SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended February 28, 2017
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number : 000-06936
WD-40 COMPANY
(Exact name of registrant as specified in its charter)
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Delaware |
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95-1797918 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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1061 Cudahy Place, San Diego, California |
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92110 |
(Address of principal executive offices ) |
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(Zip code) |
Registrant’s telephone number, including area code: (619) 275-1400
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Yes ☑ No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☑ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☑ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☑
The number of outstanding shares of the registrant’s comm on stock, par value $0.001 per share, as of April 3, 2017 was 14, 063 , 204 .
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WD-40 COMPANY
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended February 28, 2017
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Item 1. |
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Item 2. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. |
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Item 6. |
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WD-40 COMPANY
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 markets its maintenance products and its homecare and cleaning products under the following well-known brands: WD-40®, 3-IN-ONE®, GT85®, X-14®, 2000 Flushes®, Carpet Fresh®, no vac®, Spot Sh ot®, 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, 2016 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, 2016, which was filed with the SEC on October 24, 2016.
The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year .
Foreign Currency Forward Contracts
In the normal course of business, the Company employs established policies and procedures to manage its exposure to fluctuations in foreign currency exchange rates. The Company’s U.K. subsidiary, whose functional currency is Pound Sterling, utilizes foreign currency forward contracts to limit its exposure to net asset balances held in non-functional currency , specifically the Euro . The Company regularly monitors its foreign currency exchange rate exposures to ensure the overall effectiveness of its foreign currency hedge positions. While the Company engages in foreign currency hedging activity to reduce its risk, for accounting purposes, none of its foreign currency forward contracts are designated as hedges .
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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 February 28, 2017 , the Company had a notional amount o f $ 15.3 million outstanding in foreign currency forward contracts, which mature in March 2017. Unrealized net gains and losses related to foreign currency forward contracts were not significant at February 28, 2017 and August 31, 2016. Realized net gains and losses related to foreign currency forward contracts were not material for each of the three and six month periods ended February 28, 2017 and February 29, 2016.
Fair Value Measurements
Accounting Standards Codification (“ASC”) 820, “ Fair Value Measurements and Disclosures” , defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes its financial assets and liabilities measured at fair value into a hierarchy that categorizes fair value measurements into the following three levels based on the types of inputs used in measuring their fair value :
Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities;
Level 2: Observable market-based inputs or observable inputs that are corroborated by market data; and
Level 3: Unobservable inputs reflecting the Company’s own assumptions.
Under fair value accounting, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. As of February 28, 2017, the Company had no assets or liabilities that are measured at fair value in the financial statements on a recurring basis, with the exception of the foreign currency forward contracts, which are classified as Level 2 within the fair value hierarchy. The carrying values of cash equivalents, short-term investments and short-term borrowings are recorded at cost, which approximates their fair values primarily due to their short-term maturities and are classified as Level 2 within the fair value hierarchy. During the six months ended February 28, 2017, 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 January 2017, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2017-04, “Simplifying the Test for Goodwill Impairment”. This updated guidance eliminates Step 2 from the current two-step quantitative model for goodwill impairment tests. Step 2 required an entity to calculate an implied fair value, which included a hypothetical purchase price allocation requirement, for reporting units that failed Step 1. Per this updated guidance, a goodwill impairment will instead be measured as the amount by which a reporting unit’s carrying value exceeds its fair value as identified in Step 1. This guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within that reporting period. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017 . The Company has evaluated the potential impacts of this updated guidance, and it does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.
In October 2016, the FASB issued ASU No. 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory”, which requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs . This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period. Early adoption is permitted in the first interim period of an entity's annual financial statements . The Company has evaluated the potential impacts of this updated guidance, and it does not expect the adoption of this guidance to have a material impact on its consolidated financial statements and related disclosures.
In August 2016, the FASB issued ASU No. 2016-15, “ Classification of Certain Cash Receipts and Cash Payments ”. The amendments in this updated guidance address eight specific cash flow issues to reduce the existing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This guidance is effective for fiscal years beginning after December 15, 2017, including interim periods within that reporting period.
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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 throu gh 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 this 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.
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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):
Note 4 . Property and Equipment
Property and equipment, net, consisted of the following (in thousands):
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February 28, |
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August 31, |
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2017 |
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2016 |
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Machinery, equipment and vehicles |
$ |
15,730 |
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$ |
14,892 |
Buildings and improvements |
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4,136 |
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4,223 |
Computer and office equipment |
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3,613 |
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3,605 |
Software |
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7,773 |
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7,392 |
Furniture and fixtures |
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1,238 |
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1,286 |
Capital in progress |
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12,785 |
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2,200 |
Land |
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247 |
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254 |
Subtotal |
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45,522 |
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33,852 |
Less: accumulated depreciation and amortization |
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(23,229) |
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(22,307) |
Total |
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22,293 |
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11,545 |
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At February 28, 2017, capital in progress on the balance sheet included $11.0 million associated with capital costs related to the purchase and buildout 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):
During the second quarter of fiscal year 2017, the Company performed its annual goodwill impairment test. The annual goodwill impairment test was performed at the reporting unit level as required by the authoritative guidance. In accordance with ASU No. 2011-08, “ Testing Goodwill for Impairment ”, companies are permitted to first assess qualitative factors to
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determine whether it is necessary to perform the two-step quantitative 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; (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 and, thus, the two-step quantitat ive analysis was not required. As a result, the Company concluded that no impairment of its goodwill existed as of February 28, 2017.
D efinite-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)
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February 28, |
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August 31, |
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2017 |
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2016 |
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Gross carrying amount |
$ |
35,554 |
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$ |
36,009 |
Accumulated amortization |
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(18,004) |
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(16,818) |
Net carrying amount |
$ |
17,550 |
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$ |
19,191 |
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There has been no impairment charge for the six months ended February 28, 2017 as a result of the Company’s review of events and circumstances related to its existing definite-lived intangible assets.
Changes in the carrying amounts of definite-lived intangible assets by segment for the six months ended February 28, 2017 are summarized below (in thousands):
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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.
Note 6 . Accrued and Other Liabilities
Accrued liabilities consisted of the following (in thousands):
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February 28, |
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August 31, |
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2017 |
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2016 |
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Accrued advertising and sales promotion expenses |
$ |
9,919 |
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$ |
9,763 |
Accrued professional services fees |
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1,477 |
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1,262 |
Accrued sales taxes and other taxes |
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1,700 |
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954 |
Other |
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3,752 |
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3,778 |
Total |
$ |
16,848 |
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$ |
15,757 |
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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 Businesspark Avenue, San Diego, California (the “Property”). The Fourth Amendment permits the Company to spend $18.0 million in aggregate for the acquisition and improvement costs for the Property , with any excess applied against the $7.5 million permitted annually by the amended
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agreement for other capital expenditures. In addition, the Fourth Amendment 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:
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The consolidated leverage ratio cannot be greater than three to one. The consolidated leverage ratio means, as of any date of determination, the ratio of (a) consolidated funded indebtedness as of such date to (b) consolidated EBITDA for the most recently completed four fiscal quarters. |
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The consolidated interest coverage ratio cannot be less than three to one. The consolidated interest coverage ratio means, as of any date of determination, the ratio of (a) consolidated EBITDA for the most recently completed four fiscal quarters to (b) consolidated interest charges for the most recently completed four fiscal quarters. |
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 $4.2 million in net borrowings outstanding under the autoborrow agreement at February 28, 2017. 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 Company has classified $14. 2 million borrowed under the revolving credit facility during the six months ended February 28 , 201 7 as short-term on its consolidated balance sheets.
In addition to the $14.2 million in borrowings classified as short-term, the Company borrowed an additional $12.0 million U.S. Dollars under the revolving credit facility during the six months ended February 28, 2017. Based on management’s ability and intent to refinance these new draws and 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 $134.0 million outstanding under the revolving credit facility as a long-term liability at February 28 , 201 7 . The Company regularly converts existing draws on its line of credit to new draws with new maturity dates and interest rates. As of February 28, 2017 , the Company had a $148.2 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, 201 8 . 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 f rom September 1, 2016 through February 28 , 201 7 , the Company repurchased 174,337 shares at a total cost of $18.7 million under this $75.0 million plan.
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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 February 28, 2017, there were no anti-dilutive stock-based equity awards outstanding. For the three months ended February 29, 2016, weighted-average stock-based equity awards outstanding that are non-participating securities in the amount of 8,884 were excluded from the calculation of diluted EPS under the treasury stock method as they were anti-dilutive.
For the six months ended February 28, 2017, there were no anti-dilutive stock-based equity awards outstanding. For the six months ended February 29, 2016 , weighted-average stock-based equity awards outstanding that are non-participating securities in the amount of 8,457 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 President and 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 $0.2 million and $0.1 million for the three months ended February 28, 2017 and February 29, 2016 , respectively , and $0. 5 million and $0.4 million for the six months ended February 28, 2017 and February 29, 2016 . Accounts receivable from Tractor Supply were not material as of February 28, 2017 .
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Note 11. Commitments and Contingencies
Purchase Commitments
The Company has ongoing relationships with various suppliers (contract manufacturers) who manuf acture 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 wi th 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 February 28, 2017 , no such commitments were outstanding.
Litigation
From time to time, the Company is subject to various claims, lawsuits, investigations and proceedings arising in the ordinary course of business, including but not limited to, product liability litigation and other claims and proceedings with respect to intellectual property, breach of contract, labor and employment, tax and other matters.
On February 24, 2017, a legal action was filed against the Company in a United States District Court in Ohio (FirstPower Group, LLC v. WD-40 Company, WD-40 Manufacturing Company, Wal-Mart Stores East, LP, Lowe’s Home Centers, LLC, and Home Depot U.S.A., Inc.) . The complaint alleges claims of trademark infringement, unfair competition, counterfeiting, and deceptive trade practices arising out of the Company’s marketing and sale of the WD ‑40 EZ -REACH Flexible Straw product. FirstPower Group, LLC (“FirstPower”) claims exclusive ownership and the right to use the words “EZ REACH” for lubricating oil products based on certain registered trademarks covering such words. In addition to findings on the merits of FirstPower’s infringement claims, the complaint seeks an award of damages and a permanent injunction prohibiting the alleged infringement of FirstPower’s asserted trademark rights.
On February 24, 2017, FirstPower also filed a motion for preliminary injunction seeking an interim order prohibiting the alleged infringement of FirstPower’s asserted trademark rights pending disposition of FirstPower’s claims on the merits at trial.
The Company disputes FirstPower’s claims of trademark infringement arising out of the Company’s sale of the WD ‑40 EZ-REACH Flexible Straw product. The Company contends that there is no likelihood of confusion as to the source of the products marketed and sold by WD-40 Company and FirstPower with the words “EZ REACH” in their respective names. The Company intends to vigorously oppose FirstPower’s cl aims. Although the Company believes that any loss resulting from this litigation will not have a material impact on the Company’s financial condition or results of operation s , suc h a loss is reasonably possible . The Company is unable to estimate the possible loss or a range of possible loss that the Company may incur .
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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 February 28, 2017 .
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 February 28, 2017 .
Note 12. Income Taxes
The Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates, to determine its quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
The provision for income taxes was 32.8% and 28.0 % of income before income taxes for the three months ended February 28, 2017 and February 29, 2016, respectively, and 30.7% and 28.3% of income before income taxes for the six months ended February 28, 2017 and February 29, 2016, respectively. The increase in the effective income tax rate from period to period was primarily driven by an immaterial out-of-period correction that the Company recorded in the second quarter of fiscal year 2017 associated with the tax impacts from certain unrealized foreign currency exchange losses in periods prior to fiscal year 2017.
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 notified in September 2016 by the U.S. Internal Revenue Service of its plans to perform an income tax audit for the tax period ended August 31, 2015 and this audit is currently underway. The Company is also currently under audit in various state and international 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 $ 0.3 million of unrecognized tax benefits related to income tax positions may be affected by the resolution of tax examinations or expiring statutes of limitation within the next twelve months. Audit outcomes and the timing of settlements are subject to significant uncertainty .
17
Note 1 3 . 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):
|
(1) |
|
Unallocated corporate expenses are general corporate overhead expenses not directly attributable to any one of the operating segments. These expenses are reported separate from the Company’s identified segments and are included in Selling, General and Administrative expenses on the Company’s condensed consolidated statements of operations. |
18
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):
Note 14. Subsequent Events
On March 21, 201 7 , the Company’s Board of Directors declared a cash dividend of $0.49 per share payable on April 28, 2017 to shareholders of record on April 14, 2017 .
Effective as of March 9, 2017, the Company became obligated to incur certain costs under a contract for the construction of improvements to the Company’s new office building located at 9715 Businesspark Avenue, San Diego , California (the “Property”). The Company and Back’s Construction, Inc. (the “Contractor”) entered into a Standard Form of Agreement between Owner and Contractor dated as of February 23, 2017 (the “Agreement”) for the construction of the improvements to the Property (the “Project”). On March 9, 2017, the Company and the Contractor executed Change Order #1 to the Agreement to finalize a cost summary exhibit and to establish the maximum price for th e Project in the amount of $4.2 million . The Project is scheduled to be completed no later than July 14, 2017.
19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
As used in this report, the terms “we,” “our,” “us” and “the Company” refer to WD-40 Company and its wholly-owned subsidiaries, unless the context suggests otherwise. Amounts and percentages in tables and discussions may not total due to rounding.
The following information is provided as a supplement to, and should be read in conjunction with, the unaudited condensed consolidated financial statements and notes thereto included in Part I ― Item 1 of this Quarterly Report and the audited consolidated financial statements and notes thereto and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our Annual Report on Form 10-K for the fiscal year ended August 31, 2016, which was filed with the Securities and Exchange Commission (“SEC”) on October 24, 2016 .
In order to show the impact of changes in foreign currency exchange rates on our results of operations, we have included constant currency disclosures, where necessary, in the Overview and Results of Operations sections which follow. Constant currency disclosures represent the translation of our current fiscal year revenues and expenses from the functional currencies of our subsidiaries to U.S. dollars using the exchange rates in effect for the corresponding period of the prior fiscal year. We use results on a constant currency basis as one of the measures to understand our operating results and evaluate our performance in comparison to prior periods. Results on a constant currency basis are not in accordance with accounting principles generally accepted in the United States of America (“non-GAAP”) and should be considered in addition to, not as a substitute for , results prepared in accordance with GAAP.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. This report contains forward-looking statements, which reflect the Company’s current views with respect to future events and financial performance.
These forward-looking statements include, but are not limited to, discussions about future financial and operating results, including: growth expectations for maintenance products; expected levels of promotional and advertising spending; plans for and success of product innovation, the impact of new product introductions on the growth of sales; anticipated results from product line extension sales; and forecasted foreign currency exchange rates and commodity prices. These forward-looking statements are generally identified with words such as “believe,” “expect,” “intend,” “plan,” “could,” “may,” “aim,” “anticipate,” “estimate” and similar expressions. The Company undertakes no obligation to revise or update any forward looking statements.
Actual events or results may differ materially from those projected in forward-looking statements due to various factors, including, but not limited to, those identified in Part I ― Item 1A, “Risk Factors,” in the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2016, and in the Company’s Quarterly Reports on Form 10-Q, which may be updated from time to time .
Overview
The Company
WD-40 Company (“the Company”), based in San Diego, California, is a global marketing organization dedicated to creating positive lasting memories by developing and selling products which solve problems in workshops, factories and homes around the world. We market our maintenance products and our homecare and cleaning products under the following well-known brands: WD-40®, 3-IN-ONE®, GT85®, X-14®, 2000 Flushes®, Carpet Fresh®, no vac®, Spot Sh ot®, 1001®, Lava® and Solvol®. Currently included in the WD-40 brand are the WD-40 multi-use product and the WD-40 Specialist® and WD-40 BIKE® product lines .
Our brands are sold in various locations around the world. Maintenance products are sold worldwide in markets throughout North, Central and South America, Asia, Australia, Europe, the Middle East and Africa. Homecare and cleaning products are sold primarily in North America, the United Kingdom (“U.K.”) and Australia. We sell our products primarily through mass retail and home center stores, warehouse club stores, grocery stores, hardware stores, automotive parts outlets, sport retailers, independent bike dealers, online retailers and industrial distributors and suppliers.
20
Highlights
The following summarizes the financial and operational highlights for our business during the six months ended February 28, 2017 :
|
· |
|
Consolidated net sales decreased $1.3 million for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year . Changes in foreign currency exchange rates had an unfavorable impact of $12.4 million on consolidated net sales for the six months ended February 28, 2017 compared to the corresponding period of the prior fisca l year. Thus, on a constant currency basis, net sales would have increased by $11.1 million from period to period. This unfavorable impact from changes in foreign currency exchange rates mainly came from our EMEA segment, which accounted for 36% of our consolidated sales for the six months ended February 28, 2017. |
|
· |
|
Consolidated net sales for the WD-40 Specialist product line were $11.2 million which is a 17% increase for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year. Although the WD-40 Specialist product line is expected to provide the Company with long-term growth opportunities, we will see some volatility in sales levels from period to period due to the timing of promotional programs, the building of distribution, and various other factors that come with building a new product line . |
|
· |
|
Gross profit as a percentage of net sales increased to 56.8% for the six months ended February 28, 2017 compared to 55.5% for the corresponding period of the prior fiscal year. |
|
· |
|
Consolidated net income decreased $1.6 million, or 6 %, for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact of $ 2.4 million on consolidated net income for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year. Thus, on a constant currency basis, net income would have increased $ 0.8 million. |
|
· |
|
Diluted earnings per common share for the six months ended February 28, 2017 were $ 1.69 versus $ 1.77 in the prior fiscal year period. |
|
· |
|
Share repurchases were executed under our current $75.0 million share buy-back plan, which was approved by the Company’s Board of Directors in June 2016 and became effective on September 1, 2016. During the period from September 1, 2016 through February 28, 2017, the Company repurchase d 174,337 shares at an average price of $107.35 per share, for a total cost of $18.7 million. |
Our strategic initiatives and the areas where we will continue to focus our time, talent and resources in future periods include: (i) maximizing WD-40 multi-use product sales through geographic expansion and increased market penetration; (ii) leveraging the WD-40 brand by growing the WD-40 Specialist product line; (iii) leveraging the strengths of the Company through broadened product and revenue base; (iv) attracting, developing and retaining talented people; and (v) operating with excellence .
21
Results of Operations
Three Months Ended February 28, 2017 Compared to Three Months Ended February 29, 2016
Operating Items
The following table summarizes operating data for our consolidated operations ( in thousands, except percentages and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
||||||||||
|
February 28, |
|
February 29, |
|
Change from
|
||||||
|
2017 |
|
2016 |
|
Dollars |
|
Percent |
||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
Maintenance products |
$ |
87,771 |
|
$ |
84,641 |
|
$ |
3,130 |
|
|
4% |
Homecare and cleaning products |
|
8,748 |
|
|
9,909 |
|
|
(1,161) |
|
|
(12)% |
Total net sales |
|
96,519 |
|
|
94,550 |
|
|
1,969 |
|
|
2% |
Cost of products sold |
|
42,057 |
|
|
42,188 |
|
|
(131) |
|
|
- |
Gross profit |
|
54,462 |
|
|
52,362 |
|
|
2,100 |
|
|
4% |
Operating expenses |
|
35,600 |
|
|
34,456 |
|
|
1,144 |
|
|
3% |
Income from operations |
$ |
18,862 |
|
$ |
17,906 |
|
$ |
956 |
|
|
5% |
Net income |
$ |
12,360 |
|
$ |
13,669 |
|
$ |
(1,309) |
|
|
(10)% |
Earnings per common share - diluted |
$ |
0.87 |
|
$ |
0.94 |
|
$ |
(0.07) |
|
|
(7)% |
Shares used in per share calculations - diluted |
|
14,143 |
|
|
14,429 |
|
|
(286) |
|
|
(2)% |
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales by Segment
The following table summarizes net sales by segment (in thousands, except percentages):
22
Americas
The following table summarizes net sales by product line for the Americas segment (in thousands, except percentages):
Sales in the Americas segment, w hich includes the U.S., Canada and Latin America, decreased to $45.1 million, down $0.5 million, or 1%, for the three months ended February 28, 2017 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates did not have a material impact on sales for the three months ended February 28, 2017 compared to the corresponding period of the prior fiscal year.
