing model.

The total intrinsic value of stock options exercised was $ 0.5 million and $ 1.6 million for the fiscal years ended August 31, 2018 and 2017, respectively.

The income tax benefits from stock options exercised totaled $ 0.1 million and $ 0.4 million for the fiscal years ended August 31, 2018 and 2017, respectively.

Restricted Stock Units

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The expected volatility utilized was based on the historical volatilities of the Company’s common stock and the Index in order to model the stock price movements.

The volatility used was calculated over the most recent 2.90 -year period for MSUs granted during the fiscal year ended August 31, 2019 and over the most recent 2.89 -year periods for MSUs granted during each of the fiscal years ended August 31, 2018 and 2017, which were the remaining terms of the performance Measurement Period at the dates of grant.

The volatility used was calculated over the most recent 2.90 -year period for MSUs granted during the fiscal year ended August 31, 2020 and over the most recent 2.90 -year and 2.89 -year periods for MSUs granted during each of the fiscal years ended August 31, 2019 and 2018, which were the remaining terms of the performance Measurement Period at the dates of grant.

The risk-free interest rates used were based on the implied yield available on a U.S.

Treasury zero-coupon bill with a remaining term equivalent to the remaining performance Measurement Period.

The MSU awards stipulate that, for

purposes of computing the relative TSR for the Company as compared to the return for the Index, dividends paid with respect to both the Company’s stock and the Index are to be treated as being reinvested into the stock of each entity as of the ex-dividend date.

The MSU awards stipulate that, for purposes of computing the relative TSR for the Company as compared to the return for the Index, dividends paid with respect to both the Company’s stock and the Index are to be treated as being reinvested into the stock of each entity as of the ex-dividend date.

Accordingly, an expected dividend yield of zero was used in the Monte Carlo simulation model, which is the mathematical equivalent to reinvesting dividends in the issuing entity over the performance Measurement Period.

11 unchanged sentences

The total intrinsic value of all MSUs converted to common shares was $ 4.4 million, $ 4.0 million and $ 3.0 million for the fiscal years ended August 31, 2020, 2019 and 2018, respectively.

The income tax benefits from MSUs converted to common shares totaled $ 0.9 million, $ 0.8 million and $ 0.9 million for the fiscal years ended August 31, 2019, 2018 and 2017, respectively.

The income tax benefits from MSUs converted to common shares totaled $ 0.9 million for both the fiscal years ended August 31, 2020 and 2019 and $ 0.8 million for the fiscal years ended 2018.

Deferred Performance Units

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The Profit Sharing/401(k) Plan may be amended or discontinued at any time by the Company.

The Company’s contribution expense for the Profit Sharing/401(k) Plan was $ 3.3 million for both fiscal years 2019 and 2018, and $ 3.2 million for fiscal year 2017.

The Company’s contribution expense for the Profit Sharing/401(k) Plan was $ 3.6 million for fiscal year 2020 and $ 3.3 million for both fiscal years 2019 and 2018.

The Company’s international subsidiaries have similar benefit plan arrangements, dependent upon the local applicable laws and regulations.

The plans provide for Company contributions to an appropriate third-party plan, as approved by the subsidiary’s Board of Directors.

The Company’s contribution expense related to the international plans was $ 1.6 million for both fiscal years 2019 and 2018, and was $ 1.4 million for the fiscal year ended August 31, 2017.

The Company’s contribution expense related to the international plans was $ 1.6 million for the fiscal years ended August 31, 2020, 2019 and 2018.

Business Segments and Foreign Operations

43 unchanged sentences

Subsequent Events

Dividend Declaration

On October 5, 2020 , the Company’s Board of Directors declared a cash dividend of $ 0.67 per share payable on October 30, 2020 to shareholders of record on October 16, 2020 .

First Amendment to Credit Agreement

On September 30, 2020, the Company entered into a First Amendment to Credit Agreement (the “First Amendment to Credit Agreement”) with Bank of America.

The First Amendment to Credit Agreement modifies the Company’s existing $ 150.0 million Credit Agreement dated March 16, 2020.

Capitalized terms not otherwise defined in this report have the meaning given to such terms in the Credit Agreement, as detailed in Exhibit 10(ad) in Part IV—Item 15, “Exhibits, Financial Statement Schedules” included in this report.

