Goodwill and Intangible Assets Impairment Risk
The Company carries goodwill and intangible assets resulting from the Company’s acquisitions. Changes in market conditions or changes in the Company’s results could subject these assets to risks of impairment.
The following items could trigger impairment:
- Significant underperformance relative to historical or projected future operating results
- Significant changes in the manner of our use of the acquired assets or the strategy for our overall business
- Significant negative industry or economic trends
- Significant decline in our stock price for a sustained period
- Decreased market capitalization relative to net book value
- Unanticipated technological change or competitive activities
- Loss of key distribution
- Loss of key personnel
- Acts by government and courts
In fiscal year 2007, the Company’s U.S. sales of household products declined versus the prior fiscal year. If the Company’s sales of household products continue to decline and are determined to be other than temporary, the Company’s intangible assets associated with these brands could be subject to impairment.
New Product Development Risks
The Company’s long-term growth is reliant, in part, on the success of new product introductions and product renovations. The Company competes in several product categories where there are frequent introductions of new products and line extensions. The ability to understand consumer preferences and identify technological trends is key to maintaining and improving the competitiveness of its product offerings. The development and introduction of new products, as well as the renovation of current products and product lines, requires significant research and development, marketing and manufacturing expenditures, which the Company may not recoup if the new or renovated products do not gain market acceptance. There are inherent risks associated with new product development, including product launch delays, which could result in the Company not being first to market, higher inventory costs if managed ineffectively, product design failures, product defects and the failure of new products to achieve expected levels of consumer acceptance. As the Company continues to focus on innovation, the Company’s financial condition, results of operations or cash flows could be adversely affected in the event that the Company is not able to effectively develop and introduce new or renovated products and line extensions.
Operating Results and Net Earnings May Not Meet Expectations
The Company cannot be sure that its operating results and net earnings will meet expectations. If the Company’s assumptions and estimates are incorrect or do not come to fruition, or if the Company does not achieve all of its key goals, then the Company’s actual performance could vary materially from its expectations. The Company’s operating results and net earnings may be influenced by a number of factors, including the following:
- The introduction of new products and line extensions by the Company or its competitors
- The mix of products with varying profitability sold in a given quarter
- The mix of products sold within channels and different countries with varying profitability in a given quarter
- The Company’s ability to control its internal costs and the cost of raw materials
- The effectiveness of the Company’s advertising, marketing and promotional programs
- Changes in product pricing policies by the Company or its competitors
- Consumer and customer reaction to price increases
- The ability of the Company to execute its strategies and to maintain and enhance profits in the face of a consolidating retail environment
- Changes in accounting policies and accounting standards
- The ability of the Company to achieve business plans, including volume growth and pricing plans, as a result of high levels of competitive activity
- The ability to maintain key customer relationships
- The ability of major customers and other debtors to meet their obligations as they come due
- The failure of parties contracting with the Company to perform their obligations and the loss of or inability to renew contracts of importance to the Company’s performance
- The Company’s reliance on brokers to maintain and grow distribution in the grocery channel
- The ability to successfully manage regulatory, tax and legal matters, including resolution of pending matters within current estimates
- Substantial costs associated with regulatory compliance
- The ability of the Company to attract and retain qualified personnel
- The ability of the Company to maintain the value of its brands
- Expenses for impairment of goodwill, trademarks and other intangible assets and equity investments in excess of projections
- Expenses for impairment and obsolescence of property, plant and equipment
- The ability to maintain the overall quality of new and existing products
- The ability of the Company to penetrate and grow markets and distribution channels
- The ability of the Company to manage the impact of foreign currency fluctuations
- The impact of foreign import and export restrictions or other trade regulations
- The availability and cost of debt financing
- Changes to cash flow resulting from tax payments, tax settlements and share repurchases
- The ability of the Company to manage inventory at appropriate levels, including decisions regarding obsolescence
- The impact of any litigation or product liability claims
- Fluctuations in federal, state, local and foreign taxes
- The impact of general economic conditions in the United States and in other countries in which the Company currently does business
In addition, sales volume growth, whether due to acquisitions or to internal growth, can place burdens on management resources and financial controls that, in turn, can have a negative impact on operating results. To some extent, the Company plans its expense levels in anticipation of future revenues. If actual revenue falls short of these expectations, operating results and net earnings are likely to be adversely affected.