Sales of maintenance products in the Americas segment increased to $39.2 million, up $0.2 million, for the three months ended February 28, 2017 compared to the corresponding period of the prior fiscal year. This sales increase was mainly driven by higher sales of maintenance products in Canada, which were up 25% from period to period. This increase from period to period was primarily due to higher sales associated with promotional programs, most of which was driven by improving market and economic conditions, particularly in the industrial channel in Western Canada as a result of increased activity levels in the oil industry. The sales increase in Canada was partially offset by a sales decrease in Latin America of 3% from period to period, primarily due to the uncertain business climate which currently exists in Mexico. Sales of maintenance products in the U.S. remained relatively constant for the three months ended February 28, 2017 compared to the corresponding period of the prior fiscal year . Sales of the WD-40 Specialist product line in the Americas segment were down $0.4 million, or 12%, from period to period due to lower sales in the United States. Sales of the WD-40 EZ- REACH Flexible Straw product, which was launched late in fiscal year 2015, favorably impacted sales in the U.S. due to added distribution.
Sales of homecare and cleaning products in the Americas decreased $0.7 million, or 10%, for the three months ended February 28, 2017 compared to the corresponding period of the prior fiscal year . This sales decrease was driven primarily by a decrease in sales of Spot Shot carpet stain remover and 2000 Flushes automatic toilet bowl cleaners in the U.S., both of which were down 9% from period to period. While each of our homecare and cleaning products continue to generate positive cash flows, we have continued to experience decreased or flat sales for many of these products primarily due to lost distribution, reduced product offerings, competition, category declines and the volatility of orders from promotional programs with certain of our customers, particularly those in the warehouse club and mass retail channels.
For the Americas segment, 80% of sales came from the U.S., and 20% of sales came from Canada and Latin America combined for the three months ended February 28, 2017 compared to the distribution for the three months ended February 29, 2016 when 81% of sales came from the U.S., and 19% of sales came from Canada and Latin America combined .
23
EMEA
The following table summarizes net sales by product line for the EMEA segment (in thousands, except percentages):
|
(1) |
|
While the Company’s reporting currency is U.S. Dollar, the functional currency of our U.K. subsidiary, the entity in which the EMEA results are generated, is Pound Sterling. Although the functional currency of this subsidiary is Pound Sterling, approximately 45% of its sales are generated in Euro and 25% are generated in U.S. Dollar. As a result, the Pound Sterling sales and earnings for the EMEA segment can be negatively or positively impacted from period to period upon translation from these currencies depending on whether the Euro and U.S. Dollar are weakening or strengthening against the Pound Sterling . |
Sales in the EMEA segment, which includes Europe, the Middle East, Africa and India, increased to $36.2 million, up $0.6 million, or 2%, for the three months ended February 28, 2017 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact on sales for the EMEA segment from period to period. Sales for the three months ended February 28, 2017 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $42.6 million in the EMEA segment. Thus, on a constant currency basis, sales would have increased by $7.0 million, or 20%, from period to period.
The countries in Europe where we sell through a direct sales force include the U.K., Italy, France, Iberia (which includes Spain and Portugal) and the Germanics sales region (which includes Germany, Austria, Denmark, Switzerland, Belgium and the Netherlands). Although the overall sales in the direct markets decreased $0.5 million, or 2 %, for the three months ended February 28, 2017 compared to the corresponding p eriod of the prior fiscal year, we experienced sales increases throughout most of the Europe direct markets from period to period , with percentage increases in sales as follows: Iberia, 10 %; France, 6%; the Germanics region and Italy, each 2 %. The sales increase in these Euro-based direct markets was primarily due to increased sales of the WD-40 multi-use product, particularly in France and Iberia from period to period . In addition, contributing to the sales increase in these Euro-based direct markets were increased sales of the WD-40 Specialist product line of $0.3 million, or 31%, from period to period due to expanded distribution. The overall increased sales in these regions were more than offset by a sales decrease of 19% in the U.K., primarily due to the unfavorable impacts of changes in foreign currency exchange rates from period to period and decreased sales of the 1001 brand products as a result of lost distribution . Sales from direct markets accounted for 64% of the EMEA segment’s sales for the three months ended February 28, 2017 compared to 67% of the EMEA segment’s sales for the corresponding period of the prior fiscal year .
The regions in the EMEA segment where we sell through local distributors include the Middle East, Africa, India, Eastern and Northern Europe. Sales in the di stributor markets increased $1.1 million, or 10 %, for the three months ended February 28, 2017 compared to the corresponding period of the prior fiscal year primarily due to an increase of 20 % in sales in Russia as a result of more stable market conditions in the current quarter compared to the same period of last fiscal year . The distributor markets accounted for 36 % of the EMEA segment’s total sales for the three months ended February 28, 2017, compared to 33% for the corresponding period of the prior fiscal year.
24
Asia-Pacific
The following table summarizes net sales by product line for the Asia-Pacific segment (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
||||||||||
|
February 28, |
|
February 29, |
|
Change from
|
||||||
|
2017 |
|
2016 |
|
Dollars |
|
Percent |
||||
Maintenance products |
$ |
13,541 |
|
$ |
11,743 |
|
$ |
1,798 |
|
|
15% |
Homecare and cleaning products |
|
1,695 |
|
|
1,639 |
|
|
56 |
|
|
3% |
Total |
$ |
15,236 |
|
$ |
13,382 |
|
$ |
1,854 |
|
|
14% |
% of consolidated net sales |
|
16% |
|
|
14% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales in the Asia-Pacific segment, which includes Australia, China and other countries in the Asia region, increased to $15.2 million, up $1. 9 million, or 14%, for the three months ended February 28, 2017 c ompared to the corresponding period of the prior fiscal year. Although changes in foreign currency exchange rates did not have a material impact on sales in the Asia-Pacific segment from period to period, fluctuations in foreign currency exchange rates impacted sales in both China and Australia.
Sales in Asia, which represented 74% of the total sales in the Asia-Pacific segment, increased $1.9 million, or 19%, for the three months ended February 28, 2017 compared to the corresponding period of the prior fiscal year . Sales in the Asia distributor markets i ncreased $1.4 million, or 21%, primarily attributable to a higher level of promotional activities and replenishment orders for the WD-40 multi-use product in the Asian distributor markets, particularly those in Indonesia, the Philippines, Malaysia and Thailand, from period to period . Sales in China increased $0.5 million, or 17%, for the three months ended February 28, 2017 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavor able impact on sales in China. On a constant currency basis, sales would have increased 25% primarily due to new distribution and a higher level of promotional activities from period to period.
Sales in Australia remained constant at $3.9 million for each of the three months ended February 28, 2017 and February 29, 2016 . Changes in foreign currency exchange rates had a favorabl e impact on sales in Australia. On a constant currency basis, sales would have decreased by 2% from period to period primarily due to the timing of promotional activities as well as certain promotional programs that were conducted in the second quarter of fiscal year 2016 but were not repeated in the second quarter of the current fiscal year .
Gross Profit
Gross profit increased to $54.5 million for the three months ended February 28, 2017 compared to $52.4 million for the corresponding period of the prior fiscal year. As a percentage of net sales, gross profit increased to 56.4% for the three months ended February 28, 2017 compared to 55.4% for the corresponding period of the prior fiscal year.
Changes in foreign currency exchange rates positively impacted gross margin by 1.6 percentage points due to the fluctuations in the exchange rates for both the Euro and U.S. Dollar against the Pound Sterling in our EMEA segment from period to period. In the EMEA segment, the majority of our cost of goods sold is denominated in Pound Sterling whereas sales are generated in Pound Sterling, Euro and the U.S. Dollar. The combined effect of the strengthening of both the Euro and U.S. Dollar against the Pound Sterling from period to period caused an increase in our Pound Sterling sales, resulting in favorable impacts to the gross margin. In addition, advertising, promotional and other discounts that we give to our customers decreased from period to period in our Americas segment , positively impacting gross margin by 0.3 percentage points. In general, the timing of advertising, promotional and other discounts may cause fluctuations in gross margin from period to period. The costs associated with certain promotional activities are recorded as a reduction to sales while others are recorded as advertising and sales promotion expenses. Advertising, promotional and other discounts that are given to our customers are recorded as a reduction to sales, whereas advertising and sales promotional costs associated with promotional activities that we pay to third parties are recorded as advertising and sales promotion expenses.
25
These favorable impacts to gross margin were partially offset by the combined effects of un favorable sales mix changes and other miscellaneous costs which negatively impacted gross margin by 0. 7 percentage points from period to period, primarily due to unfavorable shifts in product mix in the Americas segment and a higher portion of sales in our EMEA segment being made to lower margin distributor markets during the three months ended February 28, 2017 compared to the corresponding period of the prior fiscal year. In addition, n et changes in the costs of petroleum-based specialty chemicals and aerosol cans negatively impacted gross margin by 0.1 percentage points from period to period. Although this impact was insignificant, we experienced positive net impacts on gross margin from these costs in our Americas segment which were more than offset by unfavorable net impacts from these costs in our EMEA segment. The unfavorable impacts in our EMEA segment were primarily due to increased costs of petroleum-based specialty chemicals from period to period. While the costs of petroleum-based specialty chemicals for our EMEA segment are sourced in Pound Sterling, the underlying inputs are denominated in U.S. Dollars. As a result, the overall strengthening of the U.S. Dollar against the Pound Sterling from period to period resulted in a significant increase in cost of goods in Pound Sterling. There is often a delay of one quarter or more before changes in raw material costs impact cost of products sold due to production and inventory life cycles. Due to the volatility of the price of crude oil, it is uncertain the level to which gross margin will be impacted by such costs in future periods. Gross margin was also negatively impacted by 0.1 percentage points from period to period due to higher warehousing and in-bound freight costs in the Americas segment .
Note that our gross profit and gross margin may not be comparable to those of other consumer product companies, since some of these companies include all costs related to distribution of their products in cost of products sold, whereas we exclude the portion associated with amounts paid to third parties for shipment to our customers from our distribution centers and contract manufacturers and include these costs in selling, general and administrative expenses. These costs totaled $4.1 million and $3.9 million for the three months ended February 28, 2017 and February 29, 2016, respectively.
Selling, General and Administrative Expenses
Selling, general and administrativ e (“SG&A”) expenses for the three months ended February 28, 2017 increased $1.1 million, or 4%, to $ 29.8 million from $ 28.7 million for the corresponding period of the prior fiscal year. As a percentage of net sales, SG& A expenses increased to 30.9% for the three months ended February 28, 2017 from 30.3% for the corresponding period of the prior fiscal year . The increase in SG&A expenses was primarily attributable to higher employee-related costs, increased freight costs, a higher level of expenses associated with travel and meetings, increased professional services costs and increases in other miscellaneous expenses . Employee-related costs, which include salaries, incentive compensation, profit sharing, stock-based compensation and other fringe benefits, increased by $1.2 million primarily due to increased headcount . T hese increases were slightly offset by lower earned incentive compensation from period to period. Freight costs associated with shipping products to our customers increased $0.5 million primarily due to higher sales volumes in the EMEA segment from period to period as well as additional costs associated with the shift in the distribution model for the do-it-yourself (DIY) channel that we made in the Germanics region which has resulted in us selling to various retail customers directly rather than through a large wholesale customer. Travel and meeting expenses increased $0.2 million due to a higher level of travel expenses associated with various sales meetings and activities in support of our strategic initiatives. Professional services costs increased $0.2 million due to increased use of such services from period to period, primarily in the Americas and EMEA segments. Other miscellaneous expenses, the largest of which were related to research and development and investor relations, increased by $0.7 million period over period. These increases were partially offset by changes in foreign currency exchange rates, which had a favorable impact of $1.7 million on SG&A expenses for the three months ended February 28, 2017 compared to the corresponding period of the prior fiscal year .
We continued our research and development investment, the majority of which is associated with our maintenance products, in support of our focus on innovation and renovation of our products . Research and development costs were $2.2 million and $1.8 million for the three months ended February 28, 2017 and February 29, 2016, respectively. Our research and development team engages in consumer research, product development, current product improvement and testing activities. This team leverages its development capabilities by partnering with a network of outside resources including our current and prospective outsource suppliers. The level and types of expenses incurred within research and development can vary from period to period depending upon the types of activities being performed .
26
Advertising and Sales Promotion Expenses
Advertising and sales promotion expenses remained relatively constant at $ 5.0 million for both the three months ended February 28, 2017 and February 29, 2016 . As a percentage of net sales, these expenses decreased to 5.2% for the three months ended February 28, 2017 from 5.3% for the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had a favorable impact on such expenses of $0.3 million from period to period. Thus, on a constant currency basis, advertising and sales promotion expenses for the second quarter of fiscal year 2017 would have increased by 7% to $5.4 million, primarily due to a higher level of promotional programs and marketing support in the Americas and EMEA segments from period to period. Investment in global advertising and sales promotion expenses for fiscal year 2017 is expected to be below 6.0% of net sales .
As a percentage of net sales, advertising and sales promotion expenses may fluctuate period to period based upon the type of marketing activities we employ and the period in which the costs are incurred. Total promotional costs recorded as a reduction to sales for the three months ended February 28, 2017 were $4.1 million compared to $4.4 million for the corresponding period of the prior fiscal year. Therefore, our total investment in advertising and sales promotion activities totaled $9.1 million and $9.4 million for the three months ended February 28, 2017 and February 29, 2016, respectively.
Amortization of Definite-lived Intangible Assets Expense
Amortization of our definite-lived intangible assets remained constant at $0.7 million for both the three months ended February 28, 2017 and February 29, 2016.
Income from Operations by Segment
The following table summarizes income from operations by segment (in thousands, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
||||||||||
|
February 28, |
|
February 29, |
|
Change from
|
||||||
|
2017 |
|
2016 |
|
Dollars |
|
Percent |
||||
Americas |
$ |
10,710 |
|
$ |
10,814 |
|
$ |
(104) |
|
|
(1)% |
EMEA |
|
10,327 |
|
|
9,413 |
|
|
914 |
|
|
10% |
Asia-Pacific |
|
4,585 |
|
|
3,769 |
|
|
816 |
|
|
22% |
Unallocated corporate (1) |
|
(6,760) |
|
|
(6,090) |
|
|
(670) |
|
|
11% |
|
$ |
18,862 |
|
$ |
17,906 |
|
$ |
956 |
|
|
5% |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Unallocated corporate expenses are general corporate overhead expenses not directly attributable to any one of the operating segments. These expenses are reported separate from the Company’s identified segments and are included in Selling, General and Administrative expenses on the Company’s condensed consolidated statements of operations. |
Americas
Income from operations for the Americas segment decreased to $10.7 million, down $0.1 million, or 1%, for the three months ended February 28, 2017 compared to the corresponding period of the prior fiscal year , primarily due to a $ 0.5 million decrease in sales and an increase in operating expenses , which w ere almost completely offset by a higher gross margin. As a percentage of net sales, gross profit for the Americas segment increased from 53.2% to 54.2% period over period. This increase in the gross margin was primarily due to the combined positive impacts of decreased costs of petroleum-based specialty chemicals and aerosol cans as well as a lower level of advertising, promotional and other discounts that we gave to our customers from period to period . These favorable impacts were partially offset by unfavorable sales mix changes as well as higher warehousing and in-bound freight costs from period to period. Operating expenses increased $0. 3 million period over period primarily due to higher employee-related expenses and higher advertising and sales promotion expenses , as well as increased freight expenses . These increases in operating expenses were partially offset by lower earned incentive compensation expense from period to period. Operating income as a percentage of net sales increased slightly from 23.7% to 23. 8 % period over period .
27
EMEA
Income from operations for the EMEA segment increased to 10.3 million, up $ 0 . 9 million, or 1 0 %, for the three months ended February 28, 2017 compared to the corresponding period of the prior fiscal year , primarily due to a $ 0.6 million increase in sales and a higher gross margin . As a percentage of net sales, gross profit for the EMEA segment increased from 58.4% to 60 .4% period over period primarily due to favorable fluctuations in foreign currency exchange rates , which were partially offset by the combined negative impacts of costs of petroleum-based specialty chemicals and aerosol cans in our EMEA segment as well as un favorable sales mix changes from period to period . Operating income as a percentage of net sales increased from 26.4% to 2 8 . 5 % period over period.
Asia-Pacific
Income from operations for the Asia-Pacific segment in creased to $4.6 million, up $0. 8 million, or 22 %, for the three months ended February 28, 2017 compared to the corresponding period of the prior fiscal year, primarily due to a $ 1.9 million increase in sales , which was partially offset by a lower gross margin . As a percentage of net sales, gross profit for the Asia-Pacific segment de creased from 54.6% to 5 3 . 7 % period over period due to an increase in miscellaneous costs, including those related to inventory allowances, a nd the combined negative impacts of costs of petroleum-based specialty chemicals and aerosol cans . Operating income as a percentage of net sales increased from 28.2% to 30.1 % period over period.
Non-Operating Items
The following table summarizes non-operating income and expenses for our consolidated operations (in thousands):
Interest Income
Interest income remained relatively constant for the three months ended February 28, 2017 compared to the corresponding period of the prior fiscal year.
Interest Expense
Interest expense increased $0.2 million for the three months ended February 28, 2017 compared to the corresponding period of the prior fiscal year primarily due to higher interest rates and an increased outstanding balance on our revolving credit facility period over period.
Other Income
Other income decrease d by $ 1.3 million for three months ended February 28, 2017 compared to the corresponding period of the prior fiscal year primarily due to lower net foreign currency exchange gains from period to period . This significant decrease in foreign currency exchange gains was primarily due to the relative movement in foreign currency exchange rates and the fluctuation of non-functional currency balance sheet accounts, particularly those associated with our UK subsidiary, during the second quarter of this fiscal year as compared to the corresponding period of the prior fiscal year .
28
Provision for Income Taxes
The provision for income taxes was 32.8% and 28.0% of income before income taxes for the three months ended February 28, 2017 and February 29, 2016, respectively . The increase in the effective income tax rate from period to period was primarily driven by an immaterial ou t-of-period correction that we recorded in the second quarter of fiscal year 2017 associated with the tax impacts from certain unrealized foreign currency exchange losses. We expect that the income tax rate for the full fiscal year 2017 will be close to 30%.
Net Income
Net income was $12.4 million, or $ 0.87 per common share on a fully diluted basis for the three months ended February 28, 2017 compared to $ 13.7 million, or $ 0.94 per common share on a fully diluted basis for the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates h ad an unfavorable impact of $1.3 million on net income for three months ended February 28, 2017 compared to the corresponding period of the prior fisca l year. Thus, on a constant currency basis, net income would have remained relatively constant from period to period.
29
Six Months Ended February 28, 2017 Compared to Six Months Ended February 29, 2016
Operating Items
The following table summarizes operating data for our consolidated operations ( in thousands, except percentages and per share amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
||||||||||
|
February 28, |
|
February 29, |
|
Change from
|
||||||
|
2017 |
|
2016 |
|
Dollars |
|
Percent |
||||
Net sales: |
|
|
|
|
|
|
|
|
|
|
|
Maintenance products |
$ |
166,930 |
|
$ |
166,882 |
|
$ |
48 |
|
|
- |
Homecare and cleaning products |
|
18,837 |
|
|
20,190 |
|
|
(1,353) |
|
|
(7)% |
Total net sales |
|
185,767 |
|
|
187,072 |
|
|
(1,305) |
|
|
(1)% |
Cost of products sold |
|
80,265 |
|
|
83,302 |
|
|
(3,037) |
|
|
(4)% |
Gross profit |
|
105,502 |
|
|
103,770 |
|
|
1,732 |
|
|
2% |
Operating expenses |
|
70,124 |
|
|
68,719 |
|
|
1,405 |
|
|
2% |
Income from operations |
$ |
35,378 |
|
$ |
35,051 |
|
$ |
327 |
|
|
1% |
Net income |
$ |
24,118 |
|
$ |
25,731 |
|
$ |
(1,613) |
|
|
(6)% |
Earnings per common share - diluted |
$ |
1.69 |
|
$ |
1.77 |
|
$ |
(0.08) |
|
|
(5)% |
Shares used in per share calculations - diluted |
|
14,182 |
|
|
14,445 |
|
|
(263) |
|
|
(2)% |
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales by Segment
The following table summarizes net sales by segment (in thousands, except percentages):
30
Americas
The following table summarizes net sales by product line for the Americas segment (in thousands, except percentages):
Sales in the Americas segment, which includes the U.S., Canada and Latin America, decreased to $87.9 million, down $2.0 million, or 2%, for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates did not have a material impact on sales for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year.
