Summary of Significant Accounting Policies (Policies) | 12 Months Ended |
Aug. 31, 2013 |
Summary of Significant Accounting Policies | ' |
Principles of Consolidation | ' |
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Principles of Consolidation |
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The Consolidated Financial Statements include our accounts after elimination of significant intercompany transactions and accounts. |
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Revenue Recognition | ' |
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Revenue Recognition |
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We record revenue when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the selling price to the customer is fixed and determinable, and collectability is reasonably assured. Delivery is not considered to have occurred until the customer assumes the risks and rewards of ownership. Customers take delivery at the time of shipment for terms designated free on board shipping point. For sales designated free on board destination, customers take delivery when the product is delivered to the customer's delivery site. Provisions for rebates, sales incentives, product returns, and discounts to customers are recorded as an offset to revenue in the same period the related revenue is recorded. We also maintain one-time or on-going marketing and trade-promotion programs with certain customers that require us to estimate and accrue the expected costs of such programs. These arrangements include cooperative marketing programs, merchandising of our products and introductory marketing funds for new products and other trade-promotion activities conducted by the customer. Costs associated with these programs are recorded as a reduction of revenues. |
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We provide for limited product return rights to certain distributors and customers primarily for slow moving or damaged items subject to certain defined criteria. We monitor product returns and record, at the time revenue is recognized, a provision for the estimated amount of future returns based primarily on historical experience and specific notification of pending returns. Although historical product returns generally have been within expectations, there can be no assurance that future product returns will not exceed historical amounts. A significant increase in product returns could have a material impact on our operating results in future periods. |
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Use of Estimates | ' |
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Use of Estimates |
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The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. |
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Cash and Cash Equivalents | ' |
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Cash and Cash Equivalents |
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We consider time deposits and marketable securities purchased with an original maturity of three months or less to be cash equivalents, which are included in the accompanying balance sheets at fair value. |
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Accounts Receivable | ' |
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Accounts Receivable |
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We record accounts receivable at net realizable value. This value includes an allowance for estimated uncollectible accounts to reflect losses anticipated on accounts receivable balances. The allowance is based on historical write-offs, an analysis of past due accounts based on the contractual terms of the receivables, and the economic status of customers, if known. We believe that the allowance is sufficient to cover uncollectible amounts; however, there can be no assurance that unanticipated future business conditions of customers will not have a negative impact on our results of operations. We generally do not require collateral for our accounts receivable. Accounts receivable are written off against the allowance for estimated uncollectible accounts should we conclude their collection is improbable. Expense recorded in connection with our allowance for estimated uncollectable accounts totaled $1.9 million, $1.7 million, and $2.0 million for the years ended August 31, 2013, 2012, and 2011, respectively. |
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Concentrations of Credit Risk | ' |
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Concentrations of Credit Risk |
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Concentrations of credit risk with respect to receivables, which are typically unsecured, are generally limited due to the wide variety of customers and markets using our products, as well as their dispersion across many different geographic areas. Receivables due from The Home Depot, our largest single customer, were approximately $11.8 million, $9.6 million, and $10.8 million as of the years ended August 31, 2013, 2012, and 2011, respectively. Additionally, although net sales to The Home Depot were less than 10% of our total net sales in each of the fiscal years 2013 and 2012, net sales to The Home Depot accounted for approximately 10% of our total net sales during the fiscal year ended August 31, 2011. No single customer accounted for more than 10% of combined receivables or total net sales as of and for the years ended August 31, 2013 or 2012. |
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Inventories | ' |
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Inventories |
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Inventories, which include materials, direct labor, and related manufacturing overhead, are stated at the lower of cost (approximate costs determined on a first-in, first-out or average cost basis) or market, and consisted of the following at August 31, 2013 and 2012: |
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| | 2013 | | 2012 | | | | | | | |
Raw materials and supplies | | $ | 17,963 | | $ | 24,852 | | | | | | | |
Work in process | | | 1,711 | | | 899 | | | | | | | |
Finished goods | | | 50,755 | | | 47,864 | | | | | | | |
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| | | 70,429 | | | 73,615 | | | | | | | |
Less: Reserves | | | (1,796 | ) | | (2,164 | ) | | | | | | |
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| | $ | 68,633 | | $ | 71,451 | | | | | | | |
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Goodwill and Identifiable Intangible Assets | ' |
