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; the length and severity of the recent
COVID-19 outbreak and its impact on the global economy and the Company's
financial results; 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 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.
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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 six months ended February 29, 2020:
?Consolidated net sales decreased $4.0 million for the six months ended February
29, 2020 compared to the corresponding period of the prior fiscal year. Changes
in foreign currency exchange rates had an unfavorable impact of $1.9 million on
consolidated net sales for the six months ended February 29, 2020 compared to
the corresponding period of the prior fiscal year. Thus, on a constant currency
basis, net sales would have decreased by $2.1 million from period to period.
This unfavorable impact from changes in foreign currency exchange rates mainly
came from our EMEA segment, which accounted for 41% of our consolidated sales
for the six months ended February 29, 2020.
?Consolidated net sales for the WD-40 Specialist product line were $17.3 million
for the six months ended February 29, 2020 which is an increase of $0.8 million
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 53.9% for the six months
ended February 29, 2020 compared to 55.3% for the corresponding period of the
prior fiscal year.
?Consolidated net income decreased $2.7 million, or 9%, for the six months ended
February 29, 2020 compared to the corresponding period of the prior fiscal year.
Changes in foreign currency exchange rates had an unfavorable impact of $0.4
million on consolidated net income for the six months ended February 29, 2020
compared to the corresponding period of the prior fiscal year. Thus, on a
constant currency basis, net income would have decreased $2.3 million.
?Diluted earnings per common share for the six months ended February 29, 2020
were $1.92 versus $2.09 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 February 29, 2020, the Company repurchased 51,574 shares at an average
price of $187.24 per share, for a total cost of $9.7 million.
Our strategic initiatives and the areas where we will continue to focus our
time, talent and resources in future periods include: (i) maximizing WD-40
Multi-Use Product sales through geographic expansion, 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.
Significant Developments
During the first half of fiscal year 2020, financial results and operations for
our Americas and EMEA segments were not significantly impacted by the COVID-19
outbreak that occurred in many countries beginning in early calendar year 2020.
The significance of the impacts to our Asia-Pacific segment during the first
half of fiscal year 2020 were material and are discussed herein. In addition,
see Part II-Item 1A, "Risk Factors," included herein for an update that we made
to our existing
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risk factors to include information on risks associated with pandemics in
general and COVID-19 specifically. The extent to which the COVID-19 outbreak
impacts our financial results and operations for fiscal year 2020 and going
forward, for all three of our business segments, will depend on future
developments which are highly uncertain and cannot be predicted, including new
information which may emerge concerning the severity of the outbreak and the
international actions being taken to contain and treat it.
We are taking a variety of measures to ensure the availability and functioning
of our critical infrastructure, to promote the safety and security of our
employees and to support the communities in which we operate. These measures
include requiring remote working arrangements for employees where practicable.
We are following public and private sector policies and initiatives to reduce
the transmission of COVID-19, such as the imposition of travel restrictions, the
promotion of social distancing and the adoption of work-from-home arrangements,
and all of these policies and initiatives could impact our operations. Due to
the speed with which the situation is developing, we are not able at this time
to estimate the impact of COVID-19 on our financial results and operations, but
the impact could be material for the remainder of fiscal year 2020 in all
business segments and could be material during any future period affected either
directly or indirectly by this pandemic.
Results of Operations
Three Months Ended February 29, 2020 Compared to Three Months Ended February 28,
2019
Operating Items
The following table summarizes operating data for our consolidated operations
(in thousands, except percentages and per share amounts):
Three Months Ended February 29/28,
Change from
?Prior Year
2020 2019 Dollars Percent
Net sales:
Maintenance products $ 91,147 $ 92,370 $ (1,223) (1)%
Homecare and cleaning products 8,902 8,965 (63) (1)%
Total net sales 100,049 101,335 (1,286) (1)%
Cost of products sold 46,447 45,177 1,270 3%
Gross profit 53,602 56,158 (2,556) (5)%
Operating expenses 35,417 36,443 (1,026) (3)%
Income from operations $ 18,185 $ 19,715 $ (1,530) (8)%
Net income $ 14,327 $ 15,906 $ (1,579) (10)%
Earnings per common share - $ $ $
diluted 1.04 1.14 (0.10) (9)%
Shares used in per share
calculations - diluted 13,737 13,857 (120) (1)%
?
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Net Sales by Segment
The following table summarizes net sales by segment (in thousands, except
percentages):
Three Months Ended February 29/28,
Change from
?Prior Year
2020 2019 Dollars Percent
Americas $ 46,842 $ 43,897 $ 2,945 7%
EMEA 41,753 40,966 787 2%
Asia-Pacific 11,454 16,472 (5,018) (30)%
Total $ 100,049 $ 101,335 $ (1,286) (1)%
Americas
The following table summarizes net sales by product line for the Americas
segment (in thousands, except percentages):
Three Months Ended February 29/28,
Change from
?Prior Year
2020 2019 Dollars Percent
Maintenance products $ 42,421 $ 39,202 $ 3,219 8%
Homecare and cleaning products 4,421 4,695 (274) (6)%
Total $ 46,842 $ 43,897 $ 2,945 7%
% of consolidated net sales 47% 43%
Sales in the Americas segment, which includes the U.S., Canada and Latin
America, increased to $46.8, up $2.9 million, or 7%, for the three months ended
February 29, 2020 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 February 29, 2020 compared to the corresponding
period of the prior fiscal year.