Sales of maintenance products in the Americas segment decreased $1.0 million, or 1%, for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal ye ar. This sales decrease was mainly driven by lower sales of maintenance products in Latin America and the U.S., which decreased 5% and 2%, respectively, from period to period. The sales de crease in Latin America was primarily due to the uncertain business climate which currently exists in Mexico. The sales decrease in the U.S. was primarily due to a lower level of promotional activities and the timing of customer orders for the WD-40 multi-use product from period to period. The sales decreases in Latin America and the U.S. were partially offset by a sales increase in Canada of 13%, from period to period, which was primarily due to higher sales associated with promotional programs, most of which was driven by improving market and economic conditions, particularly in the industrial channel in Western Canada as a result of increased activity levels in the oil industry. The decrease in sales of WD-40 multi-use product in the Americas segment was partially offset by higher sales of the WD-40 Specialist product line , which were up $0.3 million, or 6%, from period to period due to new distribution, particularly of certain new products within this product line during the six months ended February 28, 2017.
Sales of homecare and cleaning products in the Americas decreased $1.0 million, or 8%, for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year . This sale s decrease was driven primarily by a decrease in sales of Spot Shot carpet stain remover and 2000 Flushes automatic toilet bowl cleaners in the U.S., which were down 7% and 8%, respectively, from period to period. While each of our homecare and cleaning products continue to generate positive cash flows, we have continued to experience decreased or flat sales for many of these products primarily due to lost distribution, reduced product offerings, competition, category declines and the volatility of orders from promotional programs with certain of our customers, particularly those in the warehouse club and mass retail channels.
For the Americas segment, 80% of sales came from the U.S., and 20% of sales came from Canada and Latin America combined for the six months ended February 28, 2017 compared to the distribution for the six months ended February 29 , 2016 when 81% of sales came from the U.S., and 19% of sales came from Canada and Latin America .
31
EMEA
The following table summarizes net sales by product line for the Europe segment (in thousands, except percentages):
Sal es in the EMEA segment, which includes Europe, the Middle East, Africa and India, decreased to $66.5 million, down $1.3 million, or 2%, for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact on sales for the EMEA segment from period to period. Sales for the six months ended February 28, 2017 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $ 78.9 million in the EMEA segment. Thus, on a constant currency basis, sales would have increased by $ 11. 1 million, or 17 %, for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year.
The countries in Europe where we sell through a direct sales force include the U.K., Italy, France, Iberia (which includes Spain and Portugal) and the Germanics sales region (which includes Germany, Austria, Denmark, Switzerland, Belgium and the Netherlands). Although the overall sales in the direct markets remained constant at $43.2 million for each of the six months ended February 28, 2017 and February 29, 2016, we experienced sales increases throughout most of the Europe direct markets from period to period , with percentage increases in sales as follows: Iberia, 12%; Italy, 9%; France, 8%; and the Germanics region, 3%. The sales increase in these Euro-based direct markets was primarily due to increased sales of the WD-40 multi-use product, particularly in France and Italy from period to period. Also contributing to the sales increase in the Euro-based direct markets were increased sales of the WD-40 Specialist product line of $0.8 million, or 42%, from period to period due to expanded distribution. Sales in the Euro-based direct markets also benefited from the strengthening of the Euro against the Pound Sterling, the functional currency of our U.K. subsidiary, but they were almost equally impacted in the opposite direction as a result of the weakening of the Pound Sterling against the U.S. Dollar from period to period. The overall increased sales in these regions were fully offset by a sales decrease of 15% in the U.K., which was completely due to the unfavorable impacts of changes in foreign currency exchange rates from period to period. Sales from direct markets accounted for 65% of the EMEA segment’s sales for the six months ended February 28, 2017 compared to 64% of the EMEA segment’s sales for the corresponding period of the prior fiscal year.
The regions in the EMEA segment where we sell through local distributors include the Middle East, Africa, India, Eastern and Northern Europe. Sales in the distributor markets decreased $ 1.3 million, or 5 %, for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year primarily due to a decrease of 14 % in sales in Russia as a result of the timing of customer orders for the WD-40 multi-use product from period to period. Although the market conditions in Russia have begun to stab ilize and sales have increased in the second quarter of fiscal year 2017, our year to date sales have not returned to the levels that we experienced prior to the political and economic crisis in Russia. The distributor markets accounted for 35 % of the EMEA segment’s total sales for the six months ended February 28, 2017, compared to 36% for the corresponding period of the prior fiscal year.
32
Asia-Pacific
The following table summarizes net sales by product line for the Asia-Pacific segment (in thousands, except percentages):
Sales in the Asia-Pacific segment, which includes Australia, China and other countries in the Asia region, increased to $31.4 million, up $2.0 million, or 7%, for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year. Although changes in foreign currency exchange rates did not have a material impact on sales in the Asia-Pacific segment from period to period, fluctuations in foreign currency exchange rates impacted sales in both China and Australia.
Sales in Asia, which represented 73% of the total sales in the Asia-Pacific segment , increased $1.4 million, or 6%, for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year. Sales in the Asia distributor markets increased $0.7 million, or 4%, primarily attributable to a higher level of promotional activities for the WD-40 multi-use product and successful promotional programs that were conducted during the second quarter of fiscal year 2017 in the Asian distributor markets, particularly those in Indonesia, Hong Kong, Malaysia and the Philippines, from period to period . Sales in China also increased $0.7 million, or 12%, for the six months ended February 28, 2017 compared to the corresponding pe riod of the prior fiscal year. Changes in foreign currency exchange rates had an unfavor able impact on sales in China. On a constant currency basis, sales would have increased 19% primarily due to new distribution and increased promotional activities from period to period .
Sales in Australia increased $0.6 million, or 8%, for the six months ended February 28, 2017 compared to the corresponding pe riod of the prior fiscal year. Changes in foreign currency exchange rates had a favorable impact on sales in Australia. On a constant currency basis, sales would have increased by 3% from period to period primarily due to higher sales levels resulting from successful promotional programs as well as continued growth of our base business .
Gross Profit
Gross profit increased to $105.5 million for the six months ended February 28, 2017 compared to $103.8 million for the corresponding period of the prior fiscal year. As a percentage of net sales, gross profit increased to 56.8% for the six months ended February 28, 2017 compared to 55.5% for the corresponding period of the prior fiscal year .
Changes in foreign currency exchange rates positively impacted gross margin by 1.6 percentage points due to the fluctuations in the exchange rates for both the Euro and U.S. Dollar against the Pound Sterling in our EMEA segment from period to period. In the EMEA segment, the majority of our cost of goods sold is denominated in Pound Sterling whereas sales are generated in Pound Sterling, Euro and the U.S. Dollar. The combined effect of the strengthening of both the Euro and U.S. Dollar against the Pound Sterling from period to period caused an increase in our Pound Sterling sales, resulting in favorable impacts to the gross margin. In addition, sales price increases in the EMEA segment over the last twelve months also positively impacted gross margin by 0.1 percentage points from period to period. Although the net changes in the costs of petroleum-based specialty chemicals and aerosol cans did not have an impact on the overall gross margin, we experienced positive net impacts on gross margin from these costs in our Americas and Asia Pacific segments, which were fully offset by unfavorable net impacts in our EMEA segment. The unfavorable impacts in our EMEA segment were primarily due to increased costs of petroleum-based specialty chemicals from period to period. While the costs of petroleum-based specialty chemicals for our EMEA segment are sourced in Pound Sterling, the underlying inputs are denominated in U.S. Dollars. As a result, the overall strengthening of the U.S. Dollar against the Pound Sterling from period to period resulted in a significant increase in cost of goods in Pound Sterling. There is often a delay of one quarter or more before changes in raw material costs
33
impact cost of products sold due to production and inventory life cycles. Due to the volatility of the price of crude oil, it is uncertain the level to which gross margin will be impacted by such costs in future periods.
These favorable impacts to gross margin were partially offset by the combined effects of unfavorable sales mix changes and other miscellaneous costs which negatively impacted gross margin by 0.2 percentage points for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year . In addition, gross margin was also negatively impacted by 0.2 percentage points from period to period due to higher warehousing and in-bound freight costs in the Americas segment .
Note that our gross profit and gross margin may not be comparable to those of other consumer product companies, since some of these companies include all costs related to distribution of their products in cost of products sold, whereas we exclude the portion associated with amounts paid to third parties for shipment to our customers from our distribution centers and contract manufacturers and include these costs in selling, general and administrative expenses. These costs tot aled $7.9 million and $7.7 million for the six months ended February 28, 2017 and February 29, 2016, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative expenses for the six months ended February 28, 2017 increased $2.3 million, or 4%, to $ 58.8 million from $ 56.5 million for the corresponding period of the prior fiscal year. As a percentage of net sales, SG&A expenses increased to 31.7% for the six months ended February 28, 2017 from 30.2% for the corresponding period of the prior fiscal year. The increase in SG&A expenses was primarily attributable to higher employee-related costs, increased freight costs, a higher level of expenses associated with travel and meetings, higher costs associated with research and development, increased professional services costs and increases in other miscellaneous expenses . Employee-related costs, which include salaries, incentive compensation, profit sharing, stock-based compensation and other fringe benefits, increased by $2.6 million. This increase was primarily due to increased headcount and higher stock-based compensation expense from period to period. The increase in stock-based compensation expense was due to the acceleration of expense for certain equity awards granted during the first quarter of fiscal year 2017 under updated equity award agreements that include expanded accelerated vesting provisions in the event of retirement of the award recipients. T hese increases were partially offset by lower earned incentive compensation from period to period. Freight costs associated with shipping products to our customers increased $0.8 million primarily due to higher sales volumes in the EMEA segment from period to period as well as additional costs associated with the shift in the distribution model for the do-it-yourself (DIY) channel that we made in the Germanics region which has resulted in us selling to various retail customers directly rather than through a large wholesale customer. Travel and meeting expenses increased $0.7 million due to a higher level of travel expenses associated with various sales meetings and activities in support of our strategic initiatives. Research and development costs increased $0.5 million primarily due to an increased level of spending from period to period related to the continued development of our products within the WD-40 brand, particularly in the Americas segment. Professional services costs increased $0.2 million due to increased use of such services from period to period, primarily in the Americas and EMEA segments. Other miscellaneous expenses, the largest of which were related to general office overhead, sales commissions and depreciation expense, increased by $0.9 million period over period. These increases were partially offset by changes in foreign currency exchange rates, which had a favorable impact of $3.4 million on SG&A expenses for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year .
We continued our research and development investment, the majority of which is associated with our maintenance products, in support of our focus on innovation and renovation of our products. Research and development costs were $4.3 million and $3.6 million for the six months ended February 28, 2017 and February 29, 2016, respectively.
Advertising and Sales Promotion Expenses
Advertising and sales promotion expenses for the six months ended February 28, 2017 decreased $0.8 million, or 8%, to $9.9 million from $10.7 million for the corresponding period of the prior fiscal year . As a percentage of net sales, these expenses decreased to 5.3% for the six months ended February 28, 2017 from 5.7% for the corresponding period of the prior fiscal year . Changes in foreign currency exchange rates had a favorable impact on such expenses of $0.7 million from period to period. Thus, on a constant currency basis, advertising and sales promotion expenses would have remained relatively constant from period to period. Although such expenses would have remained constant, promotional programs and marketing support in the EMEA segment were actually increased from period to period but these increases were more than offset by lower expenses for such activities in the Americas segment.
34
As a percentage of net sales, advertising and sales promotion expenses may fluctuate period to period based upon the type of marketing activities we employ and the period in which the costs are incurred. Total promotional costs recorded as a reduction to sales were $ 8.1 million for both the six months ended February 28, 2017 and February 29, 2016. Therefore, our total investment in advertising and sales promotion activities totaled $18.0 million and $ 18.8 million for the six months ended February 28, 2017 and February 29, 2016 , respectively .
Amortization of Definite-lived Intangible Assets Expense
Amortization of our definite-lived intangible assets was $1.4 million and $ 1.5 million for th e six months ended February 28, 2017 and February 29, 2016, respectively .
Income from Operations by Segment
The following table summarizes income from operations by segment (in thousands, except percentages):
|
(1) |
|
Unallocated corporate expenses are general corporate overhead expenses not directly attributable to any one of the operating segments. These expenses are reported separate from the Company’s identified segments and are included in Selling, General and Administrative expenses on the Company’s condensed consolidated statements of operations. |
Americas
Income from operations for the Americas segment de creased to $ 21.5 million, down $0. 2 million, or 1 %, for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year, primarily due to a $2.0 million decrease in sales , which was significantly offset by a higher gross margin. As a percentage of net sales, gross profit for the America s segment increased from 54.2% to 5 5 . 0 % period over period. This increase in the gross margin was primarily due to the combined positive impacts of decreased costs of petroleum-based specialty chemicals and aerosol cans, which were significantly offset by unfavorable sales mix changes as well as higher warehousing and in-bound freight costs from period to period . Operating expenses decreased $0.3 million period over period primarily due to lower earned incentive compensation expense and decreased advertisi ng and sales promotion expenses, which were mostly offset by higher employee-related expenses and research and development costs from period to period . Operating income as a percentage of net sales increased from 24.1% to 24. 4 % period over period.
EMEA
Income from operations for the EMEA segment increased to $ 17.5 million, up $1.4 million, or 9 %, for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year, primarily due to a higher gross margin and lower operating expenses, which were partially offset by a $1. 3 million decrease in sales. As a percentage of net sales, gross profit for the EMEA segment increased from 57.8% to 6 0 . 4 % period over period primarily due to favorable fluctuations in foreign currency exchange rates and sales mix changes . These favorable impacts were partially offset by the combined negative impacts of costs of petroleum-based specialty chemicals and aerosol cans in our EMEA segment . Operating expenses decreased $0.3 million period over period primarily due to the favorable impacts of fluctuations in foreign currency exchange rates, which w ere partially offset by slightly higher earned incentive compensation expense from period to period . Operating income as a percentage of net sales increased from 23.8% to 2 6 . 3 % period over period .
35
Asia-Pacific
Income from operations for the Asia-Pacific segment increased to $ 9. 6 million, up $ 0.7 million, or 8 %, for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year, primarily due to a $ 2.0 million increase in sales and a higher gross margin , which w ere partially offset by an increase in operating expenses . As a percentage of net sales, gross profit for the Asia-Pacific segment increased from 53.9% to 5 4 . 3 % period over period due to the combined positive impacts of decreased costs of petroleum-based speci alty chemicals and aerosol cans, which were slightly offset by a higher level of advertising, promotional and other discounts that we gave to our customers from period to period. Operating expenses increased $0.5 million period over period primarily due to higher employee-related expenses . Operating income as a percentage of net sales decreased from 30.2% to 30. 5 % period over period.
Non-Operating Items
The following table summarizes non-operating income and expenses for our consolidated operations (in thousands):
Interest Income
Interest income remained relatively constant for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year.
Interest Expense
Interest expense increased $0.3 million for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year primarily due to higher interest rates and an increased outstanding balance on our revolving credit facility period over period.
Other Income
Other income net decreased by $ 1.0 million for the six months ended February 28, 2017 compared to the corresponding period of the prior fiscal year primarily due to lower net foreign currency exchange gains from period to period . This significant decrease in foreign currency exchange gains was primarily due to the relative movement in foreign currency exchange rates and the fluctuation of non-functional currency balance sheet accounts, particularly those associated with our UK subsidiary, during the first half of this fiscal year as compared to the corresponding period of the prior fiscal year .
Provision for Income Taxes
The provision for income taxes was 30.7% and 28.3% of income before income taxes for the six months ended February 28, 2017 and February 29, 2016, respectively. The increase in the effective income tax rate from period to period was primarily driven by an immaterial out-of-period correction that we recorded in the second quarter of fiscal year 2017 associated with the tax impacts from certain unreal ized foreign currency exchange losses. We expect that the income tax rate for the full fiscal year 2017 will be close to 30%.
Net Income
Net income was $24.1 million, or $ 1.69 per common share on a fully diluted basis for the six months ended February 28, 2017 compared to $25.7 million, or $1.77 per common share on a fully diluted basis for the corresponding period of the prior fiscal year . Changes in foreign currency exchange rates had an unfavorable impact of $ 2.4 million on net income for six
36
months ended February 28, 2017 compared to the corresponding period of the prior fiscal year. Thus, on a constant currency basis, net income would have increased by $ 0.8 million from period to period.
Performance Measures and Non-GAAP Reconciliations
In managing our business operations and assessing our financial performance, we supplement the information provided by our financial statements with certain non-GAAP performance measures. These performance measures are part of our current 55/30/25 business model, which includes gross margin, cost of doing business, and earnings before interest, income taxes, depreciation and amortization (“EBITDA”), the latter two of which are non-GAAP performance measures. Cost of doing business is defined as total operating expenses less amortization of definite-lived intangible assets, impairment charges related to intangible assets and depreciation in operating departments, and EBITDA is defined as net income (loss) before interest, income taxes, depreciation and amortization. We target our gross margin to be above 55% of net sales, our cost of doing business to be at or below 30% of net sales, and our EBITDA to be above 25% of net sales. Results for these performance measures may vary from period to period depending on various factors, including economic conditions and our level of investment in activities for the future such as those related to quality assurance, regulatory compliance, and intellectual property protection in order to safeguard our WD-40 brand. The targets for these performance measures are long-term in nature, particularly those for cost of doing business and EBITDA, and we expect to make progress towards achieving them over time as our revenues increase .
The following table summarizes the results of these performance measures for the periods presented:
|
(1) |
|
Percentages may not aggregate to EBITDA percentage due to rounding and because amounts recorded in other income (expense), net on the Company’s consolidated statement of operations are not included in the EBITDA calculation. |
We use the performance measures above to establish financial goals and to gain an understanding of the comparative performance of the Company from period to period. We believe that these measures provide our shareholders with additional insights into the Company’s results of operations and how we run our business. The non-GAAP financial measures are supplemental in nature and should not be considered in isolation or as alternatives to net income, income from operations or other financial information prepared in accordance with GAAP as indicators of the Company’s performance or operations. The use of any non-GAAP measure may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies. Reconciliations of these non-GAAP financial measures to our financial statements as prepared in accordance with GAAP are as follows :
Cost of Doing Business (in thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
February 28, |
|
February 29, |
|
February 28, |
|
February 29, |
||||
|
2017 |
|
2016 |
|
2017 |
|
2016 |
||||
Total operating expenses - GAAP |
$ |
35,600 |
|
$ |
34,456 |
|
$ |
70,124 |
|
$ |
68,719 |
Amortization of definite-lived intangible assets |
|
(717) |
|
|
(747) |
|
|
(1,438) |
|
|
(1,502) |
Depreciation (in operating departments) |
|
(700) |
|
|
(690) |
|
|
(1,379) |
|
|
(1,377) |
Cost of doing business |
$ |
34,183 |
|
$ |
33,019 |
|
$ |
67,307 |
|
$ |
65,840 |
Net sales |
$ |
96,519 |
|
$ |
94,550 |
|
$ |
185,767 |
|
$ |
187,072 |
Cost of doing business as a percentage |
|
|
|
|
|
|
|
|
|
|
|
of net sales - non-GAAP |
|
35% |
|
|
35% |
|
|
36% |
|
|
35% |
37
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA (in thousands, except percentages)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Six Months Ended |
||||||||
|
February 28, |
|
February 29, |
|
February 28, |
|
February 29, |
||||
|
2017 |
|
2016 |
|
2017 |
|
2016 |
||||
Net income - GAAP |
$ |
12,360 |
|
$ |
13,669 |
|
$ |
24,118 |
|
$ |
25,731 |
Provision for income taxes |
|
6,046 |
|
|
5,323 |
|
|
10,684 |
|
|
10,131 |
Interest income |
|
(133) |
|
|
(183) |
|
|
(280) |
|
|
(331) |
Interest expense |
|
598 |
|
|
417 |
|
|
1,129 |
|
|
789 |
Amortization of definite-lived intangible assets |
|
717 |
|
|
747 |
|
|
1,438 |
|
|
1,502 |
Depreciation |
|
961 |
|
|
903 |
|
|
1,860 |
|
|
1,809 |
EBITDA |
$ |
20,549 |
|
$ |
20,876 |
|
$ |
38,949 |
|
$ |
39,631 |
Net sales |
$ |
96,519 |
|
$ |
94,550 |
|
$ |
185,767 |
|
$ |
187,072 |
EBITDA as a percentage of net sales - non-GAAP |
|
21% |
|
|
22% |
|
|
21% |
|
|
21% |
|
|
|
|
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|
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|
Liquidity and Capital Resources
Overview
The Company’s financial condition and liquidity remain strong. Net cash provided by operations was $13.7 million for the six months ended February 28, 2017 compared to $10.3 million for the corresponding period of the prior fiscal year. We believe we continue to be well positioned to weather any uncertainty in the capital markets and global economy due to our strong balance sheet and efficient business model, along with our growing and diversified global revenues. We continue to manage all aspects of our business including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, implementing gross margin enhancement strategies and developing new opportunities for growth.