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Goodwill and Identifiable Intangible Assets |
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As of August 31, 2013, our Consolidated Balance Sheets reflect a total of $121.1 million in goodwill. Goodwill is an asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized, including expected synergies from the acquisitions. The excess of the purchase price over the net tangible and identifiable intangible assets for our acquisitions has been recorded as Goodwill within the Consolidated Balance Sheets. Goodwill is not deductible for income tax purposes. Our acquisitions during the three fiscal years ended August 31, 2013 are discussed further in Note 3 of Notes to Consolidated Financial Statements. |
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We test goodwill for impairment on an annual basis at the beginning of the fourth quarter of each fiscal year, or sooner if events or changes in circumstances indicate that the carrying amount of goodwill may exceed its fair value. We have the option to perform a qualitative assessment of goodwill in lieu of completing the two-step process described below to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill and other intangible assets. If we conclude that this is the case, we must perform the two-step process. The first step identifies potential impairments by comparing the fair value of the reporting unit, Zep, with its carrying value, including goodwill. If the carrying value of a reporting unit exceeds the fair value, the second step of the test requires a calculation of possible impairment loss by comparing the implied fair value of goodwill with the carrying value. If the implied fair value of the goodwill is less than the carrying value, an impairment charge is recorded. If the calculated fair value of a reporting unit exceeds the carrying value, goodwill is not impaired and the second step is not necessary. |
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In fiscal 2013, certain qualitative factors were used to determine the likelihood of goodwill impairment for our one reporting unit. None of the analyses resulted in an impairment charge during fiscal 2013, 2012, or 2011. Changes in the carrying amount of Goodwill during fiscal years 2013 and 2012 are summarized as follows: |
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Balance as of August 31, 2011 | | $ | 84,418 | | | | | | | | | | |
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Acquisitions (Mykal) | | | 567 | | | | | | | | | | |
Currency translation adjustments | | | (381 | ) | | | | | | | | | |
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Balance as of August 31, 2012 | | $ | 84,604 | | | | | | | | | | |
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Acquisitions (Vehicle Care division of Ecolab Inc.) | | | 36,692 | | | | | | | | | | |
Currency translation adjustments | | | (194 | ) | | | | | | | | | |
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Balance as of August 31, 2013 | | $ | 121,102 | | | | | | | | | | |
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Our identifiable intangible assets primarily include the customer relationships, patents and formulations acquired through the above-mentioned business combinations. Amortization of intangible assets with finite lives is recognized over their estimated useful lives using an amortization method that reflects the pattern in which the economic benefits of the intangible assets are consumed or otherwise realized. The straight-line method is used for customer relationships. As a result of the negligible attrition rate in our customer base, the difference between the straight-line method and attrition methods is not material to our results. The estimated useful lives for our finite-lived intangible assets range from eight to 22 years, and are concentrated between 17 and 22 years. Our acquired trademarks have an indefinite useful life. |
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Information summarizing our acquired intangible assets is as follows: |
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| | August 31, 2013 | | August 31, 2012 | |
| | Gross Carrying | | Accumulated | | Gross Carrying | | Accumulated | |
Amount | Amortization | Amount | Amortization |
Definite-lived intangible assets: | | | | | | | | | | | | | |
Customer relationships | | $ | 112,700 | | $ | (14,712 | ) | $ | 57,113 | | $ | (7,989 | ) |
Patents and formulations | | | 14,786 | | | (1,245 | ) | | 10,079 | | | (861 | ) |
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Total | | $ | 127,486 | | $ | (15,957 | ) | $ | 67,192 | | $ | (8,850 | ) |
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Indefinite-lived intangible assets: | | | | | | | | | | | | | |
Trademarks | | $ | 18,400 | | | — | | $ | 7,365 | | | — | |
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Total | | $ | 145,886 | | $ | (15,957 | ) | $ | 74,557 | | $ | (8,850 | ) |
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Amortization expense totaled $7.1 million, $3.9 million, and $3.8 million for the years ended August 31, 2013, 2012, and 2011, respectively. The amortization expense associated with acquired finite-lived intangible assets established as of August 31, 2013 is expected to approximate $8 million during each of the next five years. |
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Other Long-Term Liabilities | ' |
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Other Long-Term Liabilities |
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Other long-term liabilities consisted of the following at August 31, 2013 and 2012: |
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| | 2013 | | 2012 | | | | | | | |
Deferred compensation and postretirement benefits(1) | | $ | 4,046 | | $ | 3,983 | | | | | | | |
Liabilities related to uncertain income tax positions(2) | | | 1,000 | | | 1,064 | | | | | | | |
Environmental remediation liabilities(3) | | | 8,912 | | | 10,452 | | | | | | | |
Acquisition earnout liability(4) | | | — | | | 1,208 | | | | | | | |
Miscellaneous(5) | | | 1,115 | | | 1,143 | | | | | | | |
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| | $ | 15,073 | | $ | 17,850 | | | | | | | |
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-1 |
