NOTES TO CONDENSED CONSOL IDATED FINANCIAL STATEMENTS (Unaudited)



Note 1.  The Company



WD-40 Company (“the Company”), based in San Diego, California, is a global marketing organization dedicated to creating positive lasting memories by developing and selling products which solve problems in workshops, factories and homes around the world.  The Company market s   its maintenance products and its homecare and cleaning products under the following well-known brands: WD-40®, 3-IN-ONE®, GT85®, X-14®, 2000 Flushes®, Carpet Fresh®, no vac®, Spot Shot®, 1001®, Lava® and Solvol®.  Currently included in the WD-40 brand are the WD-40 multi-use product and the WD-40 Specialist® and WD-40  BIKE®   product lines. 



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



Note 2.  Basis of Presentation and Summary of Significant Accounting Policies



Basis of Consolidation



The condensed consolidated financial statements included herein have been prepared by the Company, without audit, according to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The August 31, 201 6   year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP.

In the opinion of management, the unaudited financial information for the interim periods shown reflects all adjustments necessary for a fair statement thereof   and such adjustments are of a normal recurring nature. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 201 6 , which was filed with the SEC on October 2 4 ,   201 6 .



The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.



Use of Estimates



The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.



Foreign Currency Forward Contracts



In the normal course of business, the Company employs established policies and procedures to manage its exposure to fluctuations in foreign currency exchange rates. The Company’s U.K. subsidiary, whose functional currency is Pound Sterling, utilizes foreign currency forward contracts to limit its exposure in converting accounts receivable and accounts payable balances denominated in non-functional currencies. The principal currency affected is the Euro. The Company regularly monitors its foreign currency exchange rate exposures to ensure the overall effectiveness of its foreign currency

hedge positions. While the Company engages in foreign currency hedging activity to reduce its risk, for accounting purposes, none of its foreign currency forward contracts are designated as hedges.



Foreign currency forward contracts are carried at fair value, with net realized and unrealized gains and losses recognized currently in other income (expense) in the Company’s consolidated statements of operations. Cash flows from settlements of foreign currency forward contracts are included in operating activities in the consolidated statements of cash flows. Foreign currency forward contracts in an asset position at the end of the reporting period are included in other current assets, while foreign currency forward contracts in a liability position at the end of the reporting period are included in accrued liabilities in the Company’s consolidated balance sheets. At November 30, 2016 , the Company had a notional amount of $ 14 . 2 million outstanding in foreign currency forward contracts , which mature in January   201 7 . Unrealized net gains and losses related to foreign currency forward contracts were not significant   at November 30, 2016 and August 31, 201 6 . Realized net losses related to foreign currency forward contracts were $0. 4 million for three month s   ended November 30 , 201 6 and the net realized gains and losses were not material for the three months ended November 30, 201 5 .



Fair Value Measurements



Accounting Standards Codification (“ASC”) 820, “ Fair Value Measurements and Disclosures” , defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes its financial assets and liabilities measured at fair value into a hierarchy that categorizes fair value measurements into the following three levels based on the types of inputs used in measuring their fair value:   



Level 1:  Observable inputs such as quoted market prices in active markets for identical assets or liabilities;

Level 2:  Observable market-based inputs or observable inputs that are corroborated by market data; and

Level 3:  Unobservable inputs reflecting the Company’s own assumptions.



Under fair value accounting, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. As of November 30, 2016 , the Company had no assets or liabilities that are measured at fair value in the financial statements on a recurring basis , with the exception of the foreign currency forward contracts , which are classified as Level 2 within the fair value hierarchy . The carrying values of cash equivale nts, short-term investments and short-term borrowings are recorded at cost, which approximates their fair values primarily due to their short-term maturities and are classified as Level 2 within the fair value hierarchy. During the   three months ended November 30, 2016 , the Company did not record any significant nonrecurring fair value measurements for assets or liabilities in periods subsequent to their initial recognition .



Recently Issued Accounting Standards



In October 2016, the   Financial Accounting Standards Board (“FASB”)   issued ASU No. 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory”, which   requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs . This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted in the first interim period of an entity's annual financial statements . The Company has evaluated the potential impacts of this updated guidance, and it does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.



In August 2016, the   FASB   issued ASU No. 2016-15, “ Classification of Certain Cash Receipts and Cash Payments ”. The amendments address eight specific cash flow issues to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. Early  adoption is permitted and should be applied using a retrospective approach. The  Company is in the process of evaluating the potential impacts of this new guidance on its consolidated financial statements.