Our principal sources of liquidity are our existing cash and cash equivalents, short-term investments, cash generated from operations and cash currently available from our existing $175.0 million revolving credit facility with Bank of America, N.A. (“Bank of America”), which expires on May 13, 2020. To date, we have used the proceeds of the revolving credit facility for our stock repurchases and plan to continue using such proceeds for our general working capital needs and stock repurchases under our board approved share buy-back plan . The Company also utilized this revolving credit facility in September 2016 to fund the purchase of its new headquarters office, which will house both corporate employees and employees in the Company’s Americas segment . During the six months ended February 28, 2017 , we had net new borrowings of $26.2 million U.S. dollars under the revolving credit facility. We regularly convert the vast majority of our draws on our line of credit to new draws with new maturity dates and interest rates. As of February 28, 2017, we had a $148.2 million outstanding balance on the revolving credit facility, of which $134.0 million was classified as long-term and $14.2 million was classified as short-term. There were no other letters of credit outstanding or restrictions on the amount available on this line of credit . Per the terms of the revolving credit facility agreement, our consolidated leverage ratio cannot be greater than three to one and our consolidated interest coverage ratio cannot be less than three to one. See Note 7 – Debt for additional information on these financial covenants. At February 28, 2017, we were in compliance with all debt covenants as required by the revolving credit facility and believe it is unlikely we will fail to comply with any of these covenants over the next twelve months. We would need to have a significant decrease in sales and/or a significant increase in expenses in order for us to not comply with the debt covenants .
At February 28, 2017, we had a total of $101.3 million in cash and cash equivalents and short-term investments . Of this balance, $97.8 million was held in Europe, Australia and China in foreign currencies. It is our intention to indefinitely reinvest the cumulative unremitted earnings at these locations in order to ensure sufficient working capital, expand operations and fund foreign acquisitions in these locations . We believe that our future cash from domestic operations, together with our access to funds available under our unsecured revolving credit facility will provide adequate resources to fund both short-term and long-term operating requirements, capital expenditures, share repurchases, dividend payments, acquisitions and new business development activities in the United States. Although we hold a significant amount of cash outside of the United
38
States and the draws on the credit facility to date have been made by our entity in the United States, we do not foresee any ongoing issues with repaying or refinancing these loans with domestically generated funds since we closely monitor the use of this credit facility. In the event that management elects for any reason in the future to repatriate additional foreign earnings that were previously deemed to be indefinitely reinvested outside of the U.S., we would be required to record additional tax expense at the time when we determine that such foreign earnings are no longer deemed to be indefinitely reinvested outside of the United States.
We believe that our existing consolidated cash and cash equivalents at February 28, 2017, the liquidity provided by our $175.0 million revolving credit facility and our anticipated cash flows from operations will be sufficient to meet our projected consolidated operating and capital requirements for at least the next twelve months. We consider various factors when reviewing liquidity needs and plans for available cash on hand including: future debt, principal and interest payments, future capital expenditure requirements, future share repurchases, future dividend payments (which are determined on a quarterly basis by the Company’s Board of Directors), alternative investment opportunities, debt covenants and any other relevant considerations currently facing our business.
Cash Flows
The following table summarizes our cash flows by category for the periods presented (in thousands):
Operating Activities
Net cash provided by operating activities increased $3.4 million to $13.7 million for the six months ended February 28, 2017 from $ 10.3 million for the corresponding period of the prior fiscal year. Cash flows from operating activities depend heavily on operating performance and changes in working capital. Our primary source of operating cash flows for the six months ended February 28, 2017 was net income of $24.1 million, which decreased $1.6 million from period to period . The changes in our working capital from period to period were primarily attributable to much lower increases in the trade accounts receivable balance and the timing of payments received from cu stomers from period to period. In the first half of fiscal year 2016, trade accounts receivable increased significantly due to low sales levels in the last quarter fiscal year 2015 followed by high sales levels in the second quarter of fiscal year 2016, particularly in t he last month of the quarter. In the first half of fiscal year 2017, the change in the accounts receivable balances was much lower due to more comparable sales levels in the last quarter of fiscal year 2016 as compared to the secon d quarter of fiscal year 2017. This change in working capital was mostly offset by an overall decrease in accrued payroll and related expenses due to higher earned incentive payouts in the first quarter of fiscal year 2017 compared to the same period of the prior fiscal year as well as lower earned incentive accruals from period to period .
Investing Activities
Net cash used in investing activities increased $15.7 million to $25.3 million for the six months ended February 28, 2017 from $9.6 million for the corresponding period of the prior fiscal year. This increase was primarily due to an increase of $10.7 million in cash outflow related to the purchase of the Company’s new headquarters office during the first quarter of fiscal year 2017. We have also incurred $0.3 million in additional cash outflows related to the buildout of this new office building since its acquisition and we will continue to incur such capital costs until we transition to the new headquarters office, which is expected to occur late in fi scal year 2017. Also contributing to the total cash outflows was a $5.1 million net increase in purchases of short-term investments that were made primarily by our U.K. and Australia subsidiaries from period to period .
39
Financing Activities
Net cash used in financing activities decreased $5.8 million to $4.1 million for the six months ended February 28, 2017 from $9.9 million for the corresponding period of the prior fiscal year primarily due to an $11.7 million increase in cash inflows from our revolving credit facility from period to period. This increase was partially offset by an increase of $3.6 million in cash outflows for treasury stock purchases and a $1.4 million increase in dividends paid. Also offsetting cash inflows from financing activities was a $0.6 million decrease in excess tax benefits from settlements of stock-based equity awards and a $0.3 million decrease in proceeds from the issuance of common stock upon the exercise of stock options from period to period.
Effect of Exchange Rate Changes
All of our foreign subsidiaries currently operate in currencies other than the U.S. dollar and a significant portion of our consolidated cash balance is denominated in these foreign functional currencies, particularly at our U.K. subsidiary which operates in Pound Sterling. As a result, our cash and cash equivalents balances are subject to the effects of the fluctuations in these functional currencies against the U.S. dollar at the end of each reporting period. The net effect of exchange rate changes on cash and cash equivalents, when expressed in U.S. Dollar terms, was a decrease in cash of $1.6 million and $2.3 million for the six months ended February 28, 2017 and February 29, 2016, respectively. The change of $0.7 million was primarily due to fluctuations in the foreign currency exchange rates for the Pound Sterling against the U.S. Dollar from period to period.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined by Item 303(a)(4)(ii) of Regulation S-K.
Commercial Commitments
W e have ongoing relationships with various suppliers (contract manufacturers) who manufacture our 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 our customers or third-party distribution centers in accordance with agreed upon shipment terms. Although we typically do not have definitive minimum purchase obligations included in the contract terms with our contract manufacturers, when such obligations have been included, they have been immaterial. In the ordinary course of business, we communicate supply needs to our contract manufacturers based on orders and short-term projections, ranging from two to five months. We are committed to purchase the products produced by the contract manufacturers based on the projections provided.
Upon the termination of contracts with contract manufacturers, we obtain certain inventory control rights and are obligated to work with the contract manufacturer to sell through all product held by or manufactured by the contract manufacturer on our behalf during the termination notification period. If any inventory remains at the contract manufacturer at the termination date, we are obligated to purchase such inventory which may include raw materials, components and finished goods . The amounts for inventory purchased under termination commitments have been immaterial.
In addition to the commitments to purchase products from contract manufacturers described above, we may also enter into commitments with other manufacturers to purchase finished goods and components to support innovation initiatives and/or supply chain initiatives. As of February 28, 2017, no such commitments were outstanding .
Share Repurchase Plan
On June 21, 2016, the Company’s Board of Directors approved a share buy-back plan. Under the plan, which became effective on September 1, 2016, the Company is authorized to acquire up to $75.0 million of its outstanding shares through August 31, 2018. The timing and amount of repurchases are based on terms and conditions as may be acceptable to the Company’s Chief Executive Officer and Chief Financial Officer and in compliance with all laws and regulations applicable thereto . During the period from September 1, 2016 through February 28, 2017, the Company repurchased 174,337 shares at a total cost of $18.7 million under this $75.0 million plan .
40
Dividends
On March 21, 201 7 , the Company’s Board of Directors declared a cash dividend of $0.49 per share payable on April 28, 2017 to shareholders of record on April 14, 2017 . Our ability to pay dividends could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and loan covenants .
Critical Accounting Policies
Our discussion and analysis of our operating results and financial condition is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
Critical accounting policies are those that involve subjective or complex judgments, often as a result of the need to make estimates. The following areas all require the use of judgments and estimates: revenue recognition and sales incentives, accounting for income taxes, valuation of goodwill and impairment of definite-lived intangible assets. Estimates in each of these areas are based on historical experience and various judgments and assumptions that we believe are appropriate. Actual results may differ from these estimates.
Our critical accounting policies are discussed in more detail in Part II―Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and Note 2 to our consolidated financial statements contained in our Annual Report on Form 10-K for the fiscal year ended August 31, 2016, which was filed with the SEC on October 24, 2016.
Recently Issued Accounting Standards
Information on Recently Issued Accounting Standards that could potentially impact the Company’s consolidated financial statements and related disclosures is incorporated by reference to Part I—Item 1, “Notes to Condensed Consolidated Financial Statements” Note 2 — Basis of Presentation and Summary of Significant Accounting Policies, included in this report .
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 President and 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 $0.2 million and $0.1 million for the three months ended February 28, 2017 and February 29, 2016, respectively, and $0. 5 million and $0.4 million for the six months ended February 28, 2017 and February 29, 2016. Accounts receivable from Tractor Supply were not material as of February 28, 2017 .
41
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our market risks from those disclosed in Part II ― Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2016, which was filed with the SEC on October 24, 2016.
Item 4. Controls and Procedures
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934 (“Exchange Act”). The term disclosure controls and procedures means controls and other procedures of a Company that are designed to ensure the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of February 28, 2017 , the end of the period covered by this report (the Evaluation Date), and they have concluded that, as of the Evaluation Date, such controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in the Company’s reports filed under the Exchange Act. Although management believes the Company’s existing disclosure controls and procedures are adequate to enable the Company to comply with its disclosure obligations, management continues to review and update such controls and procedures. The Company has a disclosure committee, which consists of certain members of the Company’s senior management .
There were no changes to the Company’s internal control over financial reporting that occurred during the Company’s most recent fiscal quarter that materially affected, or would be reasonably likely to materially affect, the Company’s internal control over financial reporting .
42
The information required by this item is incorporated by reference to the information set forth in Part I—Item 1, “Notes to Condensed Consolidated Financial Statements” Note 11 — Commitments and Contingencies, included in this report
There have been no material changes in our risk factors from those disclosed in Part I—Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the fiscal year ended August 31, 2016, which was filed with the SEC on October 24, 2016.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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, 2016 through February 28, 2017, the Company repurchased 174,337 shares at a total cost of $18.7 million under this $75.0 million plan .
The following table provides information with respect to all purchases made by the Company during the three months ended February 28, 2017 . All purchases listed below were made in the open market at prevailing market prices. Purchase transactions between December 1, 2016 and January 12, 2017 were executed pursuant to a trading plan adopted by the Company pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934 .
43
a
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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WD-40 COMPANY Registrant |
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Date: April 6, 2017 |
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/s/ GARRY O. RIDGE |
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Garry O. Ridge President and Chief Executive Officer (Principal Executive Officer) |
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/s/ JAY W. REMBOLT |
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Jay W. Rembolt Vice President, Finance Treasurer and Chief Financial Officer |
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45
Standard Form of Agreement Between Owner and Contractor for a Project of Limited Scope
AGREEMENT made as of th e 23rd day o f February in the year 2017
(In words, indicate day, month and year.)
BETWEEN the Owner:
(Name, legal status, address and other information)
WD-40 Company a Delaware corporation
1061 Cudahy Place
San Diego, CA 92110
Phone: 619.275.1400
and the Contractor:
(Name, legal status, address and other information)
Back’s Construction, Inc.
1602 Front Street, Suite 100
San Diego, CA 92101
Phone: 619.713.2566 / Fax: 619.713.0992
for the following Project:
(Name, location and detailed description)
WD-40 – Job#2233
9715 Business Park Ave
San Diego, CA 92131
The Architect:
(Name, legal status, address and other information)
ID Studios Interior Design & Strategic Planning, Inc.
236 S. Sierra Ave, Suite 110
Solana Beach, CA 92075
The Owner’s Representative:
Hughes Marino, Inc.
1450 Front St.
San Diego, CA 92101
Phone 619.238.2111
The Owner and Contractor agree as follows.
AIA Document A107 ™ -2007. Copyright © 1936. 19S1. 195, 8 1961, 1963, 1966, 1970, 1974, 1978 . 1987, 1997 and 2007 by The American Institute of Architects . All rights reserved. WARNING: This AIA© Document is pr otected by U.S. Copyright Law and International Tr eaties . Unauthorized reproduction or distribution or this A I A© Doc ument or any portion or it may result In sev ere civil and criminal p enalties, and will b e pr osecuted to the m aximum extent possible under the law. This draft was produced by AIA software and is not for resale.
TABLE OF ARTICLES
1 THE WORK OF THIS CONTRACT
2 DATE OF COMMENCEMENT AND SUBSTANTIAL COMPLETION
3 CONTRACT SUM
4 PAYMENT
5 DISPUTE RESOLUTION
6 ENUMERATION OF CONTRACT DOCUMENTS
7 GENERAL PROVISIONS
8 OWNER
9 CONTRACTOR
10 ARCHITECT
11 SUBCONTRACTORS
12 CONSTRUCTION BY OWNER OR BY SEPARATE CONTRACTORS
13 CHANGES IN THE WORK
14 TIME
15 PAYMENTS AND COMPLETION
16 PROTECTION OF PERSONS AND PROPERTY
17 INSURANCE & BONDS
18 CORRECTION OF WORK
19 MISCELLANEOUS PROVISIONS
20 TERMINATION OF THE CONTRACT
21 CLAIMS AND DISPUTES
ARTICLE 1 THE WORK OF THIS CONTRACT
The Contractor shall execute the Work described in the Contract Documents, except as specifically indicated in the Contract Documents to be the responsibility of others.
ARTICLE 2 DATE OF COMMENCEMENT AND SUBSTANTIAL COMPLETION
§ 2.1 The date of commencement of the Work shall be the date of this Agreement unless a different date is stated below or provision is made for the date to be fixed in a notice to proceed issued by the Owner.
(Insert the date of commencement, if it differs from the date of this Agreement or, if applicable, state that the date will be fixed in a notice to proceed.)
AIA Document A107 ™ -2007. Copyright © 1936. 19S1. 195, 8 1961, 1963, 1966, 1970, 1974, 1978 . 1987, 1997 and 2007 by The American Institute of Architects . All rights reserved. WARNING: This AIA© Document is pr otected by U.S. Copyright Law and International Tr eaties . Unauthorized reproduction or distribution or this A I A© Doc ument or any portion or it may result In sev ere civil and criminal p enalties, and will b e pr osecuted to the m aximum extent possible under the law. This draft was produced by AIA software and is not for resale.
Contractor has commenced providing pre construction services, the cost of which shall be included in the Contractor's Fee. Contractor shall commence the Work upon issuance of a Notice to Proceed by Owner.
§ 2.2 The Contract Time shall be measured from the date of commencement.
§ 2.3 The Contractor shall achieve Substantial Completion of the entire Work not later tha n July 14, 2017 ( ___ days from the date of commencement, or as follows:
(Insert number of calendar days. Alternatively, a calendar date may be used when coordinated with the date of commencement. If appropriate, insert requirements for earlier Substantial Completion of certain portions of the Work.)
Contractor shall achieve Substantial Completion no later than July 14, 2017.
Contractor agrees to pay $500/day as liquidated damages for every day after 15 days beyond substantial completion that the punch list is not complete.
Portion of Work |
Substantial Completion Date |
, subject to adjustments of this Contract Time as provided in the Contract Documents.
(Insert provisions, if any, for liquidated damages relating to failure to achieve Substantial Completion on time or for bonus payments for early completion of the Work.)
ARTICLE 3 CONTRACT SUM
§ 3.1 The Owner shall pay the Contractor the Contract Sum in current funds for the Contractor’s performance of the Contract. The Contract Sum shall be one of the following:
(Check the appropriate box.)
[ ] Stipulated Sum, in accordance with Section 3.2 below
[ ] Cost of the Work plus the Contractor’s Fee, in accordance with Section 3.3 below
[ X ] Cost of the Work plus the Contractor’s Fee with a Guaranteed Maximum Price, in accordance with Section 3.4 below
(Based on the selection above, complete Section 3.2, 3.3 or 3.4 below.)
§ 3.2 The Stipulated Sum shall be ($ ), subject to additions and deductions as provided in the Contract Documents.
§ 3.2.1 The Stipulated Sum is based upon the following alternates, if any, which are described in the Contract Documents and are hereby accepted by the Owner:
(State the numbers or other identification of accepted alternates. If the bidding or proposal documents permit the Owner to accept other alternates subsequent to the execution of this Agreement, attach a schedule of such other alternates showing the amount for each and the date when that amount expires.)
§ 3.2.2 Unit prices, if any:
(Identify and state the unit price, and state the quantity limitations, if any, to which the unit price will be applicable.)
Item |
Units and Limitations |
Price Per Unit ($0.00) |
AIA Document A107 ™ -2007. Copyright © 1936. 19S1. 195, 8 1961, 1963, 1966, 1970, 1974, 1978 . 1987, 1997 and 2007 by The American Institute of Architects . All rights reserved. WARNING: This AIA© Document is pr otected by U.S. Copyright Law and International Tr eaties . Unauthorized reproduction or distribution or this A I A© Doc ument or any portion or it may result In sev ere civil and criminal p enalties, and will b e pr osecuted to the m aximum extent possible under the law. This draft was produced by AIA software and is not for resale.
§ 3.2.3 Allowances included in the stipulated sum, if any:
(Identify allowance and state exclusions, if any, from the allowance price.)
Item |
Allowance |
§ 3.3 COST OF THE WORK PLUS CONTRACTOR’S FEE
§ 3.3.1 The Cost of the Work is as defined in Exhibit A, Determination of the Cost of the Work. (TBD)
§ 3.3.2 The Contractor’s Fee:
(State a lump sum, percentage of Cost of the Work or other provision for determining the Contractor’s Fee and the method of adjustment to the Fee for changes in the Work.)
§ 3.4 COST OF THE WORK PLUS CONTRACTOR’S FEE WITH A GUARANTEED MAXIMUM PRICE
§ 3.4.1 The Cost of the Work is as defined in Exhibit A, Determination of the Cost of the Work.
§ 3.4.2 The Contractor’s Fee: 3.00% of the Cost of the Work. Contractor’s Fee includes overhead, profit and insurance.
(State a lump sum, percentage of Cost of the Work or other provision for determining the Contractor’s Fee and the method of adjustment to the Fee for changes in the Work.)
§ 3.4.3 GUARANTEED MAXIMUM PRICE
§ 3.4.3.1 The sum of the Cost of the Work and the Contractor’s Fee is guaranteed by the Contractor not to exceed ($ ), subject to additions and deductions by changes in the Work as provided in the Contract Documents. Such maximum sum is referred to in the Contract Documents as the Guaranteed Maximum Price. Costs which would cause the Guaranteed Maximum Price to be exceeded shall be paid by the Contractor without reimbursement by the Owner.
(Insert specific provisions if the Contractor is to participate in any savings.)
In the event that the parties fail to agree to the Guaranteed Maximum Price in a Change Order by March 31, 2017, this Contract may be terminated by Owner and the provisions of Section 20.1 shall apply with respect to amounts due to Contractor.
Owner and Contractor shall agree to the Guaranteed Maximum Price in a written Change Order to be issued prior to the issuance of a Notice to Proceed by Owner.
§ 3.4.3.2 The Guaranteed Maximum Price is based on the following alternates, if any, which are described in the Contract Documents and are hereby accepted by the Owner:
§ 3.4.3.3 Unit Prices, if any:
(Identify and state the unit price, and state the quantity limitations, if any, to which the unit price will be applicable.)
Item |
Units and Limitations |
Price Per Unit ($0.00) |
§ 3.4.3.4 Allowances included in the Guaranteed Maximum Price, if any:
(Identify and state the amounts of any allowances, and state whether they include labor, materials, or both.)
Item |
Allowance |
§ 3.4.3.5 Assumptions, if any, on which the Guaranteed Maximum Price is based:
ARTICLE 4 PAYMENTS
§ 4.1 PROGRESS PAYMENTS
§ 4.1.1 Based upon Applications for Payment submitted to the Owner’s Representative by the Contractor and Certificates for Payment issued by the Owner’s Representative, the Owner shall make progress payments on account of the Contract Sum to the Contractor as provided below and elsewhere in the Contract Documents.
AIA Document A107 ™ -2007. Copyright © 1936. 19S1. 195, 8 1961, 1963, 1966, 1970, 1974, 1978 . 1987, 1997 and 2007 by The American Institute of Architects . All rights reserved. WARNING: This AIA© Document is pr otected by U.S. Copyright Law and International Tr eaties . Unauthorized reproduction or distribution or this A I A© Doc ument or any portion or it may result In sev ere civil and criminal p enalties, and will b e pr osecuted to the m aximum extent possible under the law. This draft was produced by AIA software and is not for resale.
§ 4.1.2 The period covered by each Application for Payment shall be one calendar month ending on the last day of the month, or as follows:
§ 4.1.3 Provided that an Application for Payment is received by the Owner’s Representative not later than th e 1 st day of a month, the Owner shall make payment of the certified amount to the Contractor not later than the 30th day of the same m onth. If an Application for Payment is received by the Owner’s Representative after the date fixed above, payment shall be made by the Owner not later th an forty-five (45) days after the Owner receives the Application for Payment.
(Federal, state or local laws may require payment within a certain period of time.)
§ 4.1.4 Retainage, if any, shall be withheld as follows:
10%
§ 4.1.5 Payments due and unpaid under the Contract shall bear interest from the date payment is due at the rate stated below, or in the absence thereof, at the legal rate prevailing from time to time at the place where the Project is located.
(Insert rate of interest agreed upon, if any.)
5% five percent per annum
§ 4.2 FINAL PAYMENT
§ 4.2.1 Final payment, constituting the entire unpaid balance of the Contract Sum, shall be made by the Owner to the Contractor when
.1 the Contractor has fully performed the Contract except for the Contractor’s responsibility to correct Work as provided in Section 18.2, and to satisfy other requirements, if any, which extend beyond final payment;
.2 the Contractor has submitted a final accounting for the Cost of the Work, where payment is on the basis of the Cost of the Work with or without a guaranteed maximum price; and
.3 a final Certificate for Payment has been issued by the Architect.
§ 4.2.2 The Owner’s final payment to the Contractor shall be made no later than 30 days after the issuance of the Owner’s Representative’s final Certificate for Payment, or as follows:
ARTICLE 5 DISPUTE RESOLUTION
§ 5.1 BINDING DISPUTE RESOLUTION
For any claim subject to, but not resolved by, mediation pursuant to Section 21.3, the method of binding dispute resolution shall be as follows:
(Check the appropriate box. If the Owner and Contractor do not select a method of binding dispute resolution below, or do not subsequently agree in writing to a binding dispute resolution method other than litigation, claims will be resolved in a court of competent jurisdiction.)
[ X ] Arbitration pursuant to Section 21.4 of this Agreement
[ ] Litigation in a court of competent jurisdiction
[ ] Other (Specify)
ARTICLE 6 ENUMERATION OF CONTRACT DOCUMENTS
§ 6.1 The Contract Documents are defined in Article 7 and, except for Modifications issued after execution of this Agreement, are enumerated in the sections below.
AIA Document A107 ™ -2007. Copyright © 1936. 19S1. 195, 8 1961, 1963, 1966, 1970, 1974, 1978 . 1987, 1997 and 2007 by The American Institute of Architects . All rights reserved. WARNING: This AIA© Document is pr otected by U.S. Copyright Law and International Tr eaties . Unauthorized reproduction or distribution or this A I A© Doc ument or any portion or it may result In sev ere civil and criminal p enalties, and will b e pr osecuted to the m aximum extent possible under the law. This draft was produced by AIA software and is not for resale.
§ 6.1.1 The Agreement is this executed AIA Document A107–2007, Standard Form of Agreement Between Owner and Contractor for a Project of Limited Scope.
§ 6.1.2 The Supplementary and other Conditions of the Contract:
Document |
Title |
Date |
Pages |
§ 6.1.3 The Specifications:
(Either list the Specifications here or refer to an exhibit attached to this Agreement.)
Section |
Title |
Date |
Pages |
Included with “The Drawings” Section 6.1.4
§ 6.1.4 The Drawings:
(Either list the Drawings here or refer to an exhibit attached to this Agreement.)
Number |
Title |
Date |
See Exhibit “B”, Contract Documents
§ 6.1.5 The Addenda, if any:
Number |
Date |
Pages |
Portions of Addenda relating to bidding requirements are not part of the Contract Documents unless the bidding requirements are enumerated in this Article 6.
§ 6.1.6 Additional documents, if any, forming part of the Contract Documents:
Exhibit "A" – Determination of the Cost of the Work, 6 pages
Exhibit "B" – Contract Documents, dated 2/10/17, 92 pages
Exhibit “B-1” – Back’s Certificate of Insurance (COI)
Exhibit "C" – Project Schedule, dated 2/17/17, 1 page
Exhibit "D" – Fee Schedule, 1 page
(Paragraphs deleted)
Exhibit "E" Contractor’s Project Cost Summary, (summary will follow via change order)
ARTICLE 7 GENERAL PROVISIONS
§ 7.1 THE CONTRACT DOCUMENTS
The Contract Documents are enumerated in Article 6 and consist of this Agreement (including, if applicable, Supplementary and other Conditions of the Contract), Drawings, Specifications, Addenda issued prior to the execution of this Agreement, other documents listed in this Agreement and Modifications issued after execution of this Agreement. A Modification is (1) a written amendment to the Contract signed by both parties, (2) a Change Order, (3) a Construction Change Directive or (4) a written order for a minor change in the Work issued by the Architect. The intent of the Contract Documents is to include all items necessary for the proper execution and completion of the Work by the Contractor. The Contract Documents are complementary, and what is required by one shall be as binding as if required by all; performance by the Contractor shall be required to the extent consistent with the Contract Documents and reasonably inferable from them as being necessary to produce the indicated results.
§ 7.2 THE CONTRACT
The Contract Documents form the Contract for Construction. The Contract represents the entire and integrated agreement between the parties hereto and supersedes prior negotiations, representations or agreements, either written
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or oral. The Contract may be amended or modified only by a Modification. The Contract Documents shall not be construed to create a contractual relationship of any kind between any persons or entities other than the Owner and the Contractor.
§ 7.3 THE WORK
The term “Work” means the construction and services required by the Contract Documents, whether completed or partially completed, and includes all other labor, materials, equipment and services provided or to be provided by the Contractor to fulfill the Contractor’s obligations. The Work may constitute the whole or a part of the Project.
§ 7.4 INSTRUMENTS OF SERVICE
Instruments of Service are representations, in any medium of expression now known or later developed, of the tangible and intangible creative work performed by the Architect and the Architect’s consultants under their respective professional services agreements. Instruments of Service may include, without limitation, studies, surveys, models, sketches, drawings, specifications, and other similar materials.
§ 7.5 OWNERSHIP AND USE OF DRAWINGS, SPECIFICATIONS AND OTHER INSTRUMENTS OF
SERVICE
§ 7.5.1 The Architect and the Architect’s consultants shall be deemed the authors and owners of their respective Instruments of Service, including the Drawings and Specifications, and will retain all common law, statutory and other reserved rights, including copyrights, subject to the Owner’s right to a non –exclusive license to use the Instruments of Service for the maintenance, operation, renovation or remodeling of the Project. The Contractor, Subcontractors, Sub-subcontractors, and material or equipment suppliers shall not own or claim a copyright in the Instruments of Service. Submittal or distribution to meet official regulatory requirements or for other purposes in connection with this Project is not to be construed as publication in derogation of the Architect’s or Architect’s consultants’ reserved rights.
§ 7.5.2 The Contractor, Subcontractors, Sub-subcontractors and material or equipment suppliers are authorized to use and reproduce the Instruments of Service provided to them solely and exclusively for execution of the Work. All copies made under this authorization shall bear the copyright notice, if any, shown on the Instruments of Service. The Contractor, Subcontractors, Sub-subcontractors, and material or equipment suppliers may not use the Instruments of Service on other projects or for additions to this Project outside the scope of the Work without the specific written consent of the Owner, Architect and the Architect’s consultants.
§ 7.6 TRANSMISSION OF DATA IN DIGITAL FORM
If the parties intend to transmit Instruments of Service or any other information or documentation in digital form, they shall endeavor to establish necessary protocols governing such transmission, unless otherwise provided in the Agreement or in the Contract Documents.
ARTICLE 8 OWNER
§ 8.1 INFORMATION AND SERVICES REQUIRED OF THE OWNER
§ 8.1.1 The Owner shall furnish all necessary surveys and a legal description of the site.
§ 8.1.2 The Contractor shall be entitled to rely on the accuracy of information furnished by the Owner but shall exercise proper precautions relating to the safe performance of the Work.
§ 8.1.3 Except for permits and fees that are the responsibility of the Contractor under the Contract Documents, including those required under Section 9.6.1, the Owner shall secure and pay for other necessary approvals, easements, assessments and charges required for the construction, use or occupancy of permanent structures or for permanent changes in existing facilities.
§ 8.2 OWNER’S RIGHT TO STOP THE WORK
If the Contractor fails to correct Work which is not in accordance with the requirements of the Contract Documents, or repeatedly fails to carry out the Work in accordance with the Contract Documents, the Owner may issue a written
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order to the Contractor to stop the Work, or any portion thereof, until the cause for such order is eliminated; however, the right of the Owner to stop the Work shall not give rise to a duty on the part of the Owner to exercise this right for the benefit of the Contractor or any other person or entity.
§ 8.3 OWNER’S RIGHT TO CARRY OUT THE WORK
If the Contractor defaults or neglects to carry out the Work in accordance with the Contract Documents, and fails within a ten-day period after receipt of written notice from the Owner to commence and continue correction of such default or neglect with diligence and promptness, the Owner, without prejudice to any other remedy the Owner may have, may correct such deficiencies and may deduct the reasonable cost thereof, including Owner’s expenses and compensation for the Architect’s services made necessary thereby, from the payment then or thereafter due the Contractor.
ARTICLE 9 CONTRACTOR
§ 9.1 REVIEW OF CONTRACT DOCUMENTS AND FIELD CONDITIONS BY CONTRACTOR
§ 9.1.1 Execution of the Contract by the Contractor is a representation that the Contractor has visited the site, become generally familiar with local conditions under which the Work is to be performed and correlated personal observations with requirements of the Contract Documents.
§ 9.1.2 Because the Contract Documents are complementary, the Contractor shall, before starting each portion of the Work, carefully study and compare the various Contract Documents relative to that portion of the Work, as well as the information furnished by the Owner pursuant to Section 8.1.1, shall take field measurements of any existing conditions related to that portion of the Work and shall observe any conditions at the site affecting it. These obligations are for the purpose of facilitating coordination and construction by the Contractor and are not for the purpose of discovering errors, omissions, or inconsistencies in the Contract Documents; however, the Contractor shall promptly report to the Architect any errors, inconsistencies, or omissions discovered by or made known to the Contractor as a request for information in such form as the Architect may require. It is recognized that the Contractor’s review is made in the Contractor’s capacity as a contractor and not as a licensed design professional unless otherwise specifically provided in the Contract Documents.
§ 9.1.3 The Contractor is not required to ascertain that the Contract Documents are in accordance with applicable laws, statutes, ordinances, codes, rules and regulations, or lawful orders of public authorities, but the Contractor shall promptly report to the Architect any nonconformity discovered by or made known to the Contractor as a request for information in such form as the Architect may require.
§ 9.2 SUPERVISION AND CONSTRUCTION PROCEDURES
§ 9.2.1 The Contractor shall supervise and direct the Work, using the Contractor’s best skill and attention. The Contractor shall be solely responsible for and have control over construction means, methods, techniques, sequences and procedures, and for coordinating all portions of the Work under the Contract, unless the Contract Documents give other specific instructions concerning these matters.
§ 9.2.2 The Contractor shall be responsible to the Owner for acts and omissions of the Contractor’s employees, Subcontractors and their agents and employees, and other persons or entities performing portions of the Work for or on behalf of the Contractor or any of its Subcontractors.
§ 9.3 LABOR AND MATERIALS
§ 9.3.1 Unless otherwise provided in the Contract Documents, the Contractor shall provide and pay for labor, materials, equipment, tools, construction equipment and machinery, water, heat, utilities, transportation, and other facilities and services necessary for proper execution and completion of the Work whether temporary or permanent and whether or not incorporated or to be incorporated in the Work.
§ 9.3.2 The Contractor shall enforce strict discipline and good order among the Contractor’s employees and other persons carrying out the Work. The Contractor shall not permit employment of unfit persons or persons not skilled in tasks assigned to them.
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§ 9.3.3 The Contractor may make a substitution only with the consent of the Owner, after evaluation by the Architect and in accordance with a Modification.
§ 9.4 WARRANTY
The Contractor warrants to the Owner and Architect that materials and equipment furnished under the Contract will be of good quality and new unless the Contract Documents require or permit otherwise. The Contractor further warrants that the Work will conform to the requirements of the Contract Documents and will be free from defects, except for those inherent in the quality of the Work the Contract Documents require or permit. Work, materials, or equipment not conforming to these requirements may be considered defective. The Contractor’s warranty excludes remedy for damage or defect caused by abuse, alterations to the Work not executed by the Contractor, improper or insufficient maintenance, improper operation or normal wear and tear under normal usage.
§ 9.5 TAXES
The Contractor shall pay sales, consumer, use and other similar taxes that are legally enacted when bids are received or negotiations concluded, whether or not yet effective or merely scheduled to go into effect.
§ 9.6 PERMITS, FEES, NOTICES, AND COMPLIANCE WITH LAWS
§ 9.6.1 Unless otherwise provided in the Contract Documents, the Contractor shall secure and pay for the building permit as well as other permits, fees, licenses and inspections by government agencies necessary for proper execution and completion of the Work that are customarily secured after execution of the Contract and legally required at the time bids are received or negotiations concluded.
§ 9.6.2 The Contractor shall comply with and give notices required by applicable laws, statutes, ordinances, codes, rules and regulations, and lawful orders of public authorities applicable to performance of the Work. If the Contractor performs Work knowing it to be contrary to applicable laws, statutes, ordinances, codes, rules and regulations, or lawful orders of public authorities, the Contractor shall assume appropriate responsibility for such Work and shall bear the costs attributable to correction.
§ 9.7 ALLOWANCES
The Contractor shall include in the Contract Sum all allowances stated in the Contract Documents. The Owner shall select materials and equipment under allowances with reasonable promptness. Allowance amounts shall include the costs to the Contractor of materials and equipment delivered at the site and all required taxes, less applicable trade discounts. Allowance amounts shall not include the Contractor’s costs for unloading and handling at the site, labor, installation, overhead, and profit.
§ 9.8 CONTRACTOR’S CONSTRUCTION SCHEDULES
§ 9.8.1 The Contractor, promptly after being awarded the Contract, shall prepare and submit for the Owner’s and Architect’s information a Contractor’s construction schedule for the Work. The schedule shall not exceed time limits current under the Contract Documents, shall be revised at appropriate intervals as required by the conditions of the Work and Project, shall be related to the entire Project to the extent required by the Contract Documents, and shall provide for expeditious and practicable execution of the Work.
§ 9.8.2 The Contractor shall perform the Work in general accordance with the most recent schedule submitted to the Owner and Architect.
§ 9.9 SUBMITTALS
§ 9.9.1 The Contractor shall review for compliance with the Contract Documents and submit to the Architect Shop Drawings, Product Data, Samples and similar submittals required by the Contract Documents in coordination with the Contractor’s construction schedule and in such sequence as to allow the Architect reasonable time for review. By submitting Shop Drawings, Product Data, Samples and similar submittals, the Contractor represents to the Owner and Architect that the Contractor has (1) reviewed and approved them; (2) determined and verified materials, field measurements and field construction criteria related thereto, or will do so; and (3) checked and coordinated the
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information contained within such submittals with the requirements of the Work and of the Contract Documents. The Work shall be in accordance with approved submittals.
§ 9.9.2 Shop Drawings, Product Data, Samples and similar submittals are not Contract Documents.
§ 9.10 USE OF SITE
The Contractor shall confine operations at the site to areas permitted by applicable laws, statutes, ordinances, codes, rules and regulations, lawful orders of public authorities, and the Contract Documents and shall not unreasonably encumber the site with materials or equipment.
§ 9.11 CUTTING AND PATCHING
The Contractor shall be responsible for cutting, fitting or patching required to complete the Work or to make its parts fit together properly.
§ 9.12 CLEANING UP
The Contractor shall keep the premises and surrounding area free from accumulation of waste materials or rubbish caused by operations under the Contract. At completion of the Work, the Contractor shall remove waste materials, rubbish, the Contractor’s tools, construction equipment, machinery and surplus material from and about the Project.
§ 9.13 ROYALTIES, PATENTS AND COPYRIGHTS
The Contractor shall pay all royalties and license fees. The Contractor shall defend suits or claims for infringement of copyrights and patent rights and shall hold the Owner and Architect harmless from loss on account thereof, but shall not be responsible for such defense or loss when a particular design, process or product of a particular manufacturer or manufacturers is required by the Contract Documents or where the copyright violations are contained in Drawings, Specifications or other documents prepared by the Owner or Architect. However, if the Contractor has reason to believe that the required design, process or product is an infringement of a copyright or a patent, the Contractor shall be responsible for such loss unless such information is promptly furnished to the Architect.
§ 9.14 ACCESS TO WORK
The Contractor shall provide the Owner and Architect access to the Work in preparation and progress wherever located.
§ 9.15 INDEMNIFICATION
§ 9.15.1 To the fullest extent permitted by law, the Contractor shall indemnify and hold harmless the Owner, Architect, Owner’s Representative, Architect’s consultants and agents and employees of any of them from and against claims, damages, losses and expenses, including but not limited to attorneys’ fees, arising out of or resulting from performance of the Work, provided that such claim, damage, loss or expense is attributable to bodily injury, sickness, disease or death, or to injury to or destruction of tangible property (other than the Work itself), but only to the extent caused by the negligent acts or omissions of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, regardless of whether or not such claim, damage, loss or expense is caused in part by a party indemnified hereunder. Such obligation shall not be construed to negate, abridge, or reduce other rights or obligations of indemnity which would otherwise exist as to a party or person described in this Section 9.15.1.
§ 9.15.2 In claims against any person or entity indemnified under this Section 9.15 by an employee of the Contractor, a Subcontractor, anyone directly or indirectly employed by them or anyone for whose acts they may be liable, the indemnification obligation under Section 9.15.1 shall not be limited by a limitation on amount or type of damages, compensation or benefits payable by or for the Contractor or Subcontractor under workers’ compensation acts, disability benefit acts or other employee benefit acts.
ARTICLE 10 ARCHITECT and OWNER’S REPRESENTATIVE
§ 10.1 The Owner’s Representative will provide administration of the Contract and will be an Owner’s representative during construction, until the date the Owner’s Representative issues the final Certificate for Payment. The Architect
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and Owner’s Representative will have authority to act on behalf of the Owner only to the extent provided in the Contract Documents, unless otherwise modified in writing in accordance with other provisions of the Contract.
§ 10.2 The Architect will visit the site at intervals appropriate to the stage of the construction to become generally familiar with the progress and quality of the portion of the Work completed, and to determine in general, if the Work observed is being performed in a manner indicating that the Work, when fully completed, will be in accordance with the Contract Documents. However, the Architect will not be required to make exhaustive or continuous on-site inspections to check the quality or quantity of the Work. The Architect will not have control over, charge of, or responsibility for, the construction means, methods, techniques, sequences or procedures, or for safety precautions and programs in connection with the Work, since these are solely the Contractor’s rights and responsibilities under the Contract Documents.
§ 10.3 On the basis of the site visits, the Architect will keep the Owner reasonably informed about the progress and quality of the portion of the Work completed, and report to the Owner (1) known deviations from the Contract Documents and from the most recent construction schedule submitted by the Contractor, and (2) defects and deficiencies observed in the Work. The Architect will not be responsible for the Contractor’s failure to perform the Work in accordance with the requirements of the Contract Documents. The Architect will not have control over or charge of and will not be responsible for acts or omissions of the Contractor, Subcontractors, or their agents or employees, or any other persons or entities performing portions of the Work.
§ 10.4 Based on the Architect’s evaluations of the Work and the Owner’s Representative’s evaluation of the Contractor’s Applications for Payment, the Owner’s Representative will review and certify the amounts due the Contractor and will issue Certificates for Payment in such amounts.
§ 10.5 The Architect has authority to reject Work that does not conform to the Contract Documents and to require inspection or testing of the Work.
§ 10.6 The Architect will review and approve or take other appropriate action upon the Contractor’s submittals such as Shop Drawings, Product Data and Samples, but only for the limited purpose of checking for conformance with information given and the design concept expressed in the Contract Documents.
§ 10.7 omitted.
§ 10.8 The Architect’s decisions on matters relating to aesthetic effect will be final if consistent with the intent expressed in the Contract Documents.
§ 10.9 omitted.
ARTICLE 11 SUBCONTRACTORS
§ 11.1 A Subcontractor is a person or entity who has a direct contract with the Contractor to perform a portion of the Work at the site.
§ 11.2 Unless otherwise stated in the Contract Documents or the bidding requirements, the Contractor, as soon as practicable after award of the Contract, shall furnish in writing to the Owner through the Architect the names of the Subcontractors or suppliers for each of the principal portions of the Work. The Contractor shall not contract with any Subcontractor or supplier to whom the Owner or Architect has made reasonable written objection within ten days after receipt of the Contractor’s list of Subcontractors and suppliers. If the proposed but rejected Subcontractor was reasonably capable of performing the Work, the Contract Sum and Contract Time shall be increased or decreased by the difference, if any, occasioned by such change, and an appropriate Change Order shall be issued before commencement of the substitute Subcontractor’s Work. The Contractor shall not be required to contract with anyone to whom the Contractor has made reasonable objection.
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§ 11.3 Contracts between the Contractor and Subcontractors shall (1) require each Subcontractor, to the extent of the Work to be performed by the Subcontractor, to be bound to the Contractor by the terms of the Contract Documents, and to assume toward the Contractor all the obligations and responsibilities, including the responsibility for safety of the Subcontractor’s Work, which the Contractor, by the Contract Documents, assumes toward the Owner and Architect, and (2) allow the Subcontractor the benefit of all rights, remedies and redress against the Contractor that the Contractor, by these Contract Documents, has against the Owner.
ARTICLE 12 CONSTRUCTION BY OWNER OR BY SEPARATE CONTRACTORS
§ 12.1 The Owner reserves the right to perform construction or operations related to the Project with the Owner’s own forces, and to award separate contracts in connection with other portions of the Project or other construction or operations on the site under conditions of the contract identical or substantially similar to these, including those portions related to insurance and waiver of subrogation. If the Contractor claims that delay or additional cost is involved because of such action by the Owner, the Contractor shall make such claim as provided in Article 21.
§ 12.2 The Contractor shall afford the Owner and separate contractors reasonable opportunity for introduction and storage of their materials and equipment and performance of their activities, and shall connect and coordinate the Contractor’s activities with theirs as required by the Contract Documents.
§ 12.3 The Owner shall be reimbursed by the Contractor for costs incurred by the Owner which are payable to a separate contractor because of delays, improperly timed activities or defective construction of the Contractor. The Owner shall be responsible to the Contractor for costs incurred by the Contractor because of delays, improperly timed activities, damage to the Work or defective construction of a separate contractor.
ARTICLE 13 CHANGES IN THE WORK
§ 13.1 By appropriate Modification, changes in the Work may be accomplished after execution of the Contract. The Owner, without invalidating the Contract, may order changes in the Work within the general scope of the Contract consisting of additions, deletions or other revisions, with the Contract Sum and Contract Time being adjusted accordingly. Such changes in the Work shall be authorized by written Change Order signed by the Owner, Contractor and Architect, or by written Construction Change Directive signed by the Owner.. The Contractor shall only be entitled to receive General Conditions on change Orders that require overtime, after-hour supervision or extension of the time schedule. Where applicable, General Conditions on Change Orders shall be 3% of the increase in the Cost of the Work reflected in the Change Order.
§ 13.2 Adjustments in the Contract Sum and Contract Time resulting from a change in the Work shall be determined by mutual agreement of the parties or, in the case of a Construction Change Directive signed only by the Owner, by the Contractor’s cost of labor, material, equipment, and reasonable overhead and profit, unless the parties agree on another method for determining the cost or credit. Pending final determination of the total cost of a Construction Change Directive, the Contractor may request payment for Work completed pursuant to the Construction Change Directive. The Owner’s Representative will make an interim determination of the amount of payment due for purposes of certifying the Contractor’s monthly Application for Payment. When the Owner and Contractor agree on adjustments to the Contract Sum and Contract Time arising from a Construction Change Directive, the Owner’s Representative will prepare a Change Order.
§ 13.3 The Owner’s Representative will have authority to order minor changes in the Work not involving adjustment in the Contract Sum or extension of the Contract Time and not inconsistent with the intent of the Contract Documents. Such changes shall be effected by written order and shall be binding on the Owner and Contractor. The Contractor shall carry out such written orders promptly.
§ 13.4 If concealed or unknown physical conditions are encountered at the site that differ materially from those indicated in the Contract Documents or from those conditions ordinarily found to exist, the Contract Sum and Contract Time shall be equitably adjusted as mutually agreed between the Owner and Contractor; provided that the Contractor provides notice to the Owner and Architect promptly and before conditions are disturbed.
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ARTICLE 14 TIME
§ 14.1 Time limits stated in the Contract Documents are of the essence of the Contract. By executing the Agreement the Contractor confirms that the Contract Time is a reasonable period for performing the Work.
§ 14.2 Unless otherwise provided, Contract Time is the period of time, including authorized adjustments, allotted in the Contract Documents for Substantial Completion of the Work.
§ 14.3 The term “day” as used in the Contract Documents shall mean calendar day unless otherwise specifically defined.
§ 14.4 The date of Substantial Completion is the date certified by the Owner’s Representative in accordance with Section 15.4.3.
§ 14.5 If the Contractor is delayed at any time in the commencement or progress of the Work by changes ordered in the Work, by labor disputes, fire, unusual delay in deliveries, abnormal adverse weather conditions not reasonably anticipatable, unavoidable casualties or any causes beyond the Contractor’s control, or by other causes which the Architect determines may justify delay, then the Contract Time shall be extended by Change Order for such reasonable time as the Architect may determine, subject to the provisions of Article 21.
ARTICLE 15 PAYMENTS AND COMPLETION
§ 15.1 APPLICATIONS FOR PAYMENT
§ 15.1.1 Where the Contract is based on a Stipulated Sum or the Cost of the Work with a Guaranteed Maximum Price, the Contractor shall submit to the Owner’s Representative, before the first Application for Payment, a schedule of values, allocating the entire Contract Sum to the various portions of the Work, prepared in such form and supported by such data to substantiate its accuracy as the Architect may require. This schedule, unless objected to by the Owner’s Representative, shall be used in reviewing the Contractor’s Applications for Payment.
§ 15.1.2 With each Application for Payment where the Contract Sum is based upon the Cost of the Work, or the Cost of the Work with a Guaranteed Maximum Price, the Contractor shall submit payrolls, petty cash accounts, receipted invoices or invoices with check vouchers attached, and any other evidence required by the Owner to demonstrate that cash disbursements already made by the Contractor on account of the Cost of the Work equal or exceed (1) progress payments already received by the Contractor, less (2) that portion of those payments attributable to the Contractor’s Fee; plus (3) payrolls for the period covered by the present Application for Payment.
§ 15.1.3 Payments shall be made on account of materials and equipment delivered and suitably stored at the site for subsequent incorporation in the Work. If approved in advance by the Owner, payment may similarly be made for materials and equipment stored, and protected from damage, off the site at a location agreed upon in writing.
§ 15.1.4 The Contractor warrants that title to all Work covered by an Application for Payment will pass to the Owner no later than the time of payment. The Contractor further warrants that upon submittal of an Application for Payment all Work for which Certificates for Payment have been previously issued and payments received from the Owner shall, to the best of the Contractor’s knowledge, information and belief, be free and clear of liens, claims, security interests or other encumbrances adverse to the Owner’s interests.
§ 15.2 CERTIFICATES FOR PAYMENT
§ 15.2.1 The Owner’s Representative will, within seven days after receipt of the Contractor’s Application for Payment, either issue to the Owner a Certificate for Payment, with a copy to the Contractor, for such amount as the Owner’s Representative determines is properly due, or notify the Contractor and Owner in writing of the Owner’s Representatives reasons for withholding certification in whole or in part as provided in Section 15.2.3.
§ 15.2.2 The issuance of a Certificate for Payment will constitute a representation by the Owner’s Representative to the Owner, based on the Owner’s Representative’s evaluations of the Work and the data comprising the Application for Payment, that, to the best of the Owner’s Representative’s knowledge, information and belief, the Work has
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progressed to the point indicated and that the quality of the Work is in accordance with the Contract Documents. The foregoing representations are subject to an evaluation of the Work for conformance with the Contract Documents upon Substantial Completion, to results of subsequent tests and inspections, to correction of minor deviations from the Contract Documents prior to completion and to specific qualifications expressed by the Owner’s Representative. The issuance of a Certificate for Payment will further constitute a representation that the Contractor is entitled to payment in the amount certified. However, the issuance of a Certificate for Payment will not be a representation that the Owner’s Representative has (1) made exhaustive or continuous on-site inspections to check the quality or quantity of the Work, (2) reviewed construction means, methods, techniques, sequences or procedures, (3) reviewed copies of requisitions received from Subcontractors and material suppliers and other data requested by the Owner to substantiate the Contractor’s right to payment, or (4) made examination to ascertain how or for what purpose the Contractor has used money previously paid on account of the Contract Sum.
§ 15.2.3 The Owner’s Representative may withhold a Certificate for Payment in whole or in part, to the extent reasonably necessary to protect the Owner, if in the Owner’s Representative’s opinion the representations to the Owner required by Section 15.2.2 cannot be made. If the Owner’s Representative is unable to certify payment in the amount of the Application, the Owner’s Representative will notify the Contractor and Owner as provided in Section 15.2.1. If the Contractor and the Owner’s Representative cannot agree on a revised amount, the Owner’s Representative will promptly issue a Certificate for Payment for the amount for which the Owner’s Representative is able to make such representa tions to the Owner. The Owner’s Representative may also withhold a Certificate for Payment or, because of subsequently discovered evidence, may nullify the whole or a part of a Certificate for Payment previously issued, to such extent as may be necessary in the’ Owner’s Representative’s opinion to protect the Owner from loss for which the Contractor is responsible, including loss resulting from acts and omissions described in Section 9.2.2, because of
.1 defective Work not remedied;
.2 third party claims filed or reasonable evidence indicating probable filing of such claims unless security acceptable to the Owner is provided by the Contractor;
.3 failure of the Contractor to make payments properly to Subcontractors or for labor, materials or equipment;
.4 reasonable evidence that the Work cannot be completed for the unpaid balance of the Contract Sum;
.5 damage to the Owner or a separate contractor;
.6 reasonable evidence that the Work will not be completed within the Contract Time and that the unpaid balance would not be adequate to cover actual or liquidated damages for the anticipated delay; or
.7 repeated failure to carry out the Work in accordance with the Contract Documents.
§ 15.2.4 When the above reasons for withholding certification are removed, certification will be made for amounts previously withheld.
§ 15.3 PROGRESS PAYMENTS
§ 15.3.1 The Contractor shall pay each Subcontractor, no later than seven days after receipt of payment, the amount to which the Subcontractor is entitled, reflecting percentages actually retained from payments to the Contractor on account of the Subcontractor’s portion of the Work. The Contractor shall, by appropriate agreement with each Subcontractor, require each Subcontractor to make payments to sub-subcontractors in similar manner.
§ 15.3.2 Neither the Owner, Owner’s Representative nor Architect shall have an obligation to pay or see to the payment of money to a Subcontractor except as may otherwise be required by law.
§ 15.3.3 A Certificate for Payment, a progress payment, or partial or entire use or occupancy of the Project by the Owner shall not constitute acceptance of Work not in accordance with the Contract Documents.
§ 15.4 SUBSTANTIAL COMPLETION
§ 15.4.1 Substantial Completion is the stage in the progress of the Work when the Work or designated portion thereof is sufficiently complete in accordance with the Contract Documents so that the Owner can occupy or utilize the Work for its intended use.
AIA Document A107 ™ -2007. Copyright © 1936. 19S1. 195, 8 1961, 1963, 1966, 1970, 1974, 1978 . 1987, 1997 and 2007 by The American Institute of Architects . All rights reserved. WARNING: This AIA© Document is pr otected by U.S. Copyright Law and International Tr eaties . Unauthorized reproduction or distribution or this A I A© Doc ument or any portion or it may result In sev ere civil and criminal p enalties, and will b e pr osecuted to the m aximum extent possible under the law. This draft was produced by AIA software and is not for resale.
§ 15.4.2 When the Contractor considers that the Work, or a portion thereof which the Owner agrees to accept separately, is substantially complete, the Contractor shall prepare and submit to the Architect a comprehensive list of items to be completed or corrected prior to final payment. Failure to include an item on such list does not alter the responsibility of the Contractor to complete all Work in accordance with the Contract Documents.
§ 15.4.3 Upon receipt of the Contractor’s list, the Architect will make an inspection to determine whether the Work or designated portion thereof is substantially complete. When the Architect determines that the Work or designated portion thereof is substantially complete, the Architect shall so advise the Owner’s Representative and the Owner’s Representative will issue a Certificate of Substantial Completion which shall establish the date of Substantial Completion, establish responsibilities of the Owner and Contractor for security, maintenance, heat, utilities, damage to the Work and insurance, and fix the time within which the Contractor shall finish all items on the list accompanying the Certificate. Warranties required by the Contract Documents shall commence on the date of Substantial Completion of the Work or designated portion thereof unless otherwise provided in the Certificate of Substantial Completion.
§ 15.4.4 The Certificate of Substantial Completion shall be submitted to the Owner and Contractor for their written acceptance of responsibilities assigned to them in such Certificate. Upon such acceptance and consent of surety, if any, the Owner shall make payment of retainage applying to such Work or designated portion thereof. Such payment shall be adjusted for Work that is incomplete or not in accordance with the requirements of the Contract Documents.
§ 15.5 FINAL COMPLETION AND FINAL PAYMENT
§ 15.5.1 Upon receipt of the Contractor’s written notice that the Work is ready for final inspection and acceptance and upon receipt of a final Application for Payment, the Architect will promptly make such inspection and, when the Owner’s Representative finds the Work acceptable under the Contract Documents and the Contract fully performed, the Architect will promptly issue a final Certificate for Payment stating that to the best of the Owner’s Representative’s knowledge, information and belief, and on the basis of the Architect’s on-site visits and inspections, the Work has been completed in accordance with terms and conditions of the Contract Documents and that the entire balance found to be due the Contractor and noted in the final Certificate is due and payable. The Owner’s Representative’s final Certificate for Payment will constitute a further representation that conditions stated in Section 15.5.2 as precedent to the Contractor’s being entitled to final payment have been fulfilled.
§ 15.5.2 Final payment shall not become due until the Contractor has delivered to the Owner a complete release of all liens arising out of this Contract or receipts in full covering all labor, materials and equipment for which a lien could be filed, or a bond satisfactory to the Owner to indemnify the Owner against such lien. If such lien remains unsatisfied after payments are made, the Contractor shall refund to the Owner all money that the Owner may be compelled to pay in discharging such lien, including costs and reasonable attorneys’ fees.
§ 15.5.3 The making of final payment shall constitute a waiver of claims by the Owner except those arising from
.1 liens, claims, security interests or encumbrances arising out of the Contract and unsettled;
.2 failure of the Work to comply with the requirements of the Contract Documents; or
.3 terms of special warranties required by the Contract Documents.
§ 15.5.4 Acceptance of final payment by the Contractor, a Subcontractor or material supplier shall constitute a waiver of claims by that payee except those previously made in writing and identified by that payee as unsettled at the time of final Application for Payment.
ARTICLE 16 PROTECTION OF PERSONS AND PROPERTY
§ 16.1 SAFETY PRECAUTIONS AND PROGRAMS
The Contractor shall be responsible for initiating, maintaining and supervising all safety precautions and programs in connection with the performance of the Contract. The Contractor shall take reasonable precautions for safety of, and shall provide reasonable protection to prevent damage, injury or loss to
.1 employees on the Work and other persons who may be affected thereby;
AIA Document A107 ™ -2007. Copyright © 1936. 19S1. 195, 8 1961, 1963, 1966, 1970, 1974, 1978 . 1987, 1997 and 2007 by The American Institute of Architects . All rights reserved. WARNING: This AIA© Document is pr otected by U.S. Copyright Law and International Tr eaties . Unauthorized reproduction or distribution or this A I A© Doc ument or any portion or it may result In sev ere civil and criminal p enalties, and will b e pr osecuted to the m aximum extent possible under the law. This draft was produced by AIA software and is not for resale.
.2 the Work and materials and equipment to be incorporated therein, whether in storage on or off the site, under care, custody or control of the Contractor or the Contractor’s Subcontractors or Sub-subcontractors; and
.3 other property at the site or adjacent thereto, such as trees, shrubs, lawns, walks, pavements, roadways, structures and utilities not designated for removal, relocation or replacement in the course of construction.
The Contractor shall comply with and give notices required by applicable laws, statutes, ordinances, codes, rules and regulations, and lawful orders of public authorities bearing on safety of persons and property and their protection from damage, injury or loss. The Contractor shall promptly remedy damage and loss to property caused in whole or in part by the Contractor, a Subcontractor, a sub-subcontractor, or anyone directly or indirectly employed by any of them, or by anyone for whose acts they may be liable and for which the Contractor is responsible under Sections 16.1.2 and 16.1.3, except for damage or loss attributable to acts or omissions of the Owner or Architect or by anyone for whose acts either of them may be liable, and not attributable to the fault or negligence of the Contractor. The foregoing obligations of the Contractor are in addition to the Contractor’s obligations under Section 9.15.
§ 16.2 HAZARDOUS MATERIALS
§ 16.2.1 The Contractor is responsible for compliance with the requirements of the Contract Documents regarding hazardous materials. If the Contractor encounters a hazardous material or substance not addressed in the Contract Documents, and if reasonable precautions will be inadequate to prevent foreseeable bodily injury or death to persons resulting from a material or substance, including but not limited to asbestos or polychlorinated biphenyl (PCB), encountered on the site by the Contractor, the Contractor shall, upon recognizing the condition, immediately stop Work in the affected area and report the condition to the Owner and Architect in writing. When the material or substance has been rendered harmless, Work in the affected area shall resume upon written agreement of the Owner and Contractor. By Change Order, the Contract Time shall be extended appropriately and the Contract Sum shall be increased in the amount of the Contractor’s reasonable additional costs of shutdown, delay and start-up.
