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 current
COVID-19 pandemic 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.
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
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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 nine months ended May 31, 2020:
?Consolidated net sales decreased $19.7 million for the nine months ended May
31, 2020 compared to the corresponding period of the prior fiscal year. Changes
in foreign currency exchange rates had an unfavorable impact of $4.2 million on
consolidated net sales for the nine months ended May 31, 2020 compared to the
corresponding period of the prior fiscal year. Thus, on a constant currency
basis, net sales would have decreased by $15.5 million from period to period.
This unfavorable impact from changes in foreign currency exchange rates mainly
came from our EMEA segment, which accounted for 38% of our consolidated sales
for the nine months ended May 31, 2020.
?Gross profit as a percentage of net sales decreased to 54.0% for the nine
months ended May 31, 2020 compared to 55.0% for the corresponding period of the
prior fiscal year.
?Consolidated net income decreased $6.3 million, or 13%, for the nine months
ended May 31, 2020 compared to the corresponding period of the prior fiscal
year. Changes in foreign currency exchange rates had an unfavorable impact of
$0.8 million on consolidated net income for the nine months ended May 31, 2020
compared to the corresponding period of the prior fiscal year. Thus, on a
constant currency basis, net income would have decreased $5.5 million.
?Consolidated results for the nine months ended May 31, 2020 were negatively
impacted by the COVID-19 pandemic. See Significant Developments section which
follows for details.
?Diluted earnings per common share for the nine months ended May 31, 2020 were
$2.98 versus $3.39 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 May 31, 2020, the Company repurchased 92,583 shares at an average price
of $181.71 per share, for a total cost of $16.8 million. On April 8, 2020, the
Company elected to temporarily suspend repurchases under its current share
buy-back plan. The Company has elected this suspension in order to preserve cash
while it monitors the impact of the COVID-19 pandemic as it continues to unfold.
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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Significant Developments
During the nine months ended May 31, 2020, our financial results and operations
were significantly impacted by the COVID-19 pandemic that began in early
calendar year 2020. The significance of the impacts to our financial results and
operations were material and are discussed herein at the business segment level.
See Part II-Item 1A, "Risk Factors," included herein for an update that we made
to our existing risk factors to include information on risks associated with
pandemics in general and COVID-19 specifically. The extent to which the COVID-19
pandemic impacts our financial results and operations for the remainder of
fiscal year 2020 and going forward, for all three of our business segments, will
depend on future developments which remain highly uncertain and cannot be
predicted, including new information which may emerge concerning the ongoing
severity of the COVID-19 pandemic and the international actions being taken to
contain and treat it.
We have taken 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.
These policies and initiatives will continue to impact how we operate for as
long as they are in effect. We are in the process of determining and
implementing safe and effective phased office reentry plans for employees at all
of our office locations globally. However, the timing and nature of these
reentry plans, some of which have already been launched, will vary by location
and some of the specifics related to many of these plans are still uncertain at
this time. The safety of our employees and adherence to public and private
sector policies related to COVID-19 will remain our top priorities as we have
our employees return to working at our global office locations.
During our fiscal year 2020, temporary closures, lockdowns and restrictions
mandated by various governmental authorities intended to combat the COVID-19
pandemic at physical store retailers have negatively impacted sales at varying
levels and at different times within each of the countries in which we conduct
business. The related impacts on our financial results and operations through
May 31, 2020 are discussed within Management's Discussion and Analysis of
Financial Condition and Results of Operations. Due to the speed and fluidity
with which the situation continues to develop and the uncertainty on whether a
second wave of the COVID-19 pandemic will occur later in calendar year 2020, we
are not able at this time to estimate the extent of the impact of the COVID-19
pandemic on our financial results and operations in future periods. We also
cannot predict when certain restrictions that are in place to protect our
customers, retailers and our employees will be safely reduced or will no longer
be needed. These impacts could be material for the remainder of our fiscal year
2020 in all business segments and could be material during any future period
affected either directly or indirectly by this pandemic. We are actively
managing and monitoring supply chain and transportation disruptions that have
arisen at our suppliers and other third-party distribution centers and
manufacturers as a result of the COVID-19 pandemic. While we have been
successful to date in managing such disruptions in our supply chain and we
believe that we are well-positioned to continue managing any disruptions that
may occur in future periods in order to meet customer and end-user demand, we
are not able at this time to estimate the impact of future disruptions within
our supply chain and are continually monitoring this situation.