Sales of maintenance products in the Americas segment increased $3.2 million, or
8%, for the three months ended February 29, 2020 compared to the corresponding
period of the prior fiscal year. This sales increase was mainly driven by higher
sales of WD-40 Multi Use Product in the U.S., which were up $1.8 million, or 7%
from period to period primarily due to the success of certain promotional
activities in the second quarter of fiscal year 2020. Sales of maintenance
products in Canada also increased $0.6 million, or 25%, from period to period
primarily due to successful promotional programs during the three months ended
February 29, 2020 and the timing of customer orders from period to period. Also
contributing to the overall sales increase of the maintenance products in the
Americas segment from period to period were higher sales of the WD-40 Specialist
product line, which were up $0.6 million, or 15%, from period to period due to
successful promotional programs and expanded distribution in the online channel
from period to period.
Sales of homecare and cleaning products in the Americas decreased $0.3 million,
or 6%, for the three months ended February 29, 2020 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 15% and 20%, 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.
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For the Americas segment, 78% of sales came from the U.S., and 22% of sales came
from Canada and Latin America combined for both the three months ended February
29, 2020 and February 28, 2019.
EMEA
The following table summarizes net sales by product line for the EMEA segment
(in thousands, except percentages):
Three Months Ended February 29/28,
Change from
?Prior Year
2020 2019 Dollars Percent
Maintenance products $ 38,974 $ 38,457 $ 517 1%
Homecare and cleaning products 2,779 2,509 270 11%
Total (1) $ 41,753 $ 40,966 $ 787 2%
% of consolidated net sales 42% 41%
(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 $41.8 million, up $0.8 million, or 2%, for the three months
ended February 29, 2020 compared to the corresponding period of the prior fiscal
year. Changes in foreign currency exchange rates had a favorable impact on sales
for the EMEA segment from period to period. Sales for the three months ended
February 29, 2020 translated at the exchange rates in effect for the
corresponding period of the prior fiscal year would have been $41.3 million in
the EMEA segment. Thus, on a constant currency basis, sales would have increased
by $0.3 million, or 1%, 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). Sales in the direct markets increased $1.9
million, or 7% for the three months ended February 29, 2020 compared to the
corresponding period of the prior fiscal year, primarily due to a $1.5 million,
or 8%, increase in sales of the WD-40 Multi-Use Product throughout most markets.
This increase in sales was primarily due to a higher level of promotional
activities and the timing of customer orders from period to period. In addition,
sales of 1001 Carpet Fresh in the U.K. increased $0.3 million, or 10%, as a
result of the favorable impacts of digital marketing associated with this brand.
Sales from direct markets accounted for 71% of the EMEA segment's sales for the
three months ended February 29, 2020 compared to 68% for the corresponding
period of the prior fiscal year.
The regions in the EMEA segment where we sell through local distributors include
the Middle East, Africa, India, Eastern and Northern Europe. Sales in the
distributor markets decreased $1.1 million, or 8%, for the three months ended
February 29, 2020 compared to the corresponding period of the prior fiscal year,
primarily due to lower sales of the WD-40 Multi-Use Product in Eastern Europe
and India, which were down 13% and 38%, respectively. This decrease in sales
from period to period was primarily the result of shipments of product being
delayed to customers in these regions due to extraordinary weather conditions
near the end of the second quarter of fiscal year 2020. The distributor markets
accounted for 29% of the EMEA segment's total sales for the three months ended
February 29, 2020, compared to 32% 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 February 29/28,
Change from
?Prior Year
2020 2019 Dollars Percent
Maintenance products $ 9,751 $ 14,711 $ (4,960) (34)%
Homecare and cleaning products 1,703 1,761 (58) (3)%
Total $ 11,454 $ 16,472 $ (5,018) (30)%
% of consolidated net sales 11% 16%
Sales in the Asia-Pacific segment, which includes Australia, China and other
countries in the Asia region, decreased to $11.5 million, down $5.0 million, or
30%, for the three months ended February 29, 2020 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 February 29,
2020 compared to the corresponding period of the prior fiscal year.
Sales in Asia, which represented 67% of the total sales in the Asia-Pacific
segment, decreased $4.7 million, or 38%, for the three months ended February 29,
2020 compared to the corresponding period of the prior fiscal year. Sales in the
Asia distributor markets decreased $1.3 million, or 17%, primarily attributable
to the timing of customer orders from period to period, particularly in
Indonesia, South Korea and Thailand. Sales in China decreased $3.4 million, or
70%, for the three months ended February 29, 2020 compared to the corresponding
period of the prior fiscal year due to various disruptions in the market. These
disruptions include those related to supply chain, transportation and demand for
our product, as a result of the government's response to the public health
crisis caused by COVID-19 during the second quarter of fiscal year 2020. The
impact to sales due to these disruptions were material since China had a
significant number of orders that were expected to be shipped to customers after
the Chinese New Year's holiday in early February 2020 and those shipments could
not take place due to COVID-19. The ongoing financial and operational impact to
the Asia region from COVID-19 will depend on future developments, which are
highly uncertain and cannot be predicted, including new information which may
emerge concerning the severity of the outbreak of this virus and the actions
being taken to contain it.
Sales in Australia decreased $0.3 million, or 8%, for the three months ended
February 29, 2020 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 decreased by
$0.1 million, or 3%.
Gross Profit
Gross profit decreased to $53.6 million for the three months ended February 29,
2020 compared to $56.2 million for the corresponding period of the prior fiscal
year. As a percentage of net sales, gross profit decreased to 53.6% for the
three months ended February 29, 2020 compared to 55.4% for the corresponding
period of the prior fiscal year.
Gross margin was negatively impacted by 1.2 percentage points from period to
period due to the combined effects of unfavorable impacts of changes to the
sales mix and increases in other miscellaneous costs from period to period in
all three segments. The unfavorable impacts in the Americas and EMEA segments
were primarily due to unfavorable shifts in product and customer mix, as well as
higher miscellaneous costs from period to period. The unfavorable sales mix
impact in the Asia-Pacific segment was primarily attributable to market mix
changes resulting from lower sales in China from period to period due to various
disruptions in the market. These disruptions include those related to supply
chain, transportation and demand for our product, as a result of the
government's response to the public health crisis caused by COVID-19 during the
second quarter of fiscal year 2020. Gross margin was also negatively impacted by
1.1 percentage points from period to period due to higher warehousing and
in-bound freight costs, primarily in the EMEA segment. In addition, gross margin
was negatively impacted by 0.3 percentage points from period to period due to
unfavorable changes in the costs of aerosol cans in the Americas and EMEA
segments. Gross margin was also negatively impacted by 0.4 percentage points due
to changes in foreign currency exchange rates from period to period in the EMEA
segment.
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These unfavorable 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 0.7 percentage points from period to period. In addition,
decreases to advertising, promotional and other discounts that we give to our
customers from period to period in all three segments, positively impacted gross
margin by 0.3 percentage points. In general, the timing of advertising,
promotional and other discounts may cause fluctuations in gross margin from
period to period. The costs associated with certain promotional activities are
recorded as a reduction to sales while others are recorded as advertising and
sales promotion expenses. Advertising, promotional and other discounts that are
given to our customers are recorded as a reduction to sales, whereas advertising
and sales promotional costs associated with promotional activities that we pay
to third parties are recorded as advertising and sales promotion expenses. Gross
margin was also positively affected by 0.2 percentage points from period to
period due to favorable changes in the costs of petroleum-based specialty
chemicals, primarily in the Americas segment. Beginning in late February 2020,
the price of crude oil dropped significantly from recent levels. However, there
is often a delay of one quarter or more before changes in raw material costs
impact cost of products sold due to production and inventory life cycles.
Although we expect favorability in fiscal year 2020 as a result of this decline
in oil prices, the level to which gross margin will be impacted by such costs in
future periods is uncertain due to the volatility of the price of crude oil.
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 $3.1 million and $4.2 million for the three months
ended February 29, 2020 and February 28, 2019, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the three months ended
February 29, 2020 decreased $0.7 million to $29.9 million from $30.6 million for
the corresponding period of the prior fiscal year. As a percentage of net sales,
SG&A expenses decreased to 29.9% for the three months ended February 29, 2020
compared to 30.2% 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, decreased by $0.8
million. This decrease was primarily due to lower earned incentive
compensation from period to period, partially offset by increased headcount and
annual compensation increases. These decreases were slightly offset by increased
other miscellaneous expenses from period to period. Changes in foreign currency
exchange rates did not have a significant impact on SG&A expenses for the three
months ended February 29, 2020.
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 $1.5 million
for both the three months ended February 29, 2020 and February 28, 2019. 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 February 29,
2020 decreased $0.3 million, or 6%, to $4.9 million from $5.2 million for the
corresponding period of the prior fiscal year. As a percentage of net sales,
these expenses decreased to 4.9% for the three months ended February 29, 2020
from 5.1% for the corresponding period of the prior fiscal year. Changes in
foreign currency exchange rates did not have a significant impact on advertising
and sales promotion expenses for the three months ended February 29, 2020. The
decrease in advertising and sales promotion expenses was primarily due to a
lower level of promotional programs and marketing support in the Asia-Pacific
and Americas. At this time, the Company is not able to estimate its investment
in global advertising and sales promotion expense for the remainder of fiscal
year 2020 due to the uncertainty caused by COVID-19 and its impact on our
financial results and operations.
As a percentage of net sales, advertising and sales promotion expenses may
fluctuate period to period based upon the type of marketing activities we employ
and the period in which the costs are incurred. Total promotional costs recorded
as a reduction to sales for the three months ended February 29, 2020 were $4.5
million compared to $4.8 million for the corresponding
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period of the prior fiscal year. Therefore, our total investment in advertising
and sales promotion activities totaled $9.4 million and $10.0 million for the
three months ended February 29, 2020 and February 28, 2019, respectively.
Amortization of Definite-lived Intangible Assets Expense
Amortization of our definite-lived intangible assets remained constant at $0.7
million for both the three months ended February 29, 2020 and February 28, 2019.
Income from Operations by Segment
The following table summarizes income from operations by segment (in thousands,
except percentages):
Three Months Ended February 29/28,
Change from
?Prior Year
2020 2019 Dollars Percent
Americas $ 11,400 $ 9,992 $ 1,408 14%
EMEA 10,582 10,630 (48) -
Asia-Pacific 3,106 5,143 (2,037) (40)%
Unallocated corporate (1) (6,903) (6,050) (853) (14)%
Total $ 18,185 $ 19,715 $ (1,530) (8)%
(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 increased to $11.4 million, up $1.4
million, or 14%, for the three months ended February 29, 2020 compared to the
corresponding period of the prior fiscal year, primarily due to a $2.9 million
increase in sales and slightly lower operating expenses, which were partially
offset by a lower gross margin. As a percentage of net sales, gross profit for
the Americas segment decreased from 53.2% to 52.4% period over period primarily
due to unfavorable shifts in product and customer mix, as well as higher
miscellaneous costs and unfavorable changes in the costs of aerosol cans. These
unfavorable impacts were slightly offset by the decreased costs of
petroleum-based specialty chemicals and a lower level of discount that we gave
our customers from period to period. Operating income as a percentage of net
sales increased from 22.8% to 24.3% period over period.
EMEA
Income from operations for the EMEA segment remained relatively constant at
$10.6 million from period to period. Although sales increased $0.8 million and
operating expenses decreased from period to period, these favorable impacts were
offset by a lower gross margin. Operating expenses decreased $0.8 million period
over period, primarily due to lower accruals for earned incentive compensation.
As a percentage of net sales, gross profit for the EMEA segment decreased from
58.2% to 55.0% period over period primarily due to increased warehousing,
distribution and freight costs as well as unfavorable changes in sales mix and
higher miscellaneous costs. These unfavorable impacts were partially offset by
sales price increases, favorable changes in foreign currency exchange rates and
a lower level of discounts that we gave our customers from period to period.
Operating income as a percentage of net sales decreased from 25.9% to 25.3%
period over period.
Asia-Pacific
Income from operations for the Asia-Pacific segment decreased to $3.1 million,
down $2.0 million, or 40%, for the three months ended February 29, 2020 compared
to the corresponding period of the prior fiscal year, primarily due to a $5.0
million
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decrease in sales and a lower gross margin, which were partially offset by lower
operating expenses from period to period. As a percentage of net sales, gross
profit for the Asia-Pacific segment decreased from 54.5% to 53.1% period over
period primarily due to market mix changes resulting from lower sales in China
from period to period due to various disruptions in the market. These
disruptions include those related to supply chain, transportation and demand for
our product, as a result of the government's response to the public health
crisis caused by COVID-19 during the second quarter of fiscal year 2020. In
addition, gross margin was negatively impacted by increases in warehousing,
distribution and freight costs from period to period. These unfavorable impacts
were partially offset by the decreased costs of petroleum-based specialty
chemicals period to period. The lower sales were accompanied by a $0.9 million
decrease in total operating expenses period over period, primarily due to a
lower level of advertising and sales promotion expenses from period to period.
Operating income as a percentage of net sales decreased from 31.2% to 27.1%
period over period.
Non-Operating Items
The following table summarizes non-operating income and expenses for our
consolidated operations (in thousands):
Three Months Ended February 29/28,
2020 2019 Change
Interest income $ 28 $ 45 $ (17)
Interest expense $ 593 $ 685 $ (92)
Other (expense) income, net $ (229) $ 497 $ (726)
Provision for income taxes $ 3,064 $ 3,666 $ (602)
Interest Income
Interest income was insignificant for both the three months ended February 29,
2020 and February 28, 2019.
Interest Expense
Interest expense remained relatively constant for the three months ended
February 29, 2020 compared to the corresponding period of the prior fiscal year.
Other (Expense) Income, Net
Other (expense) income, net changed by $0.7 million for the three months ended
February 29, 2020 compared to the corresponding period of the prior fiscal year
primarily due to foreign currency exchange losses of $0.2 million for the three
months ended February 29, 2020 compared to foreign currency exchange gains of
$0.5 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 17.6% and 18.7% of income before income taxes
for the three months ended February 29, 2020 and February 28, 2019,
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 during the quarter that are recognized in the
provision for income tax, as well as an increase of taxable earnings from
foreign operations which are taxed at lower tax rates.
Net Income
Net income was $14.3 million, or $1.04 per common share on a fully diluted
basis, for the three months ended February 29, 2020 compared to $15.9 million,
or $1.14 per common share on a fully diluted basis, for the corresponding period
of the prior fiscal year. Changes in foreign currency exchange rates did not
have a significant impact on net income for the three months ended February 29,
2020 compared to the corresponding period of the prior fiscal year.
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Six Months Ended February 29, 2020 Compared to Six Months Ended February 28,
2019
Operating Items
The following table summarizes operating data for our consolidated operations
(in thousands, except percentages and per share amounts):
Six Months Ended February 29/28,
Change from
?Prior Year
2020 2019 Dollars Percent
Net sales:
Maintenance products $ 180,817 $ 184,838 $ (4,021) (2)%
Homecare and cleaning products 17,788 17,779 9 -
Total net sales 198,605 202,617 (4,012) (2)%
Cost of products sold 91,460 90,628 832 1%
Gross profit 107,145 111,989 (4,844) (4)%
Operating expenses 74,256 75,873 (1,617) (2)%
Income from operations $ 32,889 $ 36,116 $ (3,227) (9)%
Net income $ 26,521 $ 29,185 $ (2,664) (9)%
Earnings per common share - $ $ $
diluted 1.92 2.09 (0.17) (8)%
Shares used in per share
calculations - diluted 13,741 13,869 (128) (1)%
Net Sales by Segment
The following table summarizes net sales by segment (in thousands, except
percentages):
Six Months Ended February 29/28,
Change from
?Prior Year
2020 2019 Dollars Percent
Americas $ 93,578 $ 91,688 $ 1,890 2%
EMEA 80,998 79,711 1,287 2%
Asia-Pacific 24,029 31,218 (7,189) (23)%
Total $ 198,605 $ 202,617 $ (4,012) (2)%
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Americas
The following table summarizes net sales by product line for the Americas
segment (in thousands, except percentages):
Six Months Ended February 29/28,
Change from
?Prior Year
2020 2019 Dollars Percent
Maintenance products $ 84,111 $ 81,620 $ 2,491 3%
Homecare and cleaning products 9,467 10,068 (601) (6)%
Total $ 93,578 $ 91,688 $ 1,890 2%
% of consolidated net sales 47% 45%
Sales in the Americas segment, which includes the U.S., Canada and Latin
America, increased to $93.6 million, up $1.9 million, or 2%, for the six months
ended February 29, 2020 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 six months ended February 29, 2020 compared to the
corresponding period of the prior fiscal year.
Sales of maintenance products in the Americas segment increased $2.5 million, or
3%, for the six months ended February 29, 2020 compared to the corresponding
period of the prior fiscal year. This sales increase was mainly driven by higher
sales of WD-40 Multi Use Product in the U.S., which were up $1.8 million, or 4%
from period to period primarily due to the success of certain promotional
activities in the second quarter of fiscal year 2020. Sales of maintenance
products in Canada also increased $0.6 million, or 11%, from period to period
primarily due to successful promotional programs during the three months ended
February 29, 2020.
Sales of homecare and cleaning products in the Americas decreased $0.6 million,
or 6%, for the six months ended February 29, 2020 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 16% and 14%, 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, 79% of sales came from the U.S., and 21% of sales came
from Canada and Latin America combined for the six months ended February 29,
2020 compared to the distribution for the six months ended February 28, 2019
when 80% of sales came from the U.S., and 20% 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):
Six Months Ended February 29/28,
Change from
?Prior Year
2020 2019 Dollars Percent
Maintenance products $ 75,874 $ 75,402 $ 472 1%
Homecare and cleaning products 5,124 4,309 815 19%
Total $ 80,998 $ 79,711 $ 1,287 2%
% of consolidated net sales 41% 39%
Sales in the EMEA segment, which includes Europe, the Middle East, Africa and
India, increased to $81.0 million, up $1.3 million, or 2%, for the six months
ended February 29, 2020 compared to the corresponding period of the prior fiscal
year. Changes in foreign currency exchange rates had an unfavorable impact on
sales for the EMEA segment from period to period. Sales for the six months ended
February 29, 2020 translated at the exchange rates in effect for the
corresponding period of the prior fiscal year would have been $82.4 million in
the EMEA segment. Thus, on a constant currency basis, sales would have increased
by $2.7 million, or 3%, 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). Sales in the direct markets increased to $54.4
million, up $2.0 million, or 4%, for the six months ended February 29, 2020,
compared to the corresponding period of the prior fiscal year primarily due to a
$1.1 million, or 3%, increase in sales of the WD-40 Multi-Use Product throughout
most markets. This increase in sales was primarily due to a higher level of
promotional activities and the timing of customer orders from period to period.
In addition, sales of 1001 Carpet Fresh in the U.K. increased $0.8 million, or
19%, as a result of the favorable impacts of digital marketing associated with
this brand. Sales from direct markets accounted for 67% of the EMEA segment's
sales for the six months ended February 29, 2020 compared to 66% for the
corresponding period of the prior fiscal year.
The regions in the EMEA segment where we sell through local distributors include
the Middle East, Africa, India, Eastern and Northern Europe. Sales in the
distributor markets decreased $0.7 million, or 2%, for the six months ended
February 29, 2020 compared to the corresponding period of the prior fiscal year,
primarily due to lower sales of the WD-40 Multi-Use Product in the Eastern
Europe and India, which were down 6% and 27%, respectively. This decrease in
sales from period to period was primarily the result of shipments of product
being delayed to customers in these regions due to extraordinary weather
conditions near the end of the second quarter of fiscal year 2020. The
distributor markets accounted for 33% of the EMEA segment's total sales for the
six months ended February 29, 2020, compared to 34% 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):
Six Months Ended February 29/28,
Change from
?Prior Year
2020 2019 Dollars Percent
Maintenance products $ 20,832 $ 27,816 $ (6,984) (25)%
Homecare and cleaning products 3,197 3,402 (205) (6)%
Total
$ 24,029 $ 31,218 $ (7,189) (23)%
% of consolidated net sales 12% 16%
Sales in the Asia-Pacific segment, which includes Australia, China and other
countries in the Asia region, decreased to $24.0 million, down $7.2 million, or
23%, for the six months ended February 29, 2020 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 six months ended February 29, 2020 translated at the
exchange rates in effect for the corresponding period of the prior fiscal year
would have been $24.5 million in the Asia-Pacific segment. Thus, on a constant
currency basis, sales would have decreased by $6.7 million, or 21%, from period
to period.
Sales in Asia, which represented 67% of the total sales in the Asia-Pacific
segment, decreased $7.0 million, or 30%, for the six months ended February 29,
2020 compared to the corresponding period of the prior fiscal year. Sales in the
Asia distributor markets decreased $3.0 million, or 19%, primarily attributable
to the timing of customer orders from period to period, particularly in
Indonesia, South Korea, Malaysia and Thailand. Sales in China decreased $4.1
million, or 52%, for the six months ended February 29, 2020 compared to the
corresponding period of the prior fiscal year primarily due to various
disruptions in the market. These disruptions include those related to supply
chain, transportation and demand for our product, as a result of the
government's response to the public health crisis caused by COVID-19 during the
second quarter of fiscal year 2020. The impact to sales due to these disruptions
were material since China had a significant number of orders that were expected
to be shipped to customers after the Chinese New Year's holiday in early
February 2020 and those shipments could not take place due to COVID-19. The
ongoing financial and operational impact to the Asia region from COVID-19 will
depend on future developments, which are highly uncertain and cannot be
predicted, including new information which may emerge concerning the severity of
the outbreak of the virus and the actions being taken to contain it.