§ 16.2.2 omitted.
§ 16.2.3 If, without negligence on the part of the Contractor, the Contractor is held liable by a government agency for the cost of remediation of a hazardous material or substance solely by reason of performing Work as required by the Contract Documents, the Owner shall indemnify the Contractor for all cost and expense thereby incurred.
ARTICLE 17 INSURANCE AND BONDS
§ 17.1 The Contractor shall purchase from, and maintain in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located, insurance for protection from claims under workers’ compensation acts and other employee benefit acts which are applicable, claims for damages because of bodily injury, including death, and claims for damages, other than to the Work itself, to property which may arise out of or result from the Contractor’s operations and completed operations under the Contract, whether such operations be by the Contractor or by a Subcontractor or anyone directly or indirectly employed by any of them. This insurance shall be written for not less than limits of liability specified in the Contract Documents or required by law, whichever coverage is greater, and shall include contractual liability insurance applicable to the Contractor’s obligations under Section 9.15. Certificates of Insurance acceptable to the Owner shall be filed with the Owner prior to commencement of the Work. Each policy shall contain a provision that the policy will not be canceled or allowed to expire until at least 30 days’ prior written notice has been given to the Owner. The Contractor shall cause the commercial liability coverage required by the Contract Documents to include: (1) the Owner, the Architect and the Architect’s Consultants as additional insureds for claims caused in whole or in part by the Contractor’s negligent acts or omissions during the Contractor’s operations; and (2) the Owner as an additional insured for claims caused in whole or in part by the Contractor’s negligent acts or omissions during the Contractor’s completed operations.
All insurance policies shall be issued by companies rate d A VII or better by A.M. Best.
AIA Document A107 ™ -2007. Copyright © 1936. 19S1. 195, 8 1961, 1963, 1966, 1970, 1974, 1978 . 1987, 1997 and 2007 by The American Institute of Architects . All rights reserved. WARNING: This AIA© Document is pr otected by U.S. Copyright Law and International Tr eaties . Unauthorized reproduction or distribution or this A I A© Doc ument or any portion or it may result In sev ere civil and criminal p enalties, and will b e pr osecuted to the m aximum extent possible under the law. This draft was produced by AIA software and is not for resale.
The general liability and automobile liability insurance policies shall apply as primary and non-contributory with any other insurance afforded to Owner, its subsidiaries, directors, officers, and employees but only for claims arising solely from the Contractor’s provision of services”.
§ 17.2 OWNER’S LIABILITY INSURANCE
The Owner shall be responsible for purchasing and maintaining the Owner’s usual liability insurance.
§ 17.3 PROPERTY INSURANCE
§ 17.3.1 Unless otherwise provided, the Owner shall purchase and maintain, in a company or companies lawfully authorized to do business in the jurisdiction in which the Project is located, property insurance on an “all-risk” or equivalent policy form, including builder’s risk, in the amount of the initial Contract Sum, plus the value of subsequent modifications and cost of materials supplied and installed by others, comprising total value for the entire Project at the site on a replacement cost basis without optional deductibles. Such property insurance shall be maintained, unless otherwise provided in the Contract Documents or otherwise agreed in writing by all persons and entities who are beneficiaries of such insurance, until final payment has been made as provided in Section 15.5 or until no person or entity other than the Owner has an insurable interest in the property required by this Section 17.3.1 to be covered, whichever is later. This insurance shall include interests of the Owner, the Contractor, Subcontractors and sub-subcontractors in the Project.
§ 17.3.2 The Owner shall file a copy of each policy with the Contractor before an exposure to loss may occur. Each policy shall contain a provision that the policy will not be canceled or allowed to expire, and that its limits will not be reduced, until at least 30 days’ prior written notice has been given to the Contractor.
§ 17.3.3 The Owner and Contractor waive all rights against (1) each other and any of their subcontractors, sub-subcontractors, agents and employees, each of the other, and (2) the Architect, Architect’s consultants, separate contractors described in Article 12, if any, and any of their subcontractors, sub-subcontractors, agents and employees for damages caused by fire or other causes of loss to the extent covered by property insurance obtained pursuant to Section 17.3 or other property insurance applicable to the Work, except such rights as they have to proceeds of such insurance held by the Owner as fiduciary. The Owner or Contractor, as appropriate, shall require of the Architect, Architect’s consultants, separate contractors described in Article 12, if any, and the subcontractors, sub-subcontractors, agents and employees of any of them, by appropriate agreements, written where legally required for validity, similar waivers each in favor of other parties enumerated herein. The policies shall provide such waivers of subrogation by endorsement or otherwise. A waiver of subrogation shall be effective as to a person or entity even though that person or entity would otherwise have a duty of indemnification, contractual or otherwise, did not pay the insurance premium directly or indirectly, and whether or not the person or entity had an insurable interest in the property damaged.
§ 17.3.4 A loss insured under the Owner’s property insurance shall be adjusted by the Owner as fiduciary and made payable to the Owner as fiduciary for the insureds, as their interests may appear, subject to requirements of any applicable mortgagee clause. The Contractor shall pay Subcontractors their just shares of insurance proceeds received by the Contractor, and by appropriate agreements, written where legally required for validity, shall require Subcontractors to make payments to their sub-subcontractors in similar manner.
§ 17.4 PERFORMANCE BOND AND PAYMENT BOND
§ 17.4.1 The Owner shall have the right to require the Contractor to furnish bonds covering faithful performance of the Contract and payment of obligations arising thereunder as stipulated in bidding requirements or specifically required in the Contract Documents on the date of execution of the Contract.
§ 17.4.2 Upon the request of any person or entity appearing to be a potential beneficiary of bonds covering payment of obligations arising under the Contract, the Contractor shall promptly furnish a copy of the bonds or shall authorize a copy to be furnished.
AIA Document A107 ™ -2007. Copyright © 1936. 19S1. 195, 8 1961, 1963, 1966, 1970, 1974, 1978 . 1987, 1997 and 2007 by The American Institute of Architects . All rights reserved. WARNING: This AIA© Document is pr otected by U.S. Copyright Law and International Tr eaties . Unauthorized reproduction or distribution or this A I A© Doc ument or any portion or it may result In sev ere civil and criminal p enalties, and will b e pr osecuted to the m aximum extent possible under the law. This draft was produced by AIA software and is not for resale.
ARTICLE 18 CORRECTION OF WORK
§ 18.1 The Contractor shall promptly correct Work rejected by the Architect or failing to conform to the requirements of the Contract Documents, whether discovered before or after Substantial Completion and whether or not fabricated, installed or completed. Costs of correcting such rejected Work, including additional testing and inspections, the cost of uncovering and replacement, and compensation for the Architect’s services and expenses made necessary thereby, shall be at the Contractor’s expense, unless compensable under Section A.2.7.3 in Exhibit A, Determination of the Cost of the Work.
§ 18.2 In addition to the Contractor’s obligations under Section 9.4, if, within one year after the date of Substantial Completion of the Work or designated portion thereof or after the date for commencement of warranties established under Section 15.4.3, or by terms of an applicable special warranty required by the Contract Documents, any of the Work is found to be not in accordance with the requirements of the Contract Documents, the Contractor shall correct it promptly after receipt of written notice from the Owner to do so unless the Owner has previously given the Contractor a written acceptance of such condition. The Owner shall give such notice promptly after discovery of the condition. During the one-year period for correction of Work, if the Owner fails to notify the Contractor and give the Contractor an opportunity to make the correction, the Owner waives the rights to require correction by the Contractor and to make a claim for breach of warranty.
§ 18.3 If the Contractor fails to correct nonconforming Work within a reasonable time, the Owner may correct it in accordance with Section 8.3.
§ 18.4 The one-year period for correction of Work shall be extended with respect to portions of Work first performed after Substantial Completion by the period of time between Substantial Completion and the actual completion of that portion of the Work.
§ 18.5 The one-year period for correction of Work shall not be extended by corrective Work performed by the Contractor pursuant to this Article 18.
ARTICLE 19 MISCELLANEOUS PROVISIONS
§ 19.1 ASSIGNMENT OF CONTRACT
Neither party to the Contract shall assign the Contract without written consent of the other, except that the Owner may, without consent of the Contractor, assign the Contract to a lender providing construction financing for the Project if the lender assumes the Owner’s rights and obligations under the Contract Documents. The Contractor shall execute all consents reasonably required to facilitate such assignment.
§ 19.2 GOVERNING LAW
The Contract shall be governed by the law of the place where the Project is located, except, that if the parties have selected arbitration as the method of binding dispute resolution, the Federal Arbitration Act shall govern Section 21.4.
§ 19.3 TESTS AND INSPECTIONS
Tests, inspections and approvals of portions of the Work required by the Contract Documents or by applicable laws, statutes, ordinances, codes, rules and regulations or lawful orders of public authorities shall be made at an appropriate time. Unless otherwise provided, the Contractor shall make arrangements for such tests, inspections and approvals with an independent testing laboratory or entity acceptable to the Owner, or with the appropriate public authority, and shall bear all related costs of tests, inspections and approvals. The Contractor shall give the Architect timely notice of when and where tests and inspections are to be made so that the Architect may be present for such procedures. The Owner shall bear costs of (1) tests, inspections or approvals that do not become requirements until after bids are received or negotiations concluded, and (2) tests, inspections or approvals where building codes or applicable laws or regulations prohibit the Owner from delegating the costs to the Contractor.
§ 19.4 COMMENCEMENT OF STATUTORY LIMITATION PERIOD
omitted.
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ARTICLE 20 TERMINATION OF THE CONTRACT
§ 20.1 TERMINATION BY THE CONTRACTOR
If the Owner’s Representative fails to certify payment as provided in Section 15.2.1 for a period of 30 days through no fault of the Contractor, or if the Owner fails to make payment as provided in Section 4.1.3 for a period of 30 days, the Contractor may, upon seven additional days’ written notice to the Owner and the Owner’s Representative, terminate the Contract and recover from the Owner payment for Work executed, including reasonable overhead and profit, costs incurred by reason of such termination, and damages.
§ 20.2 TERMINATION BY THE OWNER FOR CAUSE
§ 20.2.1 The Owner may terminate the Contract if the Contractor
.1 repeatedly refuses or fails to supply enough properly skilled workers or proper materials;
.2 fails to make payment to Subcontractors for materials or labor in accordance with the respective agreements between the Contractor and the Subcontractors;
.3 repeatedly disregards applicable laws, statutes, ordinances, codes, rules and regulations or lawful orders of a public authority; or
.4 otherwise is guilty of substantial breach of a provision of the Contract Documents.
§ 20.2.2 When any of the above reasons exists, the Owner, upon certification by the Owner’s Representative that sufficient cause exists to justify such action, may, without prejudice to any other remedy the Owner may have and after giving the Contractor seven days’ written notice, terminate the Contract and take possession of the site and of all materials, equipment, tools, and construction equipment and machinery thereon owned by the Contractor and may finish the Work by whatever reasonable method the Owner may deem expedient. Upon request of the Contractor, the Owner shall furnish to the Contractor a detailed accounting of the costs incurred by the Owner in finishing the Work.
§ 20.2.3 When the Owner terminates the Contract for one of the reasons stated in Section 20.2.1, the Contractor shall not be entitled to receive further payment until the Work is finished.
§ 20.2.4 If the unpaid balance of the Contract Sum exceeds costs of finishing the Work, including compensation for the Architect’s services and expenses made necessary thereby, and other damages incurred by the Owner and not expressly waived, such excess shall be paid to the Contractor. If such costs and damages exceed the unpaid balance, the Contractor shall pay the difference to the Owner. The amount to be paid to the Contractor or Owner, as the case may be, shall be certified by the Owner’s Representative, upon application, and this obligation for payment shall survive termination of the Contract.
§ 20.3 TERMINATION BY THE OWNER FOR CONVENIENCE
The Owner may, at any time, terminate the Contract for the Owner’s convenience and without cause. The Contractor shall be entitled to receive payment for Work executed, and costs incurred by reason of such termination, along with reasonable overhead and profit on the Work not executed.
ARTICLE 21 CLAIMS AND DISPUTES
§ 21.1 omitted.
§ 21.2 If a claim, dispute or other matter in question relates to or is the subject of a mechanic’s lien, the party asserting such matter may proceed in accordance with applicable law to comply with the lien notice or filing deadlines.
§ 21.3 The parties shall endeavor to resolve their disputes by mediation which, unless the parties mutually agree otherwise, shall be administered by the American Arbitration Association in accordance with their Construction Industry Mediation Procedures in effect on the date of the Agreement. A request for mediation shall be made in writing, delivered to the other party to this Agreement, and filed with the person or entity administering the mediation. The request may be made concurrently with the binding dispute resolution but, in such event, mediation shall proceed in advance of binding dispute resolution proceedings, which shall be stayed pending mediation for a period of 60 days from the date of filing, unless stayed for a longer period by agreement of the parties or court order. If an arbitration is
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stayed pursuant to this Section, the parties may nonetheless proceed to the selection of the arbitrator(s) and agree upon a schedule for later proceedings.
§ 21.4 If the parties have selected arbitration as the method for binding dispute resolution in the Agreement, any claim, subject to, but not resolved by, mediation shall be subject to arbitration which, unless the parties mutually agree otherwise, shall be administered by the American Arbitration Association, in accordance with the Construction Industry Arbitration Rules in effect on the date of this Agreement. Demand for arbitration shall be made in writing, delivered to the other party to the Contract, and filed with the person or entity administering the arbitration. The award rendered by the arbitrator or arbitrators shall be final, and judgment may be entered upon it in accordance with applicable law in any court having jurisdiction thereof.
§ 21.5 Either party, at its sole discretion, may consolidate an arbitration conducted under this Agreement with any other arbitration to which it is a party provided that (1) the arbitration agreement governing the other arbitration permits consolidation; (2) the arbitrations to be consolidated substantially involve common questions of law or fact; and (3) the arbitrations employ materially similar procedural rules and methods for selecting arbitrator(s).
§ 21.6 Any party to an arbitration may include by joinder persons or entities substantially involved in a common question of law or fact whose presence is required if complete relief is to be accorded in arbitration provided that the party sought to be joined consents in writing to such joinder. Consent to arbitration involving an additional person or entity shall not constitute consent to arbitration of a Claim not described in the written Consent.
§ 21.7 The foregoing agreement to arbitrate and other agreements to arbitrate with an additional person or entity duly consented to by parties to the Agreement shall be specifically enforceable under applicable law in any court having jurisdiction thereof.
§ 21.8 CLAIMS FOR CONSEQUENTIAL DAMAGES
The Contractor and Owner waive claims against each other for consequential damages arising out of or relating to this Contract. This mutual waiver includes
.1 damages incurred by the Owner for rental expenses, for losses of use, income, profit, financing, business and reputation, and for loss of management or employee productivity or of the services of such persons; and
.2 damages incurred by the Contractor for principal office expenses including the compensation of personnel stationed there, for losses of financing, business and reputation, and for loss of profit except anticipated profit arising directly from the Work.
This mutual waiver is applicable, without limitation, to all consequential damages due to either party’s termination in accordance with Article 20. Nothing contained in this Section 21.8 shall be deemed to preclude an award of liquidated damages, when applicable, in accordance with the requirements of the Contract Documents.
AIA Document A107 ™ -2007. Copyright © 1936. 19S1. 195, 8 1961, 1963, 1966, 1970, 1974, 1978 . 1987, 1997 and 2007 by The American Institute of Architects . All rights reserved. WARNING: This AIA© Document is pr otected by U.S. Copyright Law and International Tr eaties . Unauthorized reproduction or distribution or this A I A© Doc ument or any portion or it may result In sev ere civil and criminal p enalties, and will b e pr osecuted to the m aximum extent possible under the law. This draft was produced by AIA software and is not for resale.
This Agreement entered into as of the day and year first written above.
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WD-40 COMPANY |
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By: |
/s/ RICHARD T. CLAMPITT |
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/s/ DAVID BACK |
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Owner |
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Contractor |
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Richard T. Clampitt |
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David Back |
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Vice President, General Counsel |
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President and Owner |
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and Corporate Secretary |
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AIA Document A107 ™ -2007. Copyright © 1936. 19S1. 195, 8 1961, 1963, 1966, 1970, 1974, 1978 . 1987, 1997 and 2007 by The American Institute of Architects . All rights reserved. WARNING: This AIA© Document is pr otected by U.S. Copyright Law and International Tr eaties . Unauthorized reproduction or distribution or this A I A© Doc ument or any portion or it may result In sev ere civil and criminal p enalties, and will b e pr osecuted to the m aximum extent possible under the law. This draft was produced by AIA software and is not for resale.
Exhibit A – Determination of the Cost of Work
for the following PROJECT:
(Name, location and brief description)
WD-40 – Job#2233
9715 Business Park Ave
San Diego, CA 92131
THE OWNER:
(Name, legal status, address and other information)
WD-40 Company a Delaware corporation
1061 Cudahy Place
San Diego, CA 92110
Phone: 619.275.1400
THE CONTRACTOR:
(Name, legal status, address and other information)
Back’s Construction, Inc.
1602 Front Street, Suite 100
San Diego, CA 92101
Phone: 619.713.2566 / Fax: 619.713.0992
THE ARCHITECT:
(Name, legal status, address and other information)
ID Studios Interior Design & Strategic Planning, Inc.
236 S. Sierra Ave, Suite 110
Solana Beach, CA 92075
THE OWNER’S REPRESENTATIVE :
Hughes Marino, Inc.
1450 Front St.
San Diego, CA 92101
Phone 619.238.2111
ARTICLE A.1 CONTROL ESTIMATE
§ A.1.1 Where the Contract Sum is the Cost of the Work, plus the Contractor’s Fee without a Guaranteed Maximum Price pursuant to Section 3.3 of the Agreement, the Contractor shall prepare and submit to the Owner, in writing, a Control Estimate within 14 days of executing this Agreement. The Control Estimate shall include the estimated Cost of the Work plus the Contractor’s Fee. The Control Estimate shall be used to monitor actual costs and the timely performance of the Work. The Contractor shall update the Control Estimate with each Application for Payment as needed to reflect Changes in the Work.
§ A.1.2 The Control Estimate shall include
.1 the documents enumerated in Article 6 of the Agreement, including all Addenda thereto and the Conditions of the Contract;
AIA Document A107 ™ -2007. Copyright © 1936. 19S1. 195, 8 1961, 1963, 1966, 1970, 1974, 1978 . 1987, 1997 and 2007 by The American Institute of Architects . All rights reserved. WARNING: This AIA© Document is pr otected by U.S. Copyright Law and International Tr eaties . Unauthorized reproduction or distribution or this A I A© Doc ument or any portion or it may result In sev ere civil and criminal p enalties, and will b e pr osecuted to the m aximum extent possible under the law. This draft was produced by AIA software and is not for resale.
.2 a list of the clarifications and assumptions made by the Contractor in the preparation of the Control Estimate, including assumptions under A.1.4, to supplement the information provided by the Owner and contained in the Drawings and Specifications;
.3 a statement of the estimated Cost of the Work organized by trade categories or systems and the Contractor’s Fee;
.4 a project schedule indicating proposed Subcontractors, activity sequences and durations, milestone dates for receipt and approval of pertinent information, schedule of shop drawings and samples, procurement and delivery of materials or equipment requiring long-lead time, and the Owner’s occupancy requirements showing portions of the Project having occupancy priority; and
.5 contingencies for further development of design and construction as required by Section A.1.4.
§ A.1.3 The Contractor shall meet with the Owner and Architect to review the Control Estimate. In the event that the Owner or Architect discovers any inconsistencies or inaccuracies in the information presented, they shall promptly notify the Contractor, who shall make appropriate adjustments to the Control Estimate. When the Control Estimate is acceptable to the Owner, the Owner shall acknowledge it in writing. The Owner’s acceptance of the Control Estimate does not imply that the Control Estimate constitutes a Guaranteed Maximum Price.