On March 27, 2020, the U.S. Coronavirus Aid, Relief, and Economic Security Act
(the "CARES Act") was enacted in response to the COVID-19 pandemic and the
negative impacts that it is having on the global economy and U.S. companies. The
CARES Act includes various financial measures to assist companies, including
temporary changes to income and non-income-based tax laws. Although we are
currently evaluating the impact of the CARES Act, such as the ability to defer
the payment for the employer portion of social security taxes, we do not believe
assistance provided under the CARES Act will have a material impact on our
consolidated financial statements and related disclosures.
?
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Results of Operations
Three Months Ended May 31, 2020 Compared to Three Months Ended May 31, 2019
Operating Items
The following table summarizes operating data for our consolidated operations
(in thousands, except percentages and per share amounts):
Three Months Ended May 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Net sales:
Maintenance products $ 87,859 $ 104,533 $ (16,674) (16)%
Homecare and cleaning products 10,388 9,456 932 10%
Total net sales 98,247 113,989 (15,742) (14)%
Cost of products sold 45,197 51,906 (6,709) (13)%
Gross profit 53,050 62,083 (9,033) (15)%
Operating expenses 33,238 38,881 (5,643) (15)%
Income from operations $ 19,812 $ 23,202 $ (3,390) (15)%
Net income $ 14,524 $ 18,139 $ (3,615) (20)%
Earnings per common share - diluted $ 1.06 $ 1.30 $ (0.24) (18)%
Shares used in per share calculations - diluted 13,700 13,820 (120) (1)%
Net Sales by Segment
The following table summarizes net sales by segment (in thousands, except
percentages):
Three Months Ended May 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Americas $ 50,094 $ 52,966 $ (2,872) (5)%
EMEA 32,521 44,548 (12,027) (27)%
Asia-Pacific 15,632 16,475 (843) (5)%
Total $ 98,247 $ 113,989 $ (15,742) (14)%
?
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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 May 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Maintenance products $ 43,551 $ 48,284 $ (4,733) (10)%
Homecare and cleaning products 6,543 4,682 1,861 40%
Total
$ 50,094 $ 52,966 $ (2,872) (5)%
% of consolidated net sales 51% 47%
Sales in the Americas segment, which includes the U.S., Canada and Latin
America, decreased to $50.1 million, down $2.9 million, or 5%, for the three
months ended May 31, 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 May 31, 2020 compared to
the corresponding period of the prior fiscal year.
Sales of maintenance products in the Americas segment decreased $4.7 million, or
10%, for the three months ended May 31, 2020 compared to the corresponding
period of the prior fiscal year. This sales decrease was mainly driven by lower
sales of WD-40 Multi Use Product in Latin America, which were down $2.8 million,
or 46% from period to period primarily due to various disruptions in the market
related to the COVID-19 pandemic. These disruptions primarily included decreased
availability of our product due to constraints on the distribution and sale of
our products as a result of the complete lockdown of many markets within the
region, which started early in March 2020 and continued throughout the third
quarter. In addition, sales in Latin America were negatively impacted due to
decreased sales in Mexico from period to period as a result of a change we made
in the distribution model for this region. In the third quarter of fiscal year
2020, we shifted away from a distribution model for this country where we sell
product through a large wholesale customer who then supplies various retail
customers, to one where we sell direct to these retail customers. While we
anticipate a successful build of our direct customer base in Mexico in future
periods under this new direct model, sales in this region were unfavorably
impacted from period to period as a result of us starting this transition. Sales
of maintenance products in the U.S. and Canada also decreased by $1.2 million
and $0.4 million, or 3% and 16%, respectively, from period to period, primarily
due to the negative impacts of the COVID-19 pandemic during the three months
ended May 31, 2020 and the timing of customer orders from period to period.
Although sales of maintenance products in the U.S. decreased from period to
period, sales in the online retail channel increased as the Company continued to
focus its efforts on this channel, particularly as consumers have turned more to
online purchases during the COVID-19 pandemic.
Sales of homecare and cleaning products in the Americas increased $1.9 million,
or 40%, for the three months ended May 31, 2020 compared to the corresponding
period of the prior fiscal year. This sales increase was driven primarily by an
increase in sales of the 2000 Flushes, Spot Shot and Lava brand products, which
were up 64%, 23% and 50%, respectively, from period to period. We experienced a
significant increase in sales of most of our home care and cleaning products in
the Americas in the third quarter of fiscal year 2020 due to an increased demand
for such products as a result of the COVID-19 pandemic. We are not able at this
time to estimate the duration of this unexpected increase in the demand for
these products and its impact on our financial results and operations in future
periods. While each of our homecare and cleaning products have continued to
generate positive cash flows, we had experienced decreased or flat sales for
many of these products in recent years prior to the COVID-19 pandemic.
For the Americas segment, 87% of sales came from the U.S., and 13% of sales came
from Canada and Latin America combined for the three months ended May 31, 2020
compared to the distribution for the three months ended May 31, 2019 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 May 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Maintenance products $ 30,846 $ 41,495 $ (10,649) (26)%
Homecare and cleaning products 1,675 3,053 (1,378) (45)%
Total (1)
$ 32,521 $ 44,548 $ (12,027) (27)%
% of consolidated net sales 33% 39%
(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, decreased to $32.5 million, down $12.0 million, or 27%, for the three
months ended May 31, 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 three
months ended May 31, 2020 translated at the exchange rates in effect for the
corresponding period of the prior fiscal year would have been $33.8 million in
the EMEA segment. Thus, on a constant currency basis, sales would have decreased
by $10.7 million, or 24%, 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 decreased $8.4
million, or 28% for the three months ended May 31, 2020 compared to the
corresponding period of the prior fiscal year, primarily due to a $7.0 million,
or 33%, decrease in sales of the WD-40 Multi-Use Product throughout direct
markets as a result of various disruptions in the market related to the COVID-19
pandemic. These disruptions primarily include decreased availability of our
product, as well as disruptions related to supply chain and transportation as a
result of the responses from third-party businesses and governmental authorities
to the public health crisis caused by COVID-19 during the third quarter of
fiscal year 2020. Although higher sales in the online retail channel slightly
offset these impacts, WD-40 Multi-Use Product sales decreased overall primarily
due to the comprehensive lockdown measures adopted by many European countries at
physical store retailers to combat the COVID-19 pandemic during the third
quarter of fiscal year 2020. These lockdowns limited many retailers' ability to
participate in promotional activities and sell high volumes of certain products,
such as our WD-40 Multi-Use Product. In addition, sales of 1001 Carpet Fresh in
the U.K. also decreased $1.4 million, or 45%, during the third quarter of fiscal
year 2020 as a result of a significantly higher level of sales in the
corresponding period of the prior fiscal year due to favorable impacts of
digital marketing associated with this brand. Sales from direct markets
accounted for 67% of the EMEA segment's sales for the three months ended May 31,
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 $3.6 million, or 25%, for the three months ended
May 31, 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 52% and 74%, respectively. This decrease in sales
from period to period was primarily due to the lockdowns that occurred in many
of the distributor market countries in the third quarter of fiscal year 2020 due
to the COVID-19 pandemic. The distributor markets accounted for 33% of the EMEA
segment's total sales for the three months ended May 31, 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 May 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Maintenance products $ 13,462 $ 14,753 $ (1,291) (9)%
Homecare and cleaning products 2,170 1,722 448 26%
Total
$ 15,632 $ 16,475 $ (843) (5)%
% of consolidated net sales 16% 14%
Sales in the Asia-Pacific segment, which includes Australia, China and other
countries in the Asia region, decreased to $15.6 million, down $0.8 million, or
5%, for the three months ended May 31, 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 three months ended May 31, 2020 translated at the exchange rates
in effect for the corresponding period of the prior fiscal year would have been
$16.4 million in the Asia-Pacific segment. Thus, on a constant currency basis,
sales would have decreased by $0.1 million, or 1%, from period to period.
