D-40 Company
Notes to Consolidated Financial Statements
August 31, 2008, 2007 and 2006
Note 11. Stock-based Compensation
In December 2007, the Company’s shareholders approved the WD-40 Company 2007 Stock Incentive Plan (“2007 Plan”), effective as of December 11, 2007 (“Effective Date”), which permits the granting of various stock-based equity awards, including non-qualified stock options, incentive stock options, stock appreciation rights, restricted stock, restricted stock units (“RSUs”), performance shares, performance units and other stock-based awards to employees, directors and consultants. As a result of the adoption of the 2007 Plan, no further awards have been or will be granted from the prior WD-40 Company 1990 Incentive Stock Option Plan (“1990 Incentive Stock Option Plan”) or the prior WD-40 Company 1999 Non-Employee Director Restricted Stock Plan (“Director Stock Plan”) (collectively, the “Prior Plans”) subsequent to the Effective Date. The number of shares initially authorized for issuance pursuant to grants of awards under the 2007 Plan was 2,250,000 shares plus any shares remaining available for issuance pursuant to grants of awards under the Prior Plans, for a total initial pool of shares of common stock available for issuance pursuant to grants of awards under the 2007 Plan of 2,957,830. As of August 31, 2008, 2,855,682 shares of common stock remained available for future issuance pursuant to grants of awards under the 2007 Plan. Awards under the 2007 Plan or the Prior Plans that expire or are cancelled, forfeited, settled in cash or otherwise settled without the delivery of shares return to the pool available for issuance pursuant to grants of awards under the 2007 Plan. Awards of stock options or stock appreciation rights are counted as one share, and awards of restricted stock, restricted stock units, performance shares, performance units and other stock-based awards are counted as three shares, for purposes of computing the number of shares authorized and available for issuance pursuant to grants of awards under the 2007 Plan. The shares of common stock to be issued pursuant to awards under the 2007 Plan may be authorized but unissued shares or treasury shares. The Company has historically issued new authorized but unissued shares upon the exercise of stock options or the issuance of restricted stock under the Prior Plans.
The 2007 Plan is administered by the Board of Directors (the “Board”) or the Compensation Committee or other designated committee of the Board (the “Committee”) and provides that stock options granted under the 2007 Plan will be exercisable at such times and under such conditions as may be determined by the Committee at the time of grant of such stock options, however stock options may not be granted for terms in excess of ten years. The terms of the 2007 Plan provide for the granting of stock options at an exercise price of not less than 100 percent of the fair market value of the stock at the date of grant. All other forms of stock-based equity awards granted under the 2007 Plan are subject to the specific terms and conditions as determined by the Committee at the time of grant of such awards in accordance with the various terms and conditions specified for each award type per the 2007 Plan. Stock options outstanding under the 1990 Incentive Stock Option Plan were granted with immediate vesting, vesting after one year and vesting over a period of three years. Restricted stock units outstanding under the 2007 Plan were granted with immediate vesting and vesting over a period of three years.
Stock-based compensation expense related to the Company’s stock-based equity awards totaled $2.4 million, $1.9 million and $1.8 million for the fiscal years ended August 31, 2008, 2007 and 2006, respectively. The Company recognized income tax benefits related to such stock-based compensation of $0.7 million, $0.6 million and $0.5 million for the fiscal years ended August 31, 2008, 2007 and 2006, respectively.