Regulatory Risks
The Company is subject to numerous environmental laws and regulations that impose various environmental controls on its business operations, including, among other things, the discharge of pollutants into the air and water, the handling, use, treatment, storage and clean-up of solid and hazardous wastes and the investigation and remediation of soil and groundwater affected by hazardous substances. Such laws and regulations may otherwise relate to various health and safety matters that impose burdens upon the Company’s operations. These laws and regulations govern actions that may have adverse environmental effects and also require compliance with certain practices when handling and disposing of hazardous wastes. These laws and regulations also impose strict, retroactive and joint and several liability for the costs of, and damages resulting from, cleaning up current sites, past spills, disposals and other releases of hazardous substances. The Company believes that its expenditures related to environmental matters have not had, and are not currently expected to have, a material adverse effect on its financial condition, results of operations or cash flows. However, the environmental laws under which the Company operates are complicated and often increasingly more stringent, and may be applied retroactively. Accordingly, there can be no assurance that the Company will not be required to make additional expenditures to remain in or to achieve compliance with environmental laws in the future or that any such additional expenditures will not have a material adverse effect on the Company’s financial condition, results of operations or cash flows.
Some of the Company’s products have chemical compositions that are controlled by various state, federal and international laws and regulations. The Company is required to comply with these laws and regulations and seeks to anticipate regulatory developments that could impact the Company’s ability to continue to produce and market its products. The Company invests in research and development to maintain product formulations that comply with such laws and regulations. There can be no assurance that the Company will not be required to alter the chemical composition of one or more of the Company’s products in a way that will have an adverse effect upon the product’s efficacy or marketability. A delay or other inability of the Company to complete product research and development in response to any such regulatory requirements could have a material adverse effect on the Company’s financial condition and results of operations.
A focus on environmental regulations relating to Volatile Organic Compounds (VOCs) resulted in a change in 1996 in the formulation of the WD-40 product in the majority of countries where the product is sold, whereby CO2 was chosen as the aerosol propellant. This change increased the cost of manufacturing WD-40, and the Company increased its selling prices to partially offset the additional cost. In the event of future increases in product cost, the Company may not be in a position to raise selling prices, and therefore an increase in costs could have an adverse effect on the Company’s profitability.
In California, VOCs are regulated by the California Air Resources Board (CARB), one of the most influential state environmental regulatory agencies in the United States. In the past, CARB regulations have required a reformulation of the Company’s multi-purpose lubricants. The Company successfully reformulated its multi-purpose lubricants to be in full compliance with CARB regulations. The reformulation resulted in increased product costs. CARB continually reviews its allowable levels of VOCs in products and product categories in which the Company’s products compete. In the event that CARB regulations require further reformulations of any of the Company’s products, the impact of reformulation could have an adverse effect on product performance and the Company’s profitability.
In conjunction with the review of the state budget, California authorized CARB to enforce a fee-based system, which would allow it to collect “fees” from those it governs on the VOC issues. These fees go into CARB’s operating budget and help cover shortfalls, and are said to be based on the amount of VOCs a company’s product puts into the state’s atmosphere. If a similar VOC policy is adopted by other states, the potential impact of fees charged could be material to the Company.
Generally, the manufacturing, packaging, storage, distribution and labeling of the Company’s products and the Company’s business operations all must comply with extensive federal, state, and foreign laws and regulations. It is possible that the government will increase regulation of the transportation, storage or use of certain chemicals, to enhance homeland security or protect the environment and that such regulation could negatively impact raw material supply or costs.