The First Amendment to Credit Agreement revises certain financial and restrictive covenants and adjusts the interest rates on borrowings under the Credit Agreement as described below.

The maximum Consolidated Leverage Ratio has been increased from 3.0 to 1.0 to 3.5 to 1.0.

The Restricted Payments covenant has been modified to permit the payment of dividends so long as immediately prior to and after giving effect to the payment of dividends, no Event of Default exists and the Company and its subsidiary Loan Parties are in compliance with applicable financial covenants.

In addition to other non-material and technical amendments to the Credit Agreement, the First Amendment to Credit Agreement also modifies the restrictive covenants relating to Indebtedness and Investments.

The limitation on other unsecured Indebtedness (including borrowing under the Company’s amended Note Agreement described below) has been increased from $ 35.0 million to $ 125.0 million.

With respect to the restrictions on Investments, intercompany loans, advances or capital contributions from any Loan Party to Subsidiaries that are not Loan Parties may be made in an aggregate amount of up to $ 10.0 million outstanding at any time from and after September 30, 2020.

In addition, Investments not otherwise covered by any other exception to the restriction on Investments may be made in an aggregate amount of up to $ 15.0 million outstanding at any time from and after November 15, 2017.

The First Amendment to Credit Agreement also modifies the interest rate applicable to borrowings under the Credit Agreement by changing the Applicable Rate from 0.90 % for Libor Rate Loans and 0.0 % for Prime Rate Loans to a three-tier pricing approach tied to the Company’s Consolidated Leverage Ratio.

For Libor Rate Loans and Prime Rate Loans, the Applicable Rate is a spread added to the Libor Daily Floating Rate and Prime Rate, respectively.

An increase or decrease in the Applicable Rate will apply in the event of a change in the Consolidated Leverage Ratio from and after the first Business Day after the Company delivers a Compliance Certificate to Bank of America.

Table 1 below reflects the tiered Applicable Rate.

Consolidated Leverage Ratio

Commitment Fee

Libor Rate Loans

Letter of Credit Fee

Prime Rate Loans

< 2.00 to 1.0

< 3.00 to 1.0 but ≥ 2.00 to 1.0

≥ 3.00 to 1.0

The new Maturity Date for the revolving credit facility per the Credit Agreement is September 30, 2025 .

Third Amendment to Note Purchase and Private Shelf Agreement

On September 30, 2020, the Company entered into a Third Amendment to Note Purchase and Private Shelf Agreement (the “Third Amendment to Note Agreement”) amending its existing Note Agreement.

The Third Amendment to Note Agreement amends the Note Agreement to permit the Company (inclusive of its subsidiaries) to enter into the First Amendment to Credit Agreement with Bank of America and the Third Amendment includes certain conforming amendments to the Note Agreement consistent with the First Amendment to Credit Agreement, including the revision of the financial and restrictive covenants described above.

All other material terms included in the Credit Agreement and the Note Agreement remain unchanged as a result of execution of the First Amendment to Credit Agreement and the Third Amendment to Note Agreement.

Issuance and Sale of $52.0 Million in Notes under Note Purchase and Private Shelf Agreement

On September 30, 2020, the Company issued and sold senior unsecured notes pursuant to the Note Agreement to specified Note Purchasers in the aggregate amount of $ 52.0 million.

Pursuant to the Note Agreement (as amended by the Third Amendment to Note Agreement), the Company agreed to sell $ 26.0 million aggregate principal amount of senior unsecured notes (the “Series B Notes”) to specified Note Purchasers and the Company agreed to sell $ 26.0 million aggregate principal amount of senior unsecured notes (the “Series C Notes” and together with the Series B Notes, the “Senior Notes”) to specified Note Purchasers.

The Series B Notes will bear interest at 2.5 % per annum and will mature on November 15, 2027 , unless earlier redeemed by the Company.

The Series C Notes will bear interest at 2.69 % per annum and will mature on November 15, 2030 , unless earlier redeemed by the Company.

Interest on the Senior Notes is payable semi-annually beginning on May 15, 2021.

The Company used the proceeds from the Senior Notes to pay down $ 50.0 million in borrowings under the Company’s existing $ 150.0 million Credit Agreement.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures