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MarketScreener Homepage  >  Equities  >  Nasdaq  >  WD-40 Company    WDFC

WD-40 COMPANY

(WDFC)
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WD 40 : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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01/09/2020 | 04:16pm EST

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, 2019, which was filed with the Securities and Exchange Commission ("SEC") on October 22, 2019.

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; anticipated input costs for manufacturing and the costs associated with distribution of our products; 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; expected tax rates and the impact of tax legislation and regulatory action; 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," "target," "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, 2019, 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 that 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 Shot®, 1001®, Lava® and


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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.

Highlights

The following summarizes the financial and operational highlights for our business during the three months ended November 30, 2019:

?Consolidated net sales decreased $2.7 million for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact of $2.2 million on consolidated net sales for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Thus, on a constant currency basis, net sales would have decreased by $0.5 million from period to period. This unfavorable impact from changes in foreign currency exchange rates mainly came from our EMEA segment, which accounted for 40% of our consolidated sales for the three months ended November 30, 2019.

?Consolidated net sales for the WD-40 Specialist product line were $8.4 million for the three months ended November 30, 2019 which is relatively constant 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 decreased to 54.3% for the three months ended November 30, 2019 compared to 55.1% for the corresponding period of the prior fiscal year.

?Consolidated net income decreased $1.1 million, or 8%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact of $0.5 million on consolidated net income for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Thus, on a constant currency basis, net income would have decreased $0.6 million.

?Diluted earnings per common share for the three months ended November 30, 2019 were $0.88 versus $0.95 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 2018 and became effective on September 1, 2018. During the period from September 1, 2019 through November 30, 2019, the Company repurchased 26,800 shares at an average price of $184.92 per share, for a total cost of $5.0 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, increased market penetration and the development of new and unique delivery systems; (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.


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Results of Operations

Three Months Ended November 30, 2019 Compared to Three Months Ended November 30,

                                      2018

Operating Items

The following table summarizes operating data for our consolidated operations (in thousands, except percentages and per share amounts):

                                              Three Months Ended November 30,
                                                                       Change from
                                                                       ?Prior Year
                                     2019            2018        Dollars        Percent
Net sales:
Maintenance products              $    89,670$   92,468$  (2,798)           (3)%
Homecare and cleaning products          8,886          8,814            72             1%
Total net sales                        98,556        101,282       (2,726)           (3)%
Cost of products sold                  45,013         45,451         (438)           (1)%
Gross profit                           53,543         55,831       (2,288)           (4)%
Operating expenses                     38,839         39,430         (591)           (1)%
Income from operations            $    14,704$   16,401$  (1,697)          (10)%
Net income                        $    12,194$   13,279$  (1,085)           (8)%
Earnings per common share -       $               $             $
diluted                                  0.88           0.95        (0.07)           (7)%
Shares used in per share
calculations - diluted                 13,746         13,882         (136)           (1)%


Net Sales by Segment

The following table summarizes net sales by segment (in thousands, except
percentages):

                    Three Months Ended November 30,
                                           Change from
                                           ?Prior Year
                2019          2018      Dollars   Percent
Americas     $   46,736$  47,791$ (1,055)      (2)%
EMEA             39,245        38,745        500        1%
Asia-Pacific     12,575        14,746    (2,171)     (15)%
Total        $   98,556$ 101,282$ (2,726)      (3)%



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Americas

The following table summarizes net sales by product line for the Americas segment (in thousands, except percentages):

                                       Three Months Ended November 30,
                                                               Change from
                                                               ?Prior Year
                                  2019             2018     Dollars   Percent
Maintenance products           $    41,690$ 42,418$   (728)      (2)%

Homecare and cleaning products 5,046 5,373 (327) (6)% Total

                          $    46,736$ 47,791$ (1,055)      (2)%
% of consolidated net sales            47%            47%


Sales in the Americas segment, which includes the U.S., Canada and Latin America, decreased to $46.7 million, down $1.1 million, or 2%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates did not have a significant impact on sales for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year.

Sales of maintenance products in the Americas segment decreased $0.7 million, or 2%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. This sales decrease was mainly driven by lower sales of WD-40 Specialist in the U.S., which was down $0.9 million, or 19% from period to period primarily due to a holiday gift pack promotion that was executed in the first quarter of fiscal year 2019 but was not repeated in the first quarter of fiscal year 2020. Sales of maintenance products in Canada and Latin America remained relatively constant from period to period.

Sales of homecare and cleaning products in the Americas decreased $0.3 million, or 6%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. This sales decrease was driven primarily by a decrease in sales of the Spot Shot and Lava brand products in the U.S., which were down 17% 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 three months ended November 30, 2019 compared to the distribution for the three months ended November 30, 2018 when 81% of sales came from the U.S., and 19% of sales came from Canada and Latin America.


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EMEA

The following table summarizes net sales by product line for the EMEA segment (in thousands, except percentages):

                                         Three Months Ended November 30,
                                                                    Change from
                                                                    ?Prior Year
                                   2019                 2018     Dollars   Percent
Maintenance products           $     36,900$ 36,945$    (45)         -
Homecare and cleaning products        2,345              1,800        545       30%
Total                          $     39,245$ 38,745$     500        1%
% of consolidated net sales             40%                38%


(1)While the Company's reporting currency is the 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 50% of its sales are generated in Euro and 20% 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 $39.2 million, up $0.5 million, or 1%, for the three months ended November 30, 2019 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 November 30, 2019 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $41.1 million in the EMEA segment. Thus, on a constant currency basis, sales would have increased by $2.4 million, or 6%, 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 sales in the direct markets remained constant from period to period, sales of 1001 Carpet Fresh in the U.K. increased $0.5 million, or 30%, as a result of the favorable impacts of digital marketing associated with this brand. This increase was completely offset by the overall sales decrease in other European direct markets, primarily due to the unfavorable impacts of changes in foreign currency exchange rates and the timing of customer orders from period to period. Sales from direct markets accounted for 63% of the EMEA segment's sales for the three months ended November 30, 2019 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 increased $0.5 million, or 3%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year, primarily due to higher sales of the WD-40 Multi-Use Product in the Middle East, which were up 15%, as a result of the timing of customer orders from period to period. The distributor markets accounted for 37% of the EMEA segment's total sales for the three months ended November 30, 2019, compared to 36% for the corresponding period of the prior fiscal year.


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Asia-Pacific

The following table summarizes net sales by product line for the Asia-Pacific segment (in thousands, except percentages):

                                      Three Months Ended November 30,
                                                             Change from
                                                             ?Prior Year
                                  2019           2018     Dollars   Percent
Maintenance products           $   11,081$ 13,105$ (2,024)     (15)%

Homecare and cleaning products 1,494 1,641 (147) (9)% Total

                          $   12,575$ 14,746$ (2,171)     (15)%
% of consolidated net sales           13%           15%


Sales in the Asia-Pacific segment, which includes Australia, China and other countries in the Asia region, decreased to $12.6 million, down $2.2 million, or 15%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact on sales for the Asia-Pacific segment from period to period. Sales for the three months ended November 30, 2019 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $12.9 million in the Asia-Pacific segment. Thus, on a constant currency basis, sales would have decreased by $1.9 million, or 13%, from period to period.

Sales in Asia, which represented 68% of the total sales in the Asia-Pacific segment, decreased $2.4 million, or 22%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Sales in the Asia distributor markets decreased $1.7 million, or 21%, primarily attributable to the timing of customer orders from period to period, particularly in South Korea, Indonesia and Malaysia. Sales in China decreased $0.7 million, or 23%, for the three months ended November 30, 2018 compared to the corresponding period of the prior fiscal year, primarily due to the timing of customer orders, particularly in the Southern region of China. In addition, sales were negatively impacted from period to period due to activities in the first quarter of fiscal year 2020 associated with the 70th Anniversary National Day in China which resulted in slowed market conditions.

Sales in Australia increased $0.2 million, or 5%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact on Australian sales. On a constant currency basis, sales would have increased by $0.4 million, or 11%, due to a higher level of promotional activities as well as continued growth of our business from period to period.

Gross Profit

Gross profit decreased to $53.5 million for the three months ended November 30, 2019 compared to $55.8 million for the corresponding period of the prior fiscal year. As a percentage of net sales, gross profit decreased to 54.3% for the three months ended November 30, 2019 compared to 55.1% for the corresponding period of the prior fiscal year.

Gross margin was negatively impacted by the unfavorable impacts of changes to the sales mix from period to period of 0.7 percentage points. These changes in sales mix were primarily in the EMEA segment and were due to higher sales in the first quarter of fiscal year 2020 to the lower margin distributor markets as well as to lower margin customers, particularly those in the France and DACH markets. Gross margin was also negatively impacted by 0.7 percentage points from period to period due to higher warehousing and in-bound freight costs, primarily in the EMEA segment. In addition, advertising, promotional and other discounts that we give to our customers increased from period to period negatively impacting gross margin by 0.4 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. Gross margin was also negatively impacted by 0.2 percentage points from period to period due to unfavorable changes in the costs of aerosol cans, primarily in the Americas segment.


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These favorable impacts to gross margin were partially offset by sales price increases in the EMEA segment over the last twelve months positively impacting gross margin by 0.8 percentage points from period to period. In addition, gross margin was positively affected by 0.3 percentage points from period to period due to favorable changes in the costs of petroleum-based specialty chemicals in the Americas and EMEA segments. Gross margin was also positively impacted by 0.1 percentage points due to changes in foreign currency exchange rates from period to period in the EMEA 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 $3.0 million and $4.1 million for the three months ended November 30, 2019 and 2018, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses for the three months ended November 30, 2019 decreased $0.1 million to $32.6 million from $32.7 million for the corresponding period of the prior fiscal year. As a percentage of net sales, SG&A expenses increased to 33.1% for the three months ended November 30, 2019 compared to 32.3% for the corresponding period of the prior fiscal year. Employee-related costs, which include salaries, incentive compensation, profit sharing, stock-based compensation and other fringe benefits, increased by $1.5 million. This increase was primarily due to increased headcount and annual compensation increases, which take effect in the first quarter of the fiscal year, as well as higher stock-based compensation expense from period to period. These increases were more than offset by the combination of changes in foreign currency exchange rates, which had a favorable impact of $0.5 million, and decreases in other miscellaneous expenses from period to period.

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 $1.7 million and $1.8 million for the three months ended November 30, 2019 and 2018, 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 third-party contract manufacturers. 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.

Advertising and Sales Promotion Expenses

Advertising and sales promotion expenses for the three months ended November 30, 2019 decreased $0.4 million, or 6%, to $5.6 million from $6.0 million for the corresponding period of the prior fiscal year. As a percentage of net sales, these expenses decreased to 5.7% for the three months ended November 30, 2019 from 5.9% for the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had a favorable impact on such expenses of $0.2 million from period to period. Thus, on a constant currency basis, advertising and sales promotion expenses for the first quarter of fiscal year 2020 would have decreased by $0.2 million, primarily due to a lower level of promotional programs and marketing support in the Americas segment. Investment in global advertising and sales promotion expenses for fiscal year 2020 is expected to be between 5.5% and 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 November 30, 2019 were $5.0 million compared to $4.3 million for the corresponding period of the prior fiscal year. Therefore, our total investment in advertising and sales promotion activities totaled $10.6 million and $10.3 million for the three months ended November 30, 2019 and 2018, 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 November 30, 2019 and 2018.


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Income from Operations by Segment


The following table summarizes income from operations by segment (in thousands,
except percentages):

                            Three Months Ended November 30,
                                                  Change from
                                                  ?Prior Year
                         2019        2018      Dollars   Percent
Americas              $    10,580$  11,302$   (722)      (6)%
EMEA                        8,592      8,375        217        3%
Asia-Pacific                3,202      3,741      (539)     (14)%

Unallocated corporate (7,670) (7,017) (653) (9)% Total

                 $    14,704$  16,401$ (1,697)     (10)%


(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 decreased to $10.6 million, down $0.7 million, or 6%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year, primarily due to a $1.1 million decrease in sales and a lower gross margin, which were partially offset by lower operating expenses. As a percentage of net sales, gross profit for the Americas segment decreased from 54.2% to 53.1% period over period primarily due to higher discounts that we gave to our customers, increases in the price of aerosol cans, and unfavorable changes in sales mix. These unfavorable impacts were slightly offset by the decreased costs of petroleum-based specialty chemicals from period to period. The lower sales were accompanied by a $0.3 million decrease in total operating expenses period over period, primarily due to a lower level of advertising and sales promotion expenses and lower accruals for earned incentive compensation. These decreases in operating expenses were partially offset by increased employee-related expenses. Operating income as a percentage of net sales decreased from 23.6% to 22.6% period over period.

EMEA

Income from operations for the EMEA segment increased to $8.6 million, up $0.2 million, or 3%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year, primarily due to a $0.5 million increase in sales, which was offset by a lower gross margin. As a percentage of net sales, gross profit for the EMEA segment decreased from 56.7% to 55.9% period over period primarily due to increased warehousing, distribution and freight costs as well as unfavorable changes in sales mix, primarily due to a higher proportion of sales to the lower margin distributor markets as well as to lower margin customers from period to period. These unfavorable impacts were partially offset by sales price increases, decreased costs of petroleum-based specialty chemicals, and favorable changes in foreign currency exchange rates from period to period. Operating income as a percentage of net sales increased from 21.6% to 21.9% period over period.

Asia-Pacific

Income from operations for the Asia-Pacific segment decreased to $3.2 million, down $0.5 million, or 14%, for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year, primarily due to a $2.2 million decrease in sales and a slightly lower gross margin, which were partially offset by lower operating expenses. As a percentage of net sales, gross profit for the Asia-Pacific segment decreased from 54.2% to 54.0% period over period primarily due to increases in warehousing, distribution and freight costs and a higher level of advertising, promotional and other discounts that we gave to our customers from period to period. These unfavorable impacts were significantly offset by lower manufacturing costs. The lower sales were accompanied by a $0.6 million decrease in total operating expenses period over period, primarily due to decreased outbound freight costs and miscellaneous expenses during the period. Operating income as a percentage of net sales increased from 25.4% to 25.5% period over period.


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Non-Operating Items

The following table summarizes non-operating income and expenses for our consolidated operations (in thousands):

                                  Three Months Ended November 30,
                                2019                    2018    Change
Interest income             $         25               $    51$  (26)
Interest expense            $        442$   710$ (268)
Other income (expense), net $          5               $   376$ (371)
Provision for income taxes  $      2,098$ 2,839$ (741)


Interest Income

Interest income was insignificant for both the three months ended November 30, 2019 and 2018.

Interest Expense

Interest expense decreased $0.3 million for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year primarily due to lower interest rates related to draws on our credit facilities that are denominated in Euros and Pounds Sterling at our U.K. subsidiary.

Other Income (Expense), Net

Other income decreased by $0.4 million for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year primarily due to foreign currency exchange gains of $0.4 million in the corresponding period of the prior fiscal year as a result of fluctuations in the foreign currency exchange rates for both the U.S Dollar and the Euro against the Pound Sterling.

Provision for Income Taxes

The provision for income taxes was 14.7% and 17.6% of income before income taxes for the three months ended November 30, 2019 and 2018, respectively. The decrease in the effective income tax rate from period to period was primarily due to an increase in excess tax benefits from settlements of stock-based equity awards that are recognized in the provision for income taxes, as well as a nonrecurring benefit from the release of liabilities associated with unrecognized tax benefits that resulted from the expiration of statutes.

Net Income

Net income was $12.2 million, or $0.88 per common share on a fully diluted basis, for the three months ended November 30, 2019 compared to $13.3 million, or $0.95 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 $0.5 million on net income for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. On a constant currency basis, net income would have decreased by $0.6 million from period to period.


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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 at or above 55% of net sales, our cost of doing business to be at 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:

                                                   Three Months Ended November 30,
                                                       2019                2018
Gross margin - GAAP                                          54%                55%
Cost of doing business as a percentage
of net sales - non-GAAP                                      38%                37%
EBITDA as a percentage of net sales - non-GAAP (1)           17%                18%


(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 as an adjustment to earnings 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 November 30,
                                                         2019                  2018
Total operating expenses - GAAP                     $         38,839       $     39,430
Amortization of definite-lived intangible assets               (650)              (733)
Depreciation (in operating departments)                        (947)              (936)
Cost of doing business                              $         37,242       $     37,761
Net sales                                           $         98,556       $    101,282
Cost of doing business as a percentage
of net sales - non-GAAP                                          38%                37%



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EBITDA (in thousands, except percentages)

                                                     Three Months Ended November 30,
                                                         2019                  2018
Net income - GAAP                                   $         12,194       $     13,279
Provision for income taxes                                     2,098              2,839
Interest income                                                 (25)               (51)
Interest expense                                                 442                710
Amortization of definite-lived intangible assets                 650                733
Depreciation                                                   1,307              1,192
EBITDA                                              $         16,666       $     18,702
Net sales                                           $         98,556       $    101,282
EBITDA as a percentage of net sales - non-GAAP                   17%                18%


Liquidity and Capital Resources

Overview

The Company's financial condition and liquidity remain strong. Net cash provided by operations was $15.2 million for the three months ended November 30, 2019 compared to $9.0 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, as well as cash generated from operations and cash currently available from our existing $100.0 million unsecured Credit Agreement with Bank of America, which expires on January 22, 2024. We use proceeds of the revolving credit facility primarily for our general working capital needs. The Company also holds borrowings under a Note Purchase and Private Shelf Agreement. See Note 8 - Debt for additional information on these agreements.