Sales in Australia decreased $0.2 million, or 2%, for the six months ended
February 29, 2020 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
$0.3 million, or 3%, 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 $107.1 million for the six months ended February 29,
2020 compared to $112.0 million for the corresponding period of the prior fiscal
year. As a percentage of net sales, gross profit decreased to 53.9% for the six
months ended February 29, 2020 compared to 55.3% for the corresponding period of
the prior fiscal year.
Gross margin was negatively impacted by 1.2 percentage points from period to
period due to the combined effects of unfavorable impacts of changes to the
sales mix and increases in other miscellaneous costs from period to period in
all three segments. The unfavorable impacts in the Americas and EMEA segments
were primarily due to unfavorable shifts in product and customer mix, as well as
higher miscellaneous costs from period to period. The unfavorable sales mix
impact in the Asia-Pacific segment was primarily due to market mix changes
resulting from lower sales in China from period to period due to various
disruptions in the market. These disruptions include those related to supply
chain, transportation and demand for our product, as a result of the
government's response to the public health crisis caused by COVID-19 during the
second quarter of fiscal year 2020. Gross margin was also negatively impacted by
1.0 percentage points from period to period due to higher warehousing and
in-bound freight costs, primarily in the EMEA segment. In addition, gross margin
was negatively impacted
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by 0.2 percentage points from period to period due to unfavorable changes in the
costs of aerosol cans in all three segments. Gross margin was also negatively
impacted by 0.1 percentage points due to changes in foreign currency exchange
rates from period to period in the EMEA segment.
These unfavorable 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. Gross margin was
also positively affected by 0.3 percentage points from period to period due
to favorable changes in the costs of petroleum-based specialty chemicals in all
three segments.
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 $6.1 million and $8.3 million for the six months
ended February 29, 2020 and February 28, 2019, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the six months ended
February 29, 2020 decreased $0.8 million to $62.5 million from $63.3 million for
the corresponding period of the prior fiscal year. As a percentage of net sales,
SG&A expenses increased to 31.5% for the six months ended February 29, 2020
compared to 31.3% for the corresponding period of the prior fiscal year. This
decrease was primarily due to lower earned incentive compensation of $1.6
million and a favorable impact of $0.4 million due to changes in foreign
currency exchange rates from period to period. This decrease was partially
offset by increased headcount and annual compensation increases from period to
period, as well as higher stock-based compensation expense and increases 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 $3.2 million
and $3.3 million for the six months ended February 29, 2020 and February 29,
2019, respectively.
Advertising and Sales Promotion Expenses
Advertising and sales promotion expenses for the six months ended February 29,
2020 decreased $0.7 million, or 6%, to $10.4 million from $11.1 million for the
corresponding period of the prior fiscal year. As a percentage of net sales,
these expenses increased to 5.3% for the six months ended February 29, 2020 from
5.5% for the corresponding period of the prior fiscal year. Changes in foreign
currency exchange rates did not have a significant impact on advertising and
sales promotion expenses for the six months ended February 29, 2020. The
decrease in advertising and sales promotion expenses was primarily due to a
lower level of promotional programs and marketing support in the Americas and
Asia-Pacific segment.
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 six months ended February 29, 2020 were $9.5
million compared to $9.1 million for the corresponding period of the prior
fiscal year. Therefore, our total investment in advertising and sales promotion
activities totaled $19.9 million and $20.2 million for the six months ended
February 29, 2020 and February 28, 2019, respectively.
Amortization of Definite-lived Intangible Assets Expense
Amortization of our definite-lived intangible assets decreased to $1.3 million
for the six months ended February 29, 2020 compared to $1.4 million for the six
months ended February 28, 2019.
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Income from Operations by Segment
The following table summarizes income from operations by segment (in thousands,
except percentages):
Six Months Ended February 29/28,
Change from
?Prior Year
2020 2019 Dollars Percent
Americas $ 21,980 $ 21,294 $ 686 3%
EMEA 19,174 19,005 169 1%
Asia-Pacific 6,308 8,884 (2,576) (29)%
Unallocated corporate (14,573) (13,067) (1,506) (12)%
Total $ 32,889 $ 36,116 $ (3,227) (9)%
Americas
Income from operations for the Americas increased to $22.0 million, up $0.7
million, or 3%, for the six months ended February 29, 2020 compared to the
corresponding period of the prior fiscal year, primarily due to a $1.9 million
increase in sales and lower operating expenses, partially offset by a lower
gross margin. As a percentage of net sales, gross profit for the Americas
segment decreased from 53.7% to 52.8% period over period primarily due to
unfavorable shifts in product and customer mix, as well as higher miscellaneous
costs and unfavorable changes in the costs of aerosol cans. These unfavorable
impacts were slightly offset by the decreased costs of petroleum-based specialty
chemicals from period to period. Operating expenses decreased $0.5 million
period over period, primarily due to 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 increased from 23.2% to 23.5% period over period.