Sales in Asia, which represented 69% of the total sales in the Asia-Pacific
segment, decreased $1.5 million, or 12%, for the three months ended May 31, 2020
compared to the corresponding period of the prior fiscal year. Sales in the Asia
distributor markets decreased $2.5 million, or 30%. This decrease in sales was
primarily due to various disruptions in the market related to the COVID-19
pandemic. Temporary closures, complete lockdowns and restrictions required by
local governmental authorities to combat the COVID-19 pandemic in many of our
Asia distributor markets during the third quarter of fiscal year 2020 limited
many physical store retailers' ability to sell our products. Sales in China
increased $1.0 million, or 26%, for the three months ended May 31, 2020 compared
to the corresponding period of the prior fiscal year primarily due to the
reduction of certain restrictions required by local governmental authorities
during the third quarter of fiscal year 2020 in relation to the COVID-19
pandemic, as well as higher sales in the online retail channel. Disruptions in
China related to the COVID-19 pandemic were experienced more heavily in the
second quarter of fiscal year 2020. 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 the COVID-19 pandemic. Many of these shipments
subsequently took place in the third quarter of fiscal year 2020, resulting in
increased sales period over period.
Sales in Australia increased $0.7 million, or 16%, for the three months ended
May 31, 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
$1.2 million, or 28%. Sales in Australia increased primarily due to
unprecedented demand for homecare and cleaning products as a result of the
COVID-19 pandemic. In addition, WD-40 Multi Use Product and WD-40 Specialist
were up 4% and 18%, respectively, from period to period. Negative sales impacts
to Australia due to the COVID-19 pandemic were very limited in the third quarter
of fiscal year 2020 as compared to many other countries since COVID-19 case
numbers have remained relatively low in Australia and governmental authorities
have adopted less severe lockdown requirements. This has resulted in many of our
key customers in Australia remaining open for business during the COVID-19
pandemic.
?
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Gross Profit
Gross profit decreased to $53.1 million for the three months ended May 31, 2020
compared to $62.1 million for the corresponding period of the prior fiscal year.
As a percentage of net sales, gross profit decreased to 54.0% for the three
months ended May 31, 2020 compared to 54.5% 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 higher warehousing and in-bound freight costs, primarily within
the EMEA segment. In addition, increases to advertising, promotional, and other
discounts that we give to our customers from period to period in all three
segments negatively impacted gross margin by 0.7 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. In addition, gross margin was
negatively impacted by 0.2 percentage points from period to period due to
unfavorable changes in the costs of aerosol cans.