Postretirement benefits—We adopted a non-qualified deferred compensation plan effective October 31, 2007 for the benefit of eligible employees. The deferred compensation plan administered by us provides for elective deferrals of an eligible employee's compensation, which are matched with contributions from us as stipulated by the plan. In addition, the plan provides for an automatic contribution by us ranging from 3% to 5% of an eligible employee's compensation. The majority of the activity associated with these programs is recorded through corresponding short-term liability accounts. See Note 8 of Notes to Consolidated Financial Statements for more information regarding this plan. |
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-2 |
Liabilities related to uncertain income tax positions—See Note 11 of Notes to Consolidated Financial Statements for more information. |
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-3 |
Environmental remediation liabilities—The portion of these accruals related to amounts we expect to expend after fiscal year 2014 is classified within Other long-term liabilities. See Note 9 of Notes to Consolidated Financial Statements for more information regarding our environmental remediation efforts. |
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-4 |
Acquisition earnout liability—This amount represented the long-term portion of a total $1.3 million acquisition-related earnout obligation at August 31, 2012. During the year ended August 31, 2013, we reduced the fair value of this contingent consideration liability to zero based on our ongoing assessment of this liability's probable ultimate payout.See Note 12 of Notes to Consolidated Financial Statements for more information regarding our acquisition earnout liability valuation. |
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-5 |
Miscellaneous—These amounts represent a number of liabilities that will be settled beyond fiscal year 2014, the most significant of which pertains to deferred rents associated with facility lease agreements containing escalating rent clauses. |
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Shipping and Handling Fees and Costs | ' |
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Shipping and Handling Fees and Costs |
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We include shipping and handling fees billed to customers in Net Sales. Shipping and handling costs associated with inbound freight and freight between manufacturing facilities are generally recorded in Cost of Products Sold, which also includes the cost normally incurred in acquiring and producing inventory for sale, purchasing and receiving costs, and inspection costs. Certain customer-related shipping and handling costs, as well as other distribution costs, are included in Selling, Distribution, and Administrative Expenses. We believe this presentation is consistent with many of our peers and competitors. However, we acknowledge that our gross profit amounts may not be comparable to certain other entities, as some entities may include all of the costs related to their distribution network in their cost of products sold. Customer-related shipping and handling costs included within our Selling, Distribution, and Administrative Expenses totaled $45.0 million, $42.3 million, and $42.4 million for the fiscal years ended August 31, 2013, 2012, and 2011, respectively. Other distribution costs, which primarily consist of the cost of warehousing finished goods inventory, totaled $22.1 million, $23.1 million, and $22.0 million for the fiscal years ended August 31, 2013, 2012, and 2011, respectively. |
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Share-Based Compensation | ' |
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Share-Based Compensation |
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Share-based expense includes expense related to restricted stock and options issued, as well as share units deferred into the Director Deferred Compensation Plan and the Supplemental Deferred Savings Plan. We incurred $4.1 million, $4.0 million, and $5.0 million of share-based expense, which includes an estimate of forfeitures, for the fiscal years ended August 31, 2013, 2012, and 2011, respectively. We did not capitalize any expense related to share-based payments, and we record share-based expense within Selling, Distribution, and Administrative Expenses. Equity awards having service-only vesting provisions are accounted for on a straight-line basis. The majority of the share-based compensation expense does not affect our overall cash position. Therefore, certain of these expenses are reflected as Other non-cash charges within our Consolidated Statements of Cash Flows. Share-based compensation accounting rules require that the benefit of tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under prior guidance. See Note 8 of Notes to Consolidated Financial Statements for more information regarding our share-based incentive programs. |
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Property, Plant, and Equipment and Depreciation | ' |
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Property, Plant, and Equipment and Depreciation |
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Total Property, Plant, and Equipment is stated at cost, and includes capitalized software costs. The net book value of capitalized software totaled $24.9 million and $20.9 million at August 31, 2013 and 2012, respectively. Capitalized software amortization is included in depreciation of property, plant and equipment and totaled $3.0 million, $1.3 million and $1.7 million for the years ended August 31, 2013, 2012, and 2011, respectively. We report depreciation of property, plant and equipment in Cost of Products Sold and Selling, Distribution and Administrative Expenses based on the nature of the underlying assets. We record depreciation primarily related to the production of inventory within Cost of Products Sold. We record depreciation related to selling, distribution and administrative functions within Selling, Distribution and Administrative Expenses. For financial reporting purposes, depreciation is determined principally on a straight-line basis using estimated useful lives of plant and equipment (20 to 40 years for buildings and 5 to 12 years for machinery and equipment). Depreciation expense totaled $12.8 million, $10.4 million, and $10.4 million for the years ended August 31, 2013, 2012, and 2011, respectively. We amortize leasehold improvements over the life of the lease or the useful life of the improvement, whichever is shorter. |
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We sold a facility in the Boston, Massachusetts area during fiscal year 2011 and recognized the related gain within our operating results. We lease the majority of our branch and warehouse locations, and the sale of owned facilities has occurred infrequently. |
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As of August 31, 2013, Prepayments and other current assets in our Consolidated Balance Sheets included held-for-sale fixed assets. In the fourth quarter of fiscal year 2010, we began marketing a facility in Lancaster, Texas after we transferred manufacturing activities at that location to other of our facilities. After assessing the property's fair value in fiscal year 2012, we adjusted the asset's fair market value down by $0.5 million to $2.1 million. After assessing the property's fair value in fiscal year 2013, we adjusted the asset's fair market value down by $0.3 million to $1.8 million. We recorded the charges associated with these write-downs in Loss (Gain) on Assets Held for Sale and Disposal of Fixed Assets in our Consolidated Statements of Income. Further detail regarding this action is included within Note 10 of Notes to Consolidated Financial Statements. In fiscal year 2013, we began marketing a facility in Wellingborough, England for sale. We reclassified this asset's value of $1.0 million from Buildings and leasehold improvements to Prepayments and other current assets in our Consolidated Balance Sheets in accordance with its held-for-sale status. The facility in Wellinborough, England sold in October 2013. |
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Research and Development | ' |
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Research and Development |
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We expense research and development costs, which are included in Selling, Distribution, and Administrative Expenses in our Consolidated Statements of Income, as incurred. Research and development expenses ranged between $1.4 million and $1.6 million during the three years ended August 31, 2013. |
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Advertising | ' |
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Advertising |
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We expense advertising costs as incurred, and those costs are included within Selling, Distribution, and Administrative Expenses in our Consolidated Statements of Income. These expenses totaled $4.1 million, $2.7 million, and $2.0 million for the years ended August 31, 2013, 2012, and 2011, respectively. |
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Foreign Currency Translation | ' |
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Foreign Currency Translation |
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The functional currency for our foreign operations is the local currency. The translation of foreign currencies into United States dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet dates and for revenue and expense accounts using a weighted average exchange rate each month during the year. The gains or losses resulting from the translation are included in the Consolidated Statements of Comprehensive Income and the Consolidated Statements of Stockholders' Equity and are excluded from net income. Gains or losses relating to foreign currency items are included in Miscellaneous expense (income), net, in our Consolidated Statements of Income and consisted of expense of $0.3 million for each of the years ended August 31, 2013 and 2012, and income of $0.1 million for the year ended August 31, 2011. |
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Interest Expense, Net | ' |
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Interest Expense, Net |
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Interest expense, net, is composed primarily of interest expense on our variable-rate debt instruments, partially offset by interest income on cash and cash equivalents. |
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The following table summarizes the components of interest expense, net: |
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| | 2013 | | 2012 | | 2011 | | | | |
Interest expense | | $ | 9,950 | | $ | 6,294 | | $ | 6,658 | | | | |
Interest income | | | (992 | ) | | (801 | ) | | (96 | ) | | | |
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Interest expense, net | | $ | 8,958 | | $ | 5,493 | | $ | 6,562 | | | | |
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On July 15, 2010, we entered into a $320 million five-year senior, secured credit facility (the "2010 Credit Facility") with a syndicate of lenders. See Note 5 of Notes to Consolidated Financial Statements for more information regarding our debt. |
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Miscellaneous Expense (Income), Net | ' |
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Miscellaneous Expense (Income), Net |
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Miscellaneous expense (income), net, is composed primarily of gains or losses on foreign currency transactions and other non-operating items. |
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New Accounting Pronouncements | ' |
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New Accounting Pronouncements |
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In June 2011, the FASB issued guidance that amended the requirements for the presentation of comprehensive income. The amended guidance requires an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. This guidance eliminates the option to report other comprehensive income and its components in the statement of stockholders' equity, and is effective for fiscal years and interim periods beginning after December 15, 2011. Early adoption of the guidance is permitted. We early adopted this guidance as of August 31, 2012. The implementation of this guidance did not have any effect on our financial condition or results of operations. |
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In September 2011, the FASB issued guidance pertaining to the testing of certain intangible assets for impairment. The revised guidance purposes to reduce the cost and complexity of registrants' annual goodwill impairment tests by providing entities an option to perform a "qualitative" assessment to determine whether further impairment testing is necessary. If an entity believes, as a result of its qualitative assessment, that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, a more robust, quantitative impairment evaluation is required. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We implemented the new standard in our 2013 annual goodwill impairment testing. This guidance did not have a material effect on our financial condition or results of operations. |
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