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

assumptions, models and methods for estimating expected credit losses. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. Early  adoption is permitted. The  Company is in the process of evaluating the potential impacts of this new guidance on its consolidated financial statements.



In March 2016, the   FASB issued ASU No. 2016-09, “ Improvements to Employee Share-Based Payment Accounting”.   The amendments in this updated   guidance   include   changes   to simplify the Codification for several aspects of the accounting for share-based payment transactions, including those related to the income tax consequences, classification of awards as either equity or liabilities, accounting for forfeitures, minimum statutory withholding requirements and classification of certain items on the statement of cash flows. Certain of these changes are required to be applied retrospectively while other changes are required to be applied prospectively. This guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within that reporting period. Early  adoption is permitted. The Company does not expect that it will adopt this updated guidance early , but it expects that the adoption of this new guidance will have a more than inconsequential impact on the Company’s consolidated financial statements.  For example, if the Company had adopted this updated guidance in fiscal year 2016, its income tax expense for the year would have been reduced by approximately $2.1 million due to the recognition of excess tax benefits in the provision for income taxes rather than through additional paid-in-capital.  The Company also expects to change its policy related to forfeitures upon adoption of this new guidance such that it will recognize the impacts of forfeitures as they occur rather than recognizing them based on an estimated forfeiture rate.  Although the Company is still assessing the impacts of this change in policy for forfeitures on its consolidated financial statements, it does not expect that the impact will be material.



In February 2016, the   FASB issued ASU No. 2016-02, “ Leases”.   The new standard establishes a right-of-use model that requires a lessee to record a right-of-use asset and a lease liability on the balance sheet for all leases with terms longer than twelve months. Leases will be classified as either finance   or operating, with classification affecting the pattern of expense recognition in the income statement.   This guidance is effective for fiscal years beginning after December 15, 2018, including interim periods within that reporting period. Early  adoption is permitted and should be applied using a modified retrospective approach. The  Company is in the process of evaluating the impacts of this new guidance on its consolidated financial statements and related disclosures.



In August 2014, the   FASB issued ASU No. 2014-15, “ Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern ”.  This updated guidance requires management to evaluate whether there is a substantial doubt about an entity's ability to continue as a going concern within one year of the date that the financial statements are issued and provide related disclosures if necessary . This guidance is effective for the first annual fiscal period ending after December 15, 2016, and for all interim and annual periods thereafter. Early  adoption is permitted. The Company does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.



In May 2014, the   FASB   issued ASU No. 2014-09, “ Revenue from Contracts with Customers ”, which supersedes the revenue recognition requirements in ASC 605, “ Revenue Recognition ”.  The core principle of this updated guidance and related amendments   is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new rule also requires additional disclosure   about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract.  This guidance was originally to be effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. In July 2015, the FASB approved a one year deferral for the effective date of t his guidance. Early adoption is permitted but only to the original effective date. Companies are permitted to adopt this new rule following either a full or modified retrospective approach. The Company does not intend to adopt this guidance early and it will become effective for the Company on September 1, 2018.  The Company has not yet decided which implementation method it will adopt. Although management has completed its initial evaluation of this new guidance as it pertains to the Company, it is still in the process of determining the impacts that this updated guidance will have on the Company's consolidated financial statements .

Note 3 .  Inventories



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







At November 30, 2016, capital in progress on the balance sheet included $10.8 million associated with the purchase of the Company’s new headquarters office in San Diego in the first quarter of fiscal year 2017. For further information on the Company’ s new headquarters office, see the Liquidity and Capital Resources   section in Part I — Item 2 , “ Management’s Discussion and Analysis of Financial Condition and Results of Operations ”.









Note 5 .  Goodwill and Other Intangible Assets



Goodwill



The following table summarizes the changes in the carrying amounts of goodwill by segment (in thousands):



T here were no indicators of impairment identified as a result of the Company’s review of events and circum stances related to its goodwill subsequent to February 29, 2016, the date of its most recent annual goodwill impairment test. To date, there have been  no  impairment losses identified and recorded related to the Company’s goodwill .

Definite-lived Intangible Assets



The Company’s definite-lived intangible assets,   which include the 2000 Flushes, Spot Shot, Carpet Fresh, 1001 and GT85 trade names, the Belgium customer list, the GT85 customer relationships and the GT85 technology   are included in other intangible assets, net in the Company’s condensed consolidated balance sheets.   The following table summarizes the definite-lived intangible assets and the related accumulated amortization and impairment (in thousands):



There   has been no impairment charge for the three months ended November 30, 2016 as a result of the Company’s review of events and circumstances related to its existing definite-lived intangible assets.