§ A.1.4 To the extent that the Drawings and Specifications are anticipated to require further development by the Architect, the Contractor shall provide in the Control Estimate for such further development consistent with the Contract Documents and reasonably inferable therefrom. Such further development does not include changes in scope, systems, kinds and quality of materials, finishes or equipment, all of which, if required, shall be incorporated in a revised Control Estimate by mutual agreement of the parties.
§ A.1.5 The Contractor shall develop and implement a detailed system of cost control that will provide the Owner and Architect with timely information as to the anticipated total Cost of the Work. The cost control system shall compare the Control Estimate with the actual cost for activities in progress and estimates for uncompleted tasks and proposed changes. This information shall be reported to the Owner, in writing, no later than the Contractor’s first Application for Payment and shall be revised and submitted with each Application for Payment.
ARTICLE A.2 COSTS TO BE REIMBURSED
§ A.2.1 COST OF THE WORK
§ A.2.1.1 The term Cost of the Work shall mean costs necessarily incurred by the Contractor in the proper performance of the Work. Such costs shall be at rates not higher than the standard paid at the place of the Project except with prior consent of the Owner. The Cost of the Work shall include only the items set forth in this Article A.2.
§ A.2.1.2 Where any cost is subject to the Owner’s prior approval, the Contractor shall obtain this approval prior to incurring the cost. The parties shall endeavor to identify any such costs prior to executing the Agreement.
§ A.2.2 LABOR COSTS
§ A.2.2.1 Wages of construction workers directly employed by the Contractor to perform the construction of the Work at the site or, with the Owner’s prior approval, at off-site workshops.
§ A.2.2.2 Wages or salaries of the Contractor’s supervisory and administrative personnel when stationed at the site with the Owner’s prior approval.
(If it is intended that the wages or salaries of certain personnel stationed at the Contractor’s principal or other offices shall be included in the Cost of the Work, identify below the personnel to be included, whether for all or only part of their time, and the rates at which their time will be charged to the Work.)
Person included |
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AIA Document A107 ™ -2007. Copyright © 1936. 19S1. 195, 8 1961, 1963, 1966, 1970, 1974, 1978 . 1987, 1997 and 2007 by The American Institute of Architects . All rights reserved. WARNING: This AIA© Document is pr otected by U.S. Copyright Law and International Tr eaties . Unauthorized reproduction or distribution or this A I A© Doc ument or any portion or it may result In sev ere civil and criminal p enalties, and will b e pr osecuted to the m aximum extent possible under the law. This draft was produced by AIA software and is not for resale.
§ A.2.2.3 Wages and salaries of the Contractor’s supervisory or administrative personnel engaged at factories, workshops or on the road, in expediting the production or transportation of materials or equipment required for the Work, but only for that portion of their time required for the Work.
§ A.2.2.4 Costs paid or incurred by the Contractor for taxes, insurance, contributions, assessments and benefits required by law or collective bargaining agreements and, for personnel not covered by such agreements, customary benefits such as sick leave, medical and health benefits, holidays, vacations and pensions, provided such costs are based on wages and salaries included in the Cost of the Work under Section A.2.2.
§ A.2.2.5 Bonuses, profit sharing, incentive compensation and any other discretionary payments paid to anyone hired by the Contractor or paid to any Subcontractor or vendor, with the Owner’s prior approval.
§ A.2.3 SUBCONTRACT COSTS
Payments made by the Contractor to Subcontractors in accordance with the requirements of their subcontracts.
§ A.2.4 COSTS OF MATERIALS AND EQUIPMENT INCORPORATED IN THE COMPLETED
CONSTRUCTION
§ A.2.4.1 Costs, including transportation and storage, of materials and equipment incorporated or to be incorporated in the completed construction.
§ A.2.4.2 Costs of materials described in the preceding Section A.2.4.1 in excess of those actually installed to allow for reasonable waste and spoilage. Unused excess materials, if any, shall become the Owner’s property at the completion of the Work or, at the Owner’s option, shall be sold by the Contractor. Any amounts realized from such sales shall be credited to the Owner as a deduction from the Cost of the Work.
§ A.2.5 COSTS OF OTHER MATERIALS AND EQUIPMENT, TEMPORARY FACILITIES AND RELATED
ITEMS
§ A.2.5.1 Costs of transportation, storage, installation, maintenance, dismantling and removal of materials, supplies, temporary facilities, machinery, equipment and hand tools not customarily owned by construction workers that are provided by the Contractor at the site and fully consumed in the performance of the Work. Costs of materials, supplies, temporary facilities, machinery, equipment and tools that are not fully consumed shall be based on the cost or value of the item at the time it is first used on the Project site less the value of the item when it is no longer used at the Project site. Costs for items not fully consumed by the Contractor shall mean fair market value.
§ A.2.5.2 Rental charges for temporary facilities, machinery, equipment and hand tools not customarily owned by construction workers that are provided by the Contractor at the site and costs of transportation, installation, minor repairs, dismantling and removal. The total rental cost of any Contractor-owned item may not exceed the purchase price of any comparable item. Rates of Contractor-owned equipment and quantities of equipment shall be subject to the Owner’s prior approval .
§ A.2.5.3 Costs of removal of debris from the site of the Work and its proper and legal disposal.
§ A.2.5.4 Costs of document reproductions, facsimile transmissions and long-distance telephone calls, postage and parcel delivery charges, telephone service at the site and reasonable petty cash expenses of the site office.
§ A.2.5.5 Costs of materials and equipment suitably stored off the site at a mutually acceptable location, with the Owner’s prior approval.
§ A.2.6 MISCELLANEOUS COSTS
§ A.2.6.1 General Conditions of $2,800 per week. (Cost for additional week of general conditions)
AIA Document A107 ™ -2007. Copyright © 1936. 19S1. 195, 8 1961, 1963, 1966, 1970, 1974, 1978 . 1987, 1997 and 2007 by The American Institute of Architects . All rights reserved. WARNING: This AIA© Document is pr otected by U.S. Copyright Law and International Tr eaties . Unauthorized reproduction or distribution or this A I A© Doc ument or any portion or it may result In sev ere civil and criminal p enalties, and will b e pr osecuted to the m aximum extent possible under the law. This draft was produced by AIA software and is not for resale.
§ A.2.6.2 Sales, use or similar taxes imposed by a governmental authority that are related to the Work and for which the Contractor is liable.
§ A.2.6.3 Fees and assessments for the building permit and for other permits, licenses and inspections for which the Contractor is required by the Contract Documents to pay.
§ A.2.6.4 Fees of laboratories for tests required by the Contract Documents, except those related to defective or nonconforming Work for which reimbursement is excluded by Article 18 of the Agreement or by other provisions of the Contract Documents, and which do not fall within the scope of Section A.2.7.3.
§ A.2.6.5 Royalties and license fees paid for the use of a particular design, process or product required by the Contract Documents; the cost of defending suits or claims for infringement of patent rights arising from such requirement of the Contract Documents; and payments made in accordance with legal judgments against the Contractor resulting from such suits or claims and payments of settlements made with the Owner’s consent. However, such costs of legal defenses, judgments and settlements shall not be included in the calculation of the Contractor’s Fee or subject to the Guaranteed Maximum Price. If such royalties, fees and costs are excluded by the last sentence of Section 9.13 of the Agreement or other provisions of the Contract Documents, then they shall not be included in the Cost of the Work.
§ A.2.6.6 Costs for electronic equipment and software, directly related to the Work with the Owner’s prior approval.
§ A.2.6.7 Deposits lost for causes other than the Contractor’s negligence or failure to fulfill a specific responsibility in the Contract Documents.
§ A.2.6.8 Legal, mediation and arbitration costs, including attorneys’ fees, other than those arising from disputes between the Owner and Contractor, reasonably incurred by the Contractor after the execution of this Agreement in the performance of the Work and with the Owner’s prior approval, which shall not be unreasonably withheld.
§ A.2.6.9 Subject to the Owner’s prior approval, expenses incurred in accordance with the Contractor’s standard written personnel policy for relocation and temporary living allowances of the Contractor’s personnel required for the Work.
§ A.2.6.10 That portion of the reasonable expenses of the Contractor’s supervisory or administrative personnel incurred while traveling in discharge of duties connected with the Work.
§ A.2.7 OTHER COSTS AND EMERGENCIES
§ A.2.7.1 Other costs incurred in the performance of the Work if, and to the extent, approved in advance in writing by the Owner.
§ A.2.7.2 Costs incurred in taking action to prevent threatened damage, injury or loss in case of an emergency affecting the safety of persons and property.
§ A.2.7.3 Costs of repairing or correcting damaged or nonconforming Work executed by the Contractor, Subcontractors or suppliers, provided that such damaged or nonconforming Work was not caused by negligence or failure to fulfill a specific responsibility of the Contractor and only to the extent that the cost of repair or correction is not recovered by the Contractor from insurance, sureties, Subcontractors, suppliers, or others.
§ A.2.8 RELATED PARTY TRANSACTIONS
§ A.2.8.1 For purposes of Section A.2.8, the term “related party” shall mean a parent, subsidiary, affiliate or other entity having common ownership or management with the Contractor; any entity in which any stockholder in, or management employee of, the Contractor owns any interest in excess of ten percent in the aggregate; or any person or entity which has the right to control the business or affairs of the Contractor. The term “related party” includes any member of the immediate family of any person identified above.
AIA Document A107 ™ -2007. Copyright © 1936. 19S1. 195, 8 1961, 1963, 1966, 1970, 1974, 1978 . 1987, 1997 and 2007 by The American Institute of Architects . All rights reserved. WARNING: This AIA© Document is pr otected by U.S. Copyright Law and International Tr eaties . Unauthorized reproduction or distribution or this A I A© Doc ument or any portion or it may result In sev ere civil and criminal p enalties, and will b e pr osecuted to the m aximum extent possible under the law. This draft was produced by AIA software and is not for resale.
§ A.2.8.2 If any of the costs to be reimbursed arise from a transaction between the Contractor and a related party, the Contractor shall notify the Owner of the specific nature of the contemplated transaction, including the identity of the related party and the anticipated cost to be incurred, before any such transaction is consummated or cost incurred. If the Owner, after such notification, authorizes the proposed transaction, then the cost incurred shall be included as a cost to be reimbursed, and the Contractor shall procure the Work, equipment, goods or service from the related party, as a Subcontractor, according to the terms of Article A.5. If the Owner fails to authorize the transaction, the Contractor shall procure the Work, equipment, goods or service from some person or entity other than a related party according to the terms of Article A.5.
ARTICLE A.3 COSTS NOT TO BE REIMBURSED
§ A.3.1 The Cost of the Work shall not include the items listed below:
.1 Salaries and other compensation of the Contractor’s personnel stationed at the Contractor’s principal office or offices other than the site office, except as specifically provided in Section A2.2.2;
.2 Expenses of the Contractor’s principal office and offices other than the site office;
.3 Overhead and general expenses, except as may be expressly included in Article A.2;
.4 The Contractor’s capital expenses, including interest on the Contractor’s capital employed for the Work;
.5 Except as provided in Section A.2.7.3 of this Agreement, costs due to the negligence or failure of the Contractor, Subcontractors and suppliers or anyone directly or indirectly employed by any of them or for whose acts any of them may be liable to fulfill a specific responsibility of the Contract;
.6 Any cost not specifically and expressly described in Article A.2; and
.7 Costs, other than costs included in Change Orders approved by the Owner, that would cause the Guaranteed Maximum Price to be exceeded.
ARTICLE A.4 DISCOUNTS, REBATES AND REFUNDS
§ A.4.1 Cash discounts obtained on payments made by the Contractor shall accrue to the Owner if (1) before making the payment, the Contractor included them in an Application for Payment and received payment from the Owner, or (2) the Owner has deposited funds with the Contractor with which to make payments; otherwise, cash discounts shall accrue to the Contractor. Trade discounts, rebates, refunds and amounts received from sales of surplus materials and equipment shall accrue to the Owner, and the Contractor shall make provisions so that they can be obtained.
§ A.4.2 Amounts that accrue to the Owner in accordance with Section A.4.1 shall be credited to the Owner as a deduction from the Cost of the Work.
ARTICLE A.5 SUBCONTRACTS AND OTHER AGREEMENTS
§ A.5.1 Those portions of the Work that the Contractor does not customarily perform with the Contractor’s own personnel shall be performed under subcontracts or by other appropriate agreements with the Contractor. The Owner may designate specific persons from whom, or entities from which, the Contractor shall obtain bids. The Contractor shall obtain bids from Subcontractors and from suppliers of materials or equipment fabricated especially for the Work and shall deliver such bids to the Owner’s Representative. The Owner shall then determine, with the advice of the Contractor and the Owner’s Representative, which bids will be accepted. The Contractor shall not be required to contract with anyone to whom the Contractor has reasonable objection.
§ A.5.2 When the Contractor has provided a Guaranteed Maximum Price, and a specific bidder (1) is recommended to the Owner by the Contractor; (2) is qualified to perform that portion of the Work; and (3) has submitted a bid that conforms to the requirements of the Contract Documents without reservations or exceptions, but the Owner requires that another bid be accepted, then the Contractor may require that a Change Order be issued to adjust the Guaranteed Maximum Price by the difference between the bid of the person or entity recommended to the Owner by the Contractor and the amount of the subcontract or other agreement actually signed with the person or entity designated by the Owner.
§ A.5.3 Subcontracts or other agreements shall conform to the applicable payment provisions of this Agreement, and shall not be awarded on the basis of cost plus a fee without the prior consent of the Owner. If the subcontract is
AIA Document A107 ™ -2007. Copyright © 1936. 19S1. 195, 8 1961, 1963, 1966, 1970, 1974, 1978 . 1987, 1997 and 2007 by The American Institute of Architects . All rights reserved. WARNING: This AIA© Document is pr otected by U.S. Copyright Law and International Tr eaties . Unauthorized reproduction or distribution or this A I A© Doc ument or any portion or it may result In sev ere civil and criminal p enalties, and will b e pr osecuted to the m aximum extent possible under the law. This draft was produced by AIA software and is not for resale.
awarded on a cost-plus a fee basis, the Contractor shall provide in the subcontract for the Owner to receive the same audit rights with regard to the Subcontractor as the Owner receives with regard to the Contractor in Article A.6, below.
ARTICLE A.6 ACCOUNTING RECORDS
§ A.6.1 The Contractor shall keep full and detailed records and accounts related to the cost of the Work and exercise such controls as may be necessary for proper financial management under this Contract and to substantiate all costs incurred. The accounting and control systems shall be satisfactory to the Owner. The Owner and the Owner’s auditors shall, during regular business hours and upon reasonable notice, be afforded access to, and shall be permitted to audit and copy, the Contractor’s records and accounts, including complete documentation supporting accounting entries, books, correspondence, instructions, drawings, receipts, subcontracts, Subcontractor’s proposals, purchase orders, vouchers, memoranda and other data relating to this Contract. The Contractor shall preserve these records, for a period of three years after final payment, or for such longer period as may be required by law.
§ A.6.2 When the Contractor believes that all the Work required by the Agreement has been fully performed, the Contractor shall deliver to the Owner’s auditors a final accounting of the Cost of the Work.
§ A.6.3 The Owner’s auditors will review and report in writing on the Contractor’s final accounting within 30 days after delivery of the final accounting to the Owner’s Representative by the Contractor. Based upon such Cost of the Work as the Owner’s auditors report to be substantiated by the Contractor’s final accounting, and provided the other conditions of Section 4.2.1 of the Agreement have been met, the Owner’s Representative will, within seven days after receipt of the written report of the Owner’s auditors, either issue to the Owner a final Certificate for Payment with a copy to the Contractor, or notify the Contractor and Owner in writing of the Owner’s Representative’s reasons for withholding a certificate as provided in Section 15.2.3 of the Agreement. The Owner’s Representative is not responsible for verifying the accuracy of the Contractor’s final accounting.
§ A.6.4 If the Owner’s auditors report the Cost of the Work as substantiated by the Contractor’s final accounting to be less than claimed by the Contractor, the Contractor shall be entitled to request mediation.. A request for mediation shall be made by the Contractor within 30 days after the Contractor’s receipt of a copy of the Owner’s Representative’s final Certificate for Payment. If the Contractor fails to request mediation within this 30-day period, the substantiated amount reported by the Owner’s auditors shall become binding on the Contractor. Pending a final resolution of the disputed amount, the Owner shall pay the Contractor the amount, if any, determined by the Owner’s auditors to be due the Contractor.
§ A.6.5 If, subsequent to final payment and at the Owner’s request, the Contractor incurs costs in connection with the correction of defective or non-conforming work as described in Article A.2, Costs to be Reimbursed, and not excluded by Article A.3, Costs Not to be Reimbursed, the Owner shall reimburse the Contractor such costs and the Contractor’s Fee applicable thereto on the same basis as if such costs had been incurred prior to final payment, but not in excess of the Guaranteed Maximum Price, if any. If the Contractor has participated in savings, the amount of such savings shall be recalculated and appropriate credit given to the Owner in determining the net amount to be paid by the Owner to the Contractor.
AIA Document A107 ™ -2007. Copyright © 1936. 19S1. 195, 8 1961, 1963, 1966, 1970, 1974, 1978 . 1987, 1997 and 2007 by The American Institute of Architects . All rights reserved. WARNING: This AIA© Document is pr otected by U.S. Copyright Law and International Tr eaties . Unauthorized reproduction or distribution or this A I A© Doc ument or any portion or it may result In sev ere civil and criminal p enalties, and will b e pr osecuted to the m aximum extent possible under the law. This draft was produced by AIA software and is not for resale.
Omitted Contract Exhibits
Exhibit B – Contract Documents (Construction Drawings)
Exhibit B-1 – Back’s Certificate of Insurance (COI)
Exhibit C – Project Schedule
Exhibit D – Fee Schedule
Exhibit E – Con tractor’s Project Cost Summary
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Back’s Construction Inc. |
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1602 Front Street, Suite 100
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San Diego, CA 92101. |
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Ph: 619.713.2566 Fax: 619.713.0992 |
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Construction Manager Approval: |
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Con tractor Approval: |
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WD-40 |
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Back’s Construction |
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By: |
/s/ RICHARD T. CLAMPITT |
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By: |
/s/ DAVE BACK |
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Dave Back |
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Title: |
Vice President, General Counsel |
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Title: |
Project Manager |
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and Corporate Secretary |
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Date: |
March 8, 2017 |
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Date: |
March 9 , 2017 |
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Garry O. Ridge, certify that:
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I have reviewed this report on Form 10-Q of WD-40 Company; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the Registrant as of, and for, the periods presented in this report; |
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The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
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The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize, and report financial information; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: April 6 , 201 7
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/s/ GARRY O. RIDGE |
Garry O. Ridge President and Chief Executive Officer |
CERTIFICATION OF CHIEF
FINANCIAL
OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Jay W. Rembolt , certify that:
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I have reviewed this report on Form 10-Q of WD-40 Company; |
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Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations, and cash flows of the Registrant as of, and for, the periods presented in this report; |
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The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have: |
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Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
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Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
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Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and |
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The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): |
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All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize, and report financial information; and |
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Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. |
Date: April 6 , 2017
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/s/ JAY W. REMBOLT |
Jay W. Rembolt Vice President, Finance, Treasurer and Chief Financial Officer |
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Garry O. Ridge, Chief Executive Officer of WD-40 Company (the “Company”), have reviewed the Quarterly Report on Form 10-Q of the Company for the quarter ended February 28 , 201 7 (the “Report”). For purposes of Section 1350 of Title 18, United States Code, I certify that to the best of my knowledge:
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the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: April 6 , 201 7
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/s/ GARRY O. RIDGE |
Garry O. Ridge President and Chief Executive Officer |
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
I, Jay W. Rembolt, Chief Financial Officer of WD -40 Company (the “Company”), have reviewed the Quarterly Report on Form 10-Q of the Company for the quarter ended February 28 , 201 7 (the “Report”). For purposes of Section 1350 of Title 18, United States Code, I certify that to the best of my knowledge:
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the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
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the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Date: April 6 , 201 7
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/s/ JAY W. REMBOLT |
Jay W. Rembolt Vice President, Finance, Treasurer and Chief Financial Officer |