The Company maintains a balance of outstanding draws in U.S. Dollars in the Americas segment, as well as in Euros and Pounds Sterling in the EMEA segment. Euro and Pound Sterling denominated draws will fluctuate in U.S. Dollars from period to period due to changes in foreign currency exchange rates. During the three months ended November 30, 2019, the Company repaid $5.0 million in short-term borrowings outstanding under the line of credit. We regularly convert many of our draws on our line of credit to new draws with new maturity dates and interest rates. As of November 30, 2019, we had a $58.6 million balance of outstanding draws on the revolving credit facility, of which $43.6 was classified as long-term and the remaining $15.0 was classified as short-term. In addition, net borrowings under the auto-borrow agreement in the United States were $12.9 million and we paid $0.4 million in principal payments on our Series A Notes during the first quarter of fiscal year 2020. There were no other letters of credit outstanding or restrictions on the amount available on this line of credit or the Series A Notes. Per the terms of both the Note Agreement and the Credit 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 8 - Debt for additional information on these financial covenants. At November 30, 2019, we were in compliance with all debt covenants 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.

We believe that our future cash from domestic and international 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. At November 30, 2019, we had a total of $28.7 million in cash and cash equivalents. We do not foresee any ongoing issues with repaying our borrowings and we closely monitor the use of this credit facility.


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Cash Flows

The following table summarizes our cash flows by category for the periods presented (in thousands):


                                                     Three Months Ended November 30,
                                                   2019               2018         Change

Net cash provided by operating activities $ 15,206$ 9,009$ 6,197 Net cash used in investing activities

               (5,770)           (1,234)       (4,536)
Net cash used in financing activities               (8,520)          (24,148)        15,628
Effect of exchange rate changes on cash and
cash equivalents                                        531             (919)         1,450
Net increase (decrease) in cash and cash       $                   $              $
equivalents                                           1,447          (17,292)        18,739


Operating Activities

Net cash provided by operating activities increased $6.2 million to $15.2 million for the three months ended November 30, 2019 from $9.0 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 three months ended November 30, 2019 was net income of $12.2 million, which decreased $1.1 million from period to period. The changes in our working capital from period to period were primarily attributable to a decrease in the trade accounts receivable balance and the timing of payments received from customers from period to period. In the first quarter of fiscal year 2019, trade accounts receivable increased due to higher sales compared to the first quarter of fiscal year 2018, whereas trade accounts receivable decreased in the first quarter of fiscal year 2020 due to lower sales.

Investing Activities

Net cash used in investing activities increased $4.5 million to $5.8 million for the three months ended November 30, 2019 from $1.2 million for the corresponding period of the prior fiscal year, primarily due to increased capital expenditures. Capital expenditures increased by $4.7 million primarily due to the renovations and equipping of the Company's new office building in Milton Keynes, England. The renovations to this new office building were completed and employees located in the U.K. were relocated to it during the first quarter of 2020.

Financing Activities

Net cash used in financing activities decreased $15.6 million to $8.5 million for the three months ended November 30, 2019 from $24.1 million for the corresponding period of the prior fiscal year primarily due to proceeds provided by the Company's autoborrow agreement, which increased $12.9 million during the first quarter of fiscal year 2020. Also contributing to the decrease in total cash flows was a reduction in treasury stock purchases, which decreased by $1.9 million for the three months ended November 30, 2019 compared to the corresponding period of the prior fiscal year. Slightly offsetting these decreases was an increase in dividend paid of $0.9 million period over 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 an increase in cash of $0.5 million for the three months ended November 30, 2019 as compared to a decrease in cash of $0.9 million for three months ended November 30, 2018. These changes were primarily due to fluctuations in various foreign currency exchange rates from period to period, but the majority is related to the fluctuations in the Pound Sterling against the U.S. Dollar.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements as defined by Item 303(a)(4)(ii) of Regulation S-K.


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Commercial Commitments

We have ongoing relationships with various suppliers (contract manufacturers) who manufacture our products. The contract manufacturers maintain title and control of certain raw materials and components, materials utilized in finished products, and of the finished products themselves until shipment to our customers or third-party distribution centers in accordance with agreed upon shipment terms. Although we have definitive minimum purchase obligations included in the contract terms with certain of our contract manufacturers, when such obligations have been included, they have either been immaterial or the minimum amounts have been such that they are well below the volume of goods that the Company has historically purchased. 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 November 30, 2019, no such commitments were outstanding.

Share Repurchase Plan

The information required by this item is incorporated by reference to Part I-Item 1, "Notes to Condensed Consolidated Financial Statements" Note 9 - Share Repurchase Plan, included in this report.

Dividends

On December 10, 2019, the Company's Board of Directors approved a 10% increase in the regular quarterly cash dividend, increasing it from $0.61 per share to $0.67 per share. The $0.67 per share dividend declared on December 10, 2019 is payable on January 31, 2020 to shareholders of record on January 17, 2020. 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, 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.

There have been no material changes in our critical accounting policies from those disclosed 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, 2019, which was filed with the SEC on October 22, 2019.


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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.

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