Changes in the carrying amounts of definite-lived intangible assets by segment for the three months ended November 30, 2016 are summarized below (in thousands):





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

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.





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





Note 7. Debt



Revolving Credit Facility



On June 17, 2011, the Company entered into an unsecured credit agreement with Bank of America, N.A. (“Bank of America”). Since June 17, 2011, this unsecured credit agreement has been amended four   times,   most recently   on September 1, 2016, (the “Fourth Amendment”). This Fourth Amendment amended the credit agreement in connection with the purchase of the Company’s new headquarters office and land located at 9715 Business p ark Avenue, San Diego, California (the “Property”). The Fourth Amendment permits the Company to spend an aggregate amount not to exceed   $18.0   million for the acquisition and improvement costs for the Property and also includes changes to the agreement that will allow, as a permitted lien, any agreement with Bank of America for secured debt .  



Per the terms of the amended agreement, the revolving commitment may not exceed $175.0 million and the aggregate amount of the Company’s capital stock that it may repurchase may not   exceed   $150.0 million during the period from November 16, 2015 to the maturity date of the agreement so long as no default exists immediately prior and after giving effect thereto.   This revolving credit facility   matures on May 13, 2020 , and includes representations, warranties and covenants customary for credit facilities of this type, as well as customary events of default and remedies. In addition, per the terms of the amended agreement, the Company and Bank of America may enter into an autoborrow agreement in form and substance satisfactory to Bank of America, providing for the automatic advance of revolving loans in U.S. Dollars to the Company’s designated account at Bank of America. In the second quarter of fiscal year 2016, the Company entered into an autoborrow agreement with Bank of America and this agreement has been in effect since that time.



For the financial covenants, the definition of consolidated EBITDA includes the add back of non-cash stock-based compensation to consolidated net income when arriving at consolidated EBITDA. The terms of the financial covenants are as follows :  



The Company assesses its ability and intent associated with draws on the line of credit at the end of each reporting period in order to determine the proper balance sheet classification for amounts outstanding on the   line of credit .   In conjunction with the purchase of the new headquarters office in September 2016, the Company borrowed $10.0 million on the line of credit which it intends to repay in less than twelve months .   In addition, the Company had   $2.4 million in net borrowings outstanding   under the autoborrow agreement at November 30, 2016. 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. As a result , the C ompany has classified   $1 2 . 4 million borrowed under the revolving credit facility during the three months ended November 30, 2016 as short-term on its consolidated balance sheets .  



Based   on management’s ability and intent t o refinance the remainder of the Company’s short-term borrowings under the facility with successive short-term borrowings for a period of at least twelve months, the Company has classified  the remaining $122.0 million outstanding under the revolving credit facility as a long-term liability at November 30, 2016 .   The Company regularly converts existing draws on its line of credit to new draws with new maturity dates and interest rates. As of November 30, 2016, the Company had a $1 34.4 million outstanding balance on the revolving credit facility and was in compliance with all debt covenants under this credit facility .



Note 8. Share Repurchase Plans



On June 21, 201 6 , the Company’s Board of Directors approved a share buy-back plan. Under the plan, which became effective on September 1, 2016 , the Company is authorized to acquire up to $75.0 million of its outstanding shares through August 31, 2018. The timing and amount of repurchases are based on terms and conditions as may be acceptable to the Company’s Chief Executive Officer and Chief Financial Officer and in compliance with all laws and regulations applicable thereto. During the period from September 1, 201 6 through November  3 0 , 201 6 , the Company repurchased   1 12 , 701   shares at a total cost of   $1 2 . 2   million under this $75.0 million plan .



Note 9 .  Earnings per Common Share



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













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











For the three months ended November 30, 2016, there were no anti-dilutive stock-based equity awards outstanding. For the three months ended November 30, 2015 ,   weighted-average stock-based equity awards outstanding that are non-participating securities in the amount of   8 , 030 were excluded from the calculation of diluted EPS under the treasury stock method as they were anti-dilutive.  



Note 10 .  Related Parties



On October 11, 2011, the Company’s Board of Directors elected Mr. Gregory A. Sandfort as a director of WD-40 Company. Mr. Sandfort is the Chief Executive Officer of Tractor Supply Company (“Tractor Supply”), which is a WD-40 Company customer that acquires products from the Company in the ordinary course of business .  



The condensed consolidated financial statements include sales to Tractor Supply of $0.3 million for   the each of the three months ended November 30, 2016   and 201 5 , respectivel y .   Accounts rece ivable from Tractor Supply were   not material as of November 30, 2016 .  