EMEA
Income from operations for the EMEA segment increased to $19.2 million, up $0.2
million, or 1%, for the six months ended February 29, 2020 compared to the
corresponding period of the prior fiscal year, primarily due to a $1.3 million
increase in sales and lower operating expenses, which were significantly offset
by a lower gross margin. Operating expenses decreased $1.1 million period over
period, primarily due to lower accruals for earned incentive compensation. As a
percentage of net sales, gross profit for the EMEA segment decreased from 57.5%
to 55.4% period over period primarily due to increased warehousing, distribution
and freight costs as well as unfavorable changes in sales mix and higher
miscellaneous costs. These unfavorable impacts were partially offset by sales
price increases from period to period. Operating income as a percentage of net
sales decreased from 23.8% to 23.7% period over period.
Asia-Pacific
Income from operations for the Asia-Pacific segment decreased to $6.3 million,
down $2.6 million, or 29%, for the six months ended February 29, 2020 compared
to the corresponding period of the prior fiscal year, primarily due to a $7.2
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 54.4% to 53.6% period
over period primarily due to market mix changes resulting from lower sales in
China from period to period due to the various disruptions in the market. These
disruptions include those related to supply chain, transportation and demand for
our product, as a result of the government's response to the public health
crisis caused by COVID-19 during the second quarter of fiscal year 2020. In
addition, gross margin was negatively impacted by increases in warehousing,
distribution and freight costs from period to period. These unfavorable impacts
were partially offset by the decreased costs of petroleum-based specialty
chemicals from period to period. The lower sales were accompanied by a $1.5
million decrease in total operating expenses period over period, primarily due
to a lower level of advertising and sales promotion expense, as well as
decreased outbound freight costs and miscellaneous expenses during the period.
Operating income as a percentage of net sales decreased from 28.5% to 26.2%
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):
Six Months Ended February 29/28,
2020 2019 Change
Interest income $ 53 $ 96 $ (43)
Interest expense $ 1,035 $ 1,395 $ (360)
Other (expense) income, net $ (224) $ 873 $ (1,097)
Provision for income taxes $ 5,162 $ 6,505 $ (1,343)
Interest Income
Interest income was insignificant for both the six months ended February 29,
2020 and February 28, 2019.
Interest Expense
Interest expense decreased $0.4 million for the six months ended February 29,
2020 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 Pound Sterling at our U.K. subsidiary.
Other (Expense) Income, Net
Other (expense) income, net changed by $1.1 million for the six months ended
February 29, 2020 compared to the corresponding period of the prior fiscal year
primarily due to foreign currency exchange losses of $0.4 million in the current
year compared to $0.9 million of foreign currency gains during 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 16.3% and 18.2% of income before income taxes
for the six months ended February 29, 2020 and February 28, 2019, 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 during the second quarter that are recognized in the
provision for income tax, an increase of taxable earnings from foreign
operations which are taxed at lower tax rates, and a benefit from the release of
liabilities associated with unrecognized tax benefits that resulted from the
expiration of statutes.
Net Income
Net income was $26.5 million, or $1.92 per common share on a fully diluted
basis, for the six months ended February 29, 2020 compared to $29.2 million, or
$2.09 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 $0.4 million on net income for the six months ended
February 29, 2020 compared to the corresponding period of the prior fiscal year.
On a constant currency basis, net income would have decreased by $2.3 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 Six Months Ended
February 29/28, February 29/28,
2020 2019 2020 2019
Gross margin - GAAP 54% 55% 54% 55%
Cost of doing business as a
percentage
of net sales - non-GAAP 34% 34% 36% 36%
EBITDA as a percentage of net
sales - non-GAAP (1) 20% 22% 18% 20%
(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 Six Months Ended
February 29/28, February 29/28,
2020 2019 2020 2019
Total operating expenses - GAAP $ 35,417 $ 36,443 $ 74,256 $ 75,873
Amortization of definite-lived
intangible assets (654) (668) (1,304) (1,401)
Depreciation (in operating
departments) (1,049) (962) (1,996) (1,898)
Cost of doing business $ 33,714 $ 34,813 $ 70,956 $ 72,574
Net sales $ 100,049 $ 101,335 $ 198,605 $ 202,617
Cost of doing business as a
percentage
of net sales - non-GAAP 34% 34% 36% 36%
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EBITDA (in thousands, except percentages)
Three Months Ended Six Months Ended
February 29/28, February 29/28,
2020 2019 2020 2019
Net income - GAAP $ 14,327 $ 15,906 $ 26,521 $ 29,185
Provision for income taxes 3,064 3,666 5,162 6,505
Interest income (28) (45) (53) (96)
Interest expense 593 685 1,035 1,395
Amortization of definite-lived
intangible assets 654 668 1,304 1,401
Depreciation 1,432 1,232 2,739 2,424
EBITDA $ 20,042 $ 22,112 $ 36,708 $ 40,814
Net sales $ 100,049 $ 101,335 $ 198,605 $ 202,617
EBITDA as a percentage of net
sales - non-GAAP 20% 22% 18% 20%
Liquidity and Capital Resources
Overview
The Company's financial condition and liquidity remain strong. Net cash provided
by operations was $23.4 million for the six months ended February 29, 2020
compared to $17.2 million for the corresponding period of the prior fiscal year.