These unfavorable impacts to gross margin were partially offset by 0.8
percentage points from period to period due to favorable changes in the costs of
petroleum-based specialty chemicals in all three segments. 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 are beginning to experience this favorability late 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. Gross margin was also positively affected
by sales price increases primarily in the EMEA segment during the third quarter
of fiscal year 2020, impacting gross margin by 0.4 percentage points from period
to period. Gross margin was also positively impacted by 0.2 percentage points
due to changes in foreign currency exchange rates from period to period in the
EMEA segment. In addition, gross margin was positively impacted by 0.2
percentage points due to favorable changes to sales mix, primarily in the
Americas and Asia-Pacific 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 $3.1 million and $4.7 million for the three months
ended May 31, 2020 and 2019, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the three months ended
May 31, 2020 decreased $4.1 million to $27.9 million from $32.0 million for the
corresponding period of the prior fiscal year. As a percentage of net sales,
SG&A expenses increased to 28.4% for the three months ended May 31, 2020
compared to 28.0% for the corresponding period of the prior fiscal year. The
decrease in SG&A expenses from period to period was due to a variety of factors,
but most significantly due to lower travel and meeting expenses and decreased
freight costs. Travel and meeting expenses decreased by $2.0 million from period
to period, primarily due to initiatives adopted by the Company during the third
quarter of fiscal year 2020 to reduce the transmission of COVID-19, including
the imposition of business travel restrictions for all employees and the
cancellation of all large meetings, such as regional sales meetings and global
leadership meetings, in support of social distancing requirements. Freight costs
associated with shipping products to our customers also decreased by $1.6
million, partially due to lower sales from period to period. Employee-related
costs, which include salaries, incentive compensation, profit sharing,
stock-based compensation and other fringe benefits, decreased by $0.3 million.
This decrease was primarily due to lower earned incentive compensation from
period to period as a result of lower expected financial results for fiscal year
2020, partially offset by increased headcount and annual compensation increases.
In addition, favorable changes in foreign currency exchange rates decreased SG&A
expenses by $0.4 million from period to period. These decreases were slightly
offset by increases of $0.2 million of 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 $1.4 million
and $1.7 million for the three months ended May 31, 2020 and 2019, respectively.
Our research and development team engages
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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 May 31, 2020
decreased $1.5 million, or 24%, to $4.8 million from $6.3 million for the
corresponding period of the prior fiscal year. As a percentage of net sales,
these expenses decreased to 4.8% for the three months ended May 31, 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 three months ended May 31, 2020. The decreased
level of advertising and sales promotion expenses was primarily due to the
reduction of promotional program spending in all three segments due to indirect
effects of the COVID-19 pandemic during the third quarter of fiscal year 2020,
such as the cancellations of trade shows and fewer opportunities for physical
marketing and sampling activities. 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 the COVID-19
pandemic 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 was $5.0 million for both three months ended May 31,
2020 and 2019. Therefore, our total investment in advertising and sales
promotion activities totaled $9.8 million and $11.3 million for the three months
ended May 31, 2020 and 2019, respectively.
Amortization of Definite-lived Intangible Assets Expense
Amortization of our definite-lived intangible assets decreased to $0.6 million
for the three months ended May 31, 2020 compared to $0.7 million for the
corresponding period in the prior year.
Income from Operations by Segment
The following table summarizes income from operations by segment (in thousands,
except percentages):
Three Months Ended May 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Americas $ 14,424 $ 15,418 $ (994) (6)%
EMEA 7,180 9,918 (2,738) (28)%
Asia-Pacific 5,736 4,352 1,384 32%
Unallocated corporate (1) (7,528) (6,486) (1,042) (16)%
Total
$ 19,812 $ 23,202 $ (3,390) (15)%
(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.
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Americas
Income from operations for the Americas decreased to $14.4 million, down $1.0
million, or 6%, for the three months ended May 31, 2020 compared to the
corresponding period of the prior fiscal year, primarily due to a $2.9 million
decrease in sales and a lower gross margin, offset by a $0.7 million decrease in
operating expenses. As a percentage of net sales, gross profit for the Americas
segment decreased from 53.3% to 53.1% period over period primarily due to
increases to advertising, promotional, and other discounts that we give to our
customers from period to period, partially offset by favorable changes to the
sales mix and lower miscellaneous costs from period to period. Operating
expenses decreased $0.7 million period over period, primarily due to lower
travel and meeting expenses due to initiatives adopted by the Company during the
third quarter of fiscal year 2020 to reduce the transmission of COVID-19, as
well as a lower level of advertising and sales promotion expenses from period to
period. Operating income as a percentage of net sales decreased from 29.1% to
28.8% period over period.
EMEA
Income from operations for the EMEA segment decreased to $7.2 million, down $2.7
million, or 28% from period to period, primarily due to a $12.0 million decrease
in sales and a lower gross margin, partially offset by a $4.3 million decrease
in operating expenses. Operating expenses decreased primarily due to lower
accruals for earned incentive compensation, decreased freight expense, and lower
advertising and sales promotion expenses. As a percentage of net sales, gross
profit for the EMEA segment decreased from 55.8% to 54.9% 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 to gross margin were partially offset by the decreased costs
of petroleum-based specialty chemicals, as well as sales price increases from
period to period. Operating expenses decreased $4.3 million period over period,
primarily due to lower accruals for earned incentive compensation and decreased
outbound freight costs. In addition, operating expenses decreased due to lower
travel and meeting expenses due to initiatives adopted by the Company during the
third quarter of fiscal year 2020 to reduce the transmission of COVID-19, as
well as a lower level of advertising and sales promotion expenses from period to
period. Operating income as a percentage of net sales decreased from 22.3% to
22.1% period over period.
Asia-Pacific
Income from operations for the Asia-Pacific segment increased to $5.8 million,
up $1.4 million, or 32%, for the three months ended May 31, 2020 compared to the
corresponding period of the prior fiscal year, primarily due to a $1.7 million
decrease in operating expenses and a higher gross margin, which was partially
offset by reduced sales. As a percentage of net sales, gross profit for the
Asia-Pacific segment increased from 54.6% to 55.2% period over period primarily
due to the decreased costs of petroleum-based specialty chemicals, as well as
favorable market mix changes resulting primarily from higher sales in China from
period to period. Sales in China were higher from period to period partially due
to certain shipments that were delayed from the second quarter to the third
quarter of fiscal year 2020 as a result of reduced disruptions in the market
related to the COVID-19 pandemic. Disruptions in China related to the COVID-19
pandemic were experienced more heavily in the second quarter of fiscal year
2020. 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 the COVID-19 pandemic. These favorable impacts to gross margin were
partially offset by increases in warehousing, distribution and freight costs, as
well as a higher level of advertising, promotional, and other discounts that we
give to our customers from period to period. Operating expenses decreased $1.7
million period over period, primarily due to a lower level of advertising and
sales promotion expenses and lower accruals for earned incentive compensation
from period to period. In addition, operating expenses decreased due to lower
travel and meeting expenses due to initiatives adopted by the Company during the
third quarter of fiscal year 2020 to reduce the transmission of COVID-19.
Operating income as a percentage of net sales increased from 26.4% to 36.7%
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 May 31,
2020 2019 Change
Interest income $ 20 $ 27 $ (7)
Interest expense $ 778 $ 567 $ 211
Other (expense) income, net $ 27 $ (45) $ 72
Provision for income taxes $ 4,557 $ 4,478 $ 79
Interest Income
Interest income was insignificant for both the three months ended May 31, 2020
and 2019.
Interest Expense
Interest expense increased $0.2 million for the three months ended May 31, 2020
compared to the corresponding period of the prior fiscal year primarily due to
an increased outstanding balance on our revolving credit facility, partially
offset by lower interest rates from period over period.
Other Income (Expense), Net
Other income (expense), net was insignificant for both the three months ended
May 31, 2020 and 2019.
Provision for Income Taxes
The provision for income taxes was 23.9% and 19.8% of income before income taxes
for the three months ended May 31, 2020 and 2019, respectively. The increase in
the effective income tax rate from period to period was primarily due to a
decrease in earnings from foreign operations resulting in a decrease in the net
benefit received from the application of the GILTI / FDII calculation.
Net Income
Net income was $14.5 million, or $1.06 per common share on a fully diluted
basis, for the three months ended May 31, 2020 compared to $18.1 million, or
$1.30 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 three months ended May
31, 2020 compared to the corresponding period of the prior fiscal year. On a
constant currency basis, net income would have decreased by $3.2 million from
period to period.