Stock Options
The estimated fair value of each of the Company’s stock option awards was determined on the date of grant using the Black-Scholes option valuation model with the following weighted-average assumptions for stock option grants during the fiscal years ended August 31, 2008, 2007 and 2006:
| Fiscal Year Ended August 31, | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|
| 2008 | 2007 | 2006 | |||||||||
| Expected option term (in years) | 5.00 | 4.91 | 4.85 | ||||||||
| Expected volatility of common stock | 25.17 | % | 23.89 | % | 25.11 | % | |||||
| Risk-free interest rate | 4.34 | % | 4.70 | % | 4.34 | % | |||||
| Expected dividend yield | 2.78 | % | 2.81 | % | 3.22 | % | |||||
The computation of the expected term is based on a weighted-average calculation combining the average life of options that have already been exercised or cancelled with the estimated life of all unexercised options. The computation of expected volatility is based on the historical volatility of the Company’s stock using the average of the volatility over the most recent one-year period, the most recent period commensurate with the expected option term and WD-40 Company’s long-term mean reversion volatility. The risk-free interest rate is based on the implied yield on a U.S. Treasury constant maturity with a remaining term equal to the expected term of the option. The expected dividend yield is based on the projected annual dividend payment per share, divided by the stock price at the grant date.
A summary of the Company’s stock option award activity as of and for the fiscal years ended August 31, 2008, 2007 and 2006 is as follows (in thousands, except share and per share data):
| Number of Shares | Weighted-Average Exercise Price per Share |
Weighted-Average Remaining Contractual Term per Share (in years) |
Aggregate Intrinsic Value |
||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Options outstanding at August 31, 2005 | 1,381,896 | $ | 26.27 | ||||||||||||||||
| Options granted | 247,000 | $ | 27.35 | ||||||||||||||||
| Options exercised | (282,159 | ) | $ | 24.87 | |||||||||||||||
| Options forfeited or expired | (28,815 | ) | $ | 29.04 | |||||||||||||||
| Options outstanding at August 31, 2006 | 1,317,922 | $ | 26.71 | ||||||||||||||||
| Options exercisable at August 31, 2006 | 870,270 | $ | 26.16 | ||||||||||||||||
| Options granted | 301,700 | $ | 35.63 | ||||||||||||||||
| Options exercised | (368,735 | ) | $ | 26.45 | |||||||||||||||
| Options forfeited or expired | (12,313 | ) | $ | 32.29 | |||||||||||||||
| Options outstanding at August 31, 2007 | 1,238,574 | $ | 28.91 | ||||||||||||||||
| Options exercisable at August 31, 2007 | 767,516 | $ | 26.92 | ||||||||||||||||
| Options granted | 337,340 | $ | 36.03 | ||||||||||||||||
| Options exercised | (158,416 | ) | $ | 26.56 | |||||||||||||||
| Options forfeited or expired | (12,785 | ) | $ | 30.94 | |||||||||||||||
| Options outstanding at August 31, 2008 | 1,404,713 | $ | 30.86 | 6.74 | $ | 6,315 | |||||||||||||
| Options exercisable at August 31, 2008 | 831,918 | $ | 28.02 | 5.45 | $ | 5,808 | |||||||||||||
The Company’s determination of fair value is affected by its stock price as well as a number of assumptions that require judgment. The weighted-average fair value of all options granted during the fiscal years ended August 31, 2008, 2007 and 2006, estimated as of the grant date using the Black-Scholes option valuation model, was $7.53,
$7.65 and $5.61 per option, respectively. The total intrinsic value of options exercised was $1.7 million, $3.4 million, and $2.0 million for the fiscal years ended August 31, 2008, 2007 and 2006, respectively.
As of August 31, 2008, there was $2.4 million of unamortized compensation cost related to non-vested stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of 1.8 years.
Cash received from stock option exercises for the fiscal years ended August 31, 2008, 2007 and 2006 was $4.2 million, $9.8 million and $7.0 million, respectively. The income tax benefits from stock option exercises totaled $0.4 million, $1.0 million and $0.6 million for the fiscal years ended August 31, 2008, 2007 and 2006, respectively.