Although there is uncertainty related to the anticipated impact of the recent
COVID-19 outbreak on the Company's future results, we believe our efficient
business model and the recent steps we have taken to strengthen our balance
sheet leave us positioned to manage our business through this crisis as it
continues to unfold. 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 unsecured Credit Agreement with Bank of America. 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 and Note 16 - Subsequent Events for additional information on
these agreements. Included in Note 16 - Subsequent Events is information on an
Amended and Restated Credit Agreement that we executed with Bank of America on
March 13, 2020 which includes, among other amended provisions, an increase in
the revolving commitment from $100.0 million to $150.0 million. During the week
of March 23, 2020, we drew an additional $80.0 million in U.S. Dollars under
this line of credit with Bank of America, bringing the balance on the line of
credit to approximately $149.0 million. As a result of this additional
borrowing, we have now drawn almost the entirety of the $150.0 million available
under the Credit Agreement. Although we do not have any presently anticipated
need for this additional liquidity, we decided to draw this additional amount to
ensure for future liquidity given the recent significant impact on global
financial markets and the economy as a result of the COVID-19 outbreak.
The Company maintains a balance of outstanding draws in U.S. Dollars in the
Americas segment, as well as in Euros and Pound 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
six months ended February 29, 2020, the Company repaid $5.0 million in
short-term borrowings outstanding under the line of credit and drew an
additional $10.0 million in short-term borrowings in U.S. Dollars. We regularly
convert many of our draws on our line of credit to new draws with new maturity
dates and interest rates. As of February 29, 2020, we had a $68.5 million
balance of outstanding draws on the revolving credit facility, of which $43.5
was classified as long-term and the remaining $25.0 was classified as
short-term. In addition, net borrowings under the auto-borrow agreement in the
United States were $15.5 million and we paid $0.4 million in principal payments
on our Series A Notes during the first six months 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 February 29, 2020, we were in compliance with
all debt covenants. We continue to monitor our compliance with all debt
covenants. Our consolidated leverage ratio and consolidated interest coverage
ratio covenants, as
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well as the restricted payment covenant pertaining to the payment of dividends,
are dependent upon our ability to maintain certain levels of EBITDA and net
income, respectively, for our most recently completed four fiscal quarters. At
the present time, we have no reason to believe that we will be unable to satisfy
these covenants, but the COVID-19 outbreak has limited our ability to forecast
EBITDA and net income for the remainder of the year.
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. At February 29,
2020, we had a total of $30.5 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.
Cash Flows
The following table summarizes our cash flows by category for the periods
presented (in thousands):
Six Months Ended February 29/28,
2020 2019 Change
Net cash provided by operating activities $ 23,382 $ 17,226 $ 6,156
Net cash used in investing activities
(10,483) (4,882) (5,601)
Net cash used in financing activities (9,816) (28,498) 18,682
Effect of exchange rate changes on cash and
cash equivalents 187 (1,116) 1,303
Net increase (decrease) in cash and cash $ $ $
equivalents 3,270 (17,270) 20,540
Operating Activities
Net cash provided by operating activities increased $6.2 million to $23.4
million for the six months ended February 29, 2020 from $17.2 million for the
corresponding period of the prior fiscal year. Cash flows from operating
activities depend heavily on operating performance and changes in working
capital. Our primary source of operating cash flows for the six months ended
February 29, 2020 was net income of $26.5 million, which decreased $2.7 million
from period to period. The changes in our working capital from period to period
were primarily attributable to a lower level of increases in trade accounts
receivable and inventory balances during the six months ended February 29, 2020
compared to the corresponding period of the prior fiscal year.
Investing Activities
Net cash used in investing activities increased $5.6 million to $10.5 million
for the six months ended February 29, 2020 from $4.9 million for the
corresponding period of the prior fiscal year, primarily due to increased
capital expenditures. Capital expenditures increased by $5.7 million primarily
due to the renovations and equipping of the Company's new office building in
Milton Keynes, England, as well as increased manufacturing-related capital
expenditures within the U.K. and the United States. The renovations to the new
U.K. 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 $18.7 million to $9.8 million
for the six months ended February 29, 2020 from $28.5 million for the
corresponding period of the prior fiscal year primarily due to higher proceeds
provided by the Company's revolving credit facility, which increased $18.1
million during the six months ended February 29, 2020 compared to the
corresponding period of the prior fiscal year. Also contributing to cash inflows
was a reduction in treasury stock purchases of $2.4 million from period to
period. Offsetting these increases in cash inflows was an increase in dividends
paid of $1.6 million from period to period.
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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 $0.2 million for
the six months ended February 29, 2020 as compared to a decrease in cash of $1.1
million for six months ended February 28, 2019. 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.
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 months to five months. We are committed
to purchase the products produced by the contract manufacturers based on the
projections provided.
Upon the termination of contracts with contract manufacturers, we obtain certain
inventory control rights and are obligated to work with the contract
manufacturer to sell through all product held by or manufactured by the contract
manufacturer on our behalf during the termination notification period. If any
inventory remains at the contract manufacturer at the termination date, we are
obligated to purchase such inventory which may include raw materials, components
and finished goods. The amounts for inventory purchased under termination
commitments have been immaterial.
In addition to the commitments to purchase products from contract manufacturers
described above, we may also enter into commitments with other manufacturers to
purchase finished goods and components to support innovation initiatives and/or
supply chain initiatives. As of February 29, 2020, 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 March 17, 2020, the Company's Board of declared a cash dividend of $0.67 per
share payable on April 30, 2020 to shareholders of record on April 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
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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.
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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