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Nine Months Ended May 31, 2020 Compared to Nine Months Ended May 31, 2019
Operating Items
The following table summarizes operating data for our consolidated operations
(in thousands, except percentages and per share amounts):
Nine Months Ended May 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Net sales:
Maintenance products $ 268,676 $ 289,371 $ (20,695) (7)%
Homecare and cleaning products 28,176 27,235 941 3%
Total net sales 296,852 316,606 (19,754) (6)%
Cost of products sold 136,657 142,534 (5,877) (4)%
Gross profit 160,195 174,072 (13,877) (8)%
Operating expenses 107,494 114,754 (7,260) (6)%
Income from operations $ 52,701 $ 59,318 $ (6,617) (11)%
Net income $ 41,045 $ 47,324 $ (6,279) (13)%
Earnings per common share - diluted $ 2.98 $ 3.39 $ (0.41) (12)%
Shares used in per share calculations - diluted 13,727 13,853 (126) (1)%
Net Sales by Segment
The following table summarizes net sales by segment (in thousands, except
percentages):
Nine Months Ended May 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Americas $ 143,672 $ 144,654 $ (982) (1)%
EMEA 113,519 124,259 (10,740) (9)%
Asia-Pacific 39,661 47,693 (8,032) (17)%
Total $ 296,852 $ 316,606 $ (19,754) (6)%
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Americas
The following table summarizes net sales by product line for the Americas
segment (in thousands, except percentages):
Nine Months Ended May 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Maintenance products $ 127,662 $ 129,904 $ (2,242) (2)%
Homecare and cleaning products 16,010 14,750 1,260 9%
Total
$ 143,672 $ 144,654 $ (982) (1)%
% of consolidated net sales 48% 46%
Sales in the Americas segment, which includes the U.S., Canada and Latin
America, decreased to $143.7 million, down $1.0 million, or 1%, for the nine
months ended May 31, 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 nine months ended May 31, 2020 compared to
the corresponding period of the prior fiscal year.
Sales of maintenance products in the Americas segment decreased $2.2 million, or
2%, for the nine months ended May 31, 2020 compared to the corresponding period
of the prior fiscal year. This sales decrease was mainly driven by lower sales
of WD-40 Multi Use Product in Latin America, which were down $2.9 million, or
16% from period to period primarily due to various disruptions in the market
related to the COVID-19 pandemic. These disruptions primarily included decreased
availability of our product due to constraints on the distribution and sale of
our products as a result of the complete lockdown of many markets within the
region, which started early in March 2020 and continued throughout the third
quarter. In addition, sales in Latin America were negatively impacted due to
decreased sales in Mexico as a result of a change we made in the distribution
model for this region. In the third quarter of fiscal year 2020, we shifted away
from a distribution model for this country where we sold product through a large
wholesale customer who then supplied various retail customers, to one where we
sell direct to these retail customers. While we anticipate a successful build of
our direct customer base in Mexico in future periods under this new direct
model, sales in this region were unfavorably impacted from period to period as a
result of us starting this transition. The sales decreases in Latin America were
partially offset by sales increases of maintenance products in the U.S. and
Canada of $0.6 million and $0.2 million, or 1% and 3%, respectively from period
to period. Although the impacts of the COVID-19 pandemic weakened sales levels
in the U.S. and Canada during the third quarter of fiscal year 2020, these sales
decreases were more than offset by successful promotional programs during the
first six months of fiscal year 2020.