Note 11.  Commitments and Contingencies



Purchase Commitments  



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



Upon the termination of contracts with contract manufacturers, the Company obtains certain inventory control rights and is obligated to work with the contract manufacturer to sell through all product held by or manufactured by the contract manufacturer on behalf of the Company during the termination notification period. If any inventory remains at the contract manufacturer at the termination date, the Company is obligated to purchase such inventory which may include raw materials, components and finished goods. The amounts for inventory purchased under termination commitments have been immaterial .  



In addition to the commitments to purchase products from contract manufacturers described above, the Company may also enter into commitments with other manufacturers to purchase finished goods and components to support innovation and renovation initiatives and/or supply chain initiatives . As of November 30, 2016 ,   no such commitments were outstanding.



Litigation    



From time to time, the Company is subject to various claims, law suits, investigations and proceedings arising in the ordinary course of business , including but not limited to, product liability litigation and other claims and proceedings with respect to intellectual property, breach of contract, labor and employment, tax and other matters .  As of November 30, 2016, there is no current proceeding or litigation involving the Company that management believes could have a material adverse impact on its business, financial condition and results of operations.   For further information on the risks the Company faces from existing and future claims, suits, investigations and proceedings, see the Company’s risk factors disclosed in Part I―Item 1A, “Risk Factors,” in its Annual Report on Form 10-K for the fiscal year ended August 31, 2016, which was filed with the SEC on October 24, 2016 .



Indemnifications



As permitted under Delaware law, the Company has agreements whereby it indemnifies senior officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company maintains Director and Officer insurance coverage that mitigates the Company’s exposure with respect to such obligations. As a result of the Company’s insurance coverage, management believes that the estimated fair value of these indemnification agreements is minimal . Thus,   no   liabilities have been recorded for these agreements as of November 30, 2016 .



From time to time, the Company enters into indemnification agreements with certain contractual parties in the ordinary course of business, including agreements with lenders, lessors, contract manufacturers, marketing distributors, customers and certain vendors. All such indemnification agreements are entered into in the context of the particular agreements and are provided in an attempt to properly allocate risk of loss in connection with the consummation of the underlying contractual arrangements. Although the maximum amount of future payments that the Company could be required to make under these indemnification agreements is unlimited, management believes that the Company maintains adequate levels of insurance coverage to protect the Company with respect to most potential claims arising from such agreements and that such agreements do not otherwise have value separate and apart from the liabilities incurred in the ordinary course of the Company’s business . Thus, no liabilities have been recorded with respect to such indemnification agreements as of November 30, 2016 .



Note 1 2 .  Income Taxes



The Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates, to determine its quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.



The provision for income taxes was 28.3 % and 28.5 % of income before income taxes for the three months ended November 30, 2016 and 2015, respectively. The slight decrease in the effective income tax rate from period to period was primarily driven by a favorable mix of taxable earnings from foreign operatio ns which are taxed at lower rates .



The Company is subject to taxation in the U.S. and in various state and foreign jurisdictions. Due to expired statutes, the Company’s federal income tax returns for years prior to fiscal year 2014 are not subject to examination by the U.S. Internal Revenue Service.   The Company was recently notified by the U.S. Internal Revenue Service of its plans to perform an income tax audit for the tax period ended August 31, 201 5 . The Company is also currently under audit in various state and local jurisdictions for fiscal years 2013 through 2015.   Generally, for the majority of state and foreign jurisdictions where the Company does business, periods prior to fiscal year 2013 are no longer subject to examination.   The Company has estimated that up to $ 0.2 million of unrecognized tax benefits related to income tax positions may be affected by the resolution of tax examinations or expiring statutes   of limitation within the next twelve months. Audit outcomes and the timing of settlements are subject to significant uncertainty .

Note 13.  Business Segments and Foreign Operations



The Company evaluates the performance of its segments and allocates resources to them based on sales and operating income. The Company is organized on the basis of geographical area into the following three segments: the Americas; EMEA; and Asia-Pacific. Segment data does not include inter-segment revenues. Unallocated corporate expenses are general corporate overhead expenses not directly attributable to the operating segments and are reported separate from the Company’s identified segments. The corporate overhead costs include expenses for the Company’s accounting and finance, information technology, human resources, research and development, quality control and executive management functions, as well as all direct costs associated with public company compliance matters including legal, audit and other professional services costs.



Summary information about reportable segments is as follows (in thousands):







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



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