Restricted Stock Units
In October 2007, the Board adopted the WD-40 Directors’ Compensation Policy and Election Plan (“Election Plan”), effective as of October 23, 2007, which provided for compensation of directors for the period from the date of the annual meeting of stockholders in 2007 to the date of the annual meeting of stockholders in 2008. In accordance with the Election Plan, each non-employee director received an award of RSUs with a fair market value of $30,000 on the date of grant, and annual base compensation for each non-employee director payable in a combination of cash and/or RSUs that were granted under the 2007 Plan. Vesting of the RSUs granted to directors is immediate, with shares to be issued pursuant to the RSUs upon termination of each director’s service as a director of the Company. Until issuance of the shares pursuant to the RSUs, the RSU holders are entitled to receive dividend equivalents with respect to their RSUs, payable in cash as and when dividends are declared by the Company’s Board of Directors.
On December 11, 2007, a total of 9,902 RSUs were granted to directors at an aggregate fair market value of $0.4 million, or $40.38 per share, pursuant to the 2007 Plan and the Election Plan.
Additionally, on March 25, 2008, the Company granted a total of 25,739 RSUs under the 2007 Plan to certain key executives of the Company. Such RSUs were granted in settlement of these key executives’ benefits under the Company’s supplemental employee retirement plan agreements, as further described in Note 12 – Other Benefit Plans. Such RSUs were granted with vesting over a period of three years from the date of grant, with shares to be issued pursuant to the vested RSUs six months following the day after each executive officer’s termination of employment with the Company. Until issuance of the shares pursuant to the RSUs, the RSU holders are entitled to receive dividend equivalents with respect to their RSUs, payable in cash as and when dividends are declared by the Company’s Board of Directors.
Restricted Stock Awards
Pursuant to the Director Stock Plan and the director compensation policy in effect prior to fiscal year 2008, restricted shares were issued to non-employee directors of the Company in lieu of cash compensation according to elections made by each director prior to his or her re-election at the following annual meeting of stockholders. A director who held shares of the Company having a value of at least $50,000 was permitted to elect to receive his or her base annual director’s fee entirely in cash. Otherwise, directors elected to receive restricted stock in lieu of cash in an amount up to the entire base annual fee in increments of $5,500. The restricted shares were issued in accordance with a director’s election as soon as practicable after the first day of March. The number of shares issued was equal to the amount of compensation to be paid in shares divided by 90% of the closing price of the Company’s shares as of the first business day of March or other date of issuance of such shares. Restricted shares issued to a director do not become vested for resale for a period of five years from the date of issuance or until the director’s retirement from the Board following the director’s 65th birthday. Unless a director has reached age 65, the shares are subject to forfeiture if, during the five-year vesting period, the director resigns from service as a director.
In accordance with SFAS No. 123R, the fair value of restricted stock awards was estimated based on the closing market price of the stock on the date of issuance. As of August 31, 2008, there was $0.2 million of unamortized compensation cost related to non-vested restricted stock awards, which is expected to be recognized over a remaining weighted-average vesting period of 2.4 years; such unamortized compensation cost is included as a component of additional paid-in capital in the Company’s consolidated financial statements.
A summary of the Company’s restricted stock award activity as of and for the fiscal years ended August 31, 2008, 2007 and 2006 is as follows:
| Number of Shares |
Weighted-Average Grant Date Fair Value per Share |
||||||
|---|---|---|---|---|---|---|---|
| Restricted stock awards outstanding at August 31, 2005 | 11,961 | $ | 28.87 | ||||
| Shares issued | 6,099 | $ | 30.32 | ||||
| Shares vested | (201 | ) | $ | 30.32 | |||
| Shares forfeited | — | $ | — | ||||
| Restricted stock awards outstanding at August 31, 2006 | 17,859 | $ | 29.35 | ||||
| Shares issued | 3,896 | $ | 32.08 | ||||
| Shares vested | (2,718 | ) | $ | 24.40 | |||
| Shares forfeited | — | $ | — | ||||
| Restricted stock awards outstanding at August 31, 2007 | 19,037 | $ | 30.61 | ||||
| Shares issued | — | $ | — | ||||
| Shares vested | (5,968 | ) | $ | 27.93 | |||
| Shares forfeited | — | $ | — | ||||
| Restricted stock awards outstanding at August 31, 2008 | 13,069 | $ | 31.83 | ||||