Sales of homecare and cleaning products in the Americas increased $1.3 million,
or 9%, for the nine months ended May 31, 2020 compared to the corresponding
period of the prior fiscal year. This sales increase was driven primarily by an
increase in sales of the 2000 Flushes brand products in the U.S., which were up
$1.1 million or 28% from period to period. We experienced a significant increase
in sales of our homecare and cleaning products beginning in the third quarter of
fiscal year 2020 due to increased demand for such products as a result of the
COVID-19 pandemic. We are not able at this time to estimate the duration of this
unexpected increase in the demand for these products and its impact on our
financial results and operations in future periods. While each of our homecare
and cleaning products have continued to generate positive cash flows, we had
experienced decreased or flat sales for many of these products in recent years
prior to the COVID-19 pandemic.
For the Americas segment, 82% of sales came from the U.S., and 18% of sales came
from Canada and Latin America combined for the nine months ended May 31, 2020
compared to the distribution for the nine months ended May 31, 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):
Nine Months Ended May 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Maintenance products $ 106,720 $ 116,897 $ (10,177) (9)%
Homecare and cleaning products 6,799 7,362 (563) (8)%
Total
$ 113,519 $ 124,259 $ (10,740) (9)%
% of consolidated net sales 38% 39%
Sales in the EMEA segment, which includes Europe, the Middle East, Africa and
India, decreased to $113.5 million, down $10.7 million, or 9%, for the nine
months ended May 31, 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 nine
months ended May 31, 2020 translated at the exchange rates in effect for the
corresponding period of the prior fiscal year would have been $116.3 million in
the EMEA segment. Thus, on a constant currency basis, sales would have decreased
by $8.0 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). Sales in the direct markets decreased to $76.1
million, down $6.4 million, or 8%, for the nine months ended May 31, 2020,
compared to the corresponding period of the prior fiscal year primarily due to a
$5.8 million, or 10%, decrease in sales of the WD-40 Multi-Use Product
throughout the direct markets. This decrease in sales was primarily due to
various disruptions in the market related to the COVID-19 pandemic. These
disruptions primarily included decreased availability of our product, as well as
disruptions related to supply chain and transportation as a result of the
responses from third-party businesses and governmental authorities to the public
health crisis caused by COVID-19 during the third quarter of fiscal year 2020.
Although higher overall sales during the first half of fiscal year 2020 slightly
offset these negative impacts, WD-40 Multi-Use Product sales decreased from
period to period primarily due to the comprehensive lockdown measures adopted by
many European countries at physical store retailers to combat the COVID-19
pandemic during the third quarter of fiscal year 2020. These lockdowns limited
many retailers' ability to participate in promotional activities and sell high
volumes of certain products, such as our WD-40 Multi-Use Product. In addition,
sales of 1001 Carpet Fresh in the U.K. also decreased $0.6 million, or 8%,
during the nine months ended May 31, 2020 as a result of a significantly higher
level of sales in the corresponding period of the prior fiscal year,
particularly in the third quarter, due to 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 nine months ended May 31, 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 $4.3 million, or 10%, for the nine months ended
May 31, 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 20% and 42%, respectively. This decrease in
sales from period to period was primarily due to the lockdowns that occurred in
many of the distributor market countries in the third quarter of fiscal year
2020 due to the COVID-19 pandemic. The distributor markets accounted for 33% of
the EMEA segment's total sales for the nine months ended May 31, 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):
Nine Months Ended May 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Maintenance products $ 34,294 $ 42,569 $ (8,275) (19)%
Homecare and cleaning products 5,367 5,124 243 5%
Total
$ 39,661 $ 47,693 $ (8,032) (17)%
% of consolidated net sales 14% 15%
Sales in the Asia-Pacific segment, which includes Australia, China and other
countries in the Asia region, decreased to $39.7 million, down $8.0 million, or
17%, for the nine months ended May 31, 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 nine months ended May 31, 2020 translated at the exchange rates in
effect for the corresponding period of the prior fiscal year would have been
$40.9 million in the Asia-Pacific segment. Thus, on a constant currency basis,
sales would have decreased by $6.8 million, or 14%, from period to period.
Sales in Asia, which represented 68% of the total sales in the Asia-Pacific
segment, decreased $8.5 million, or 24%, for the nine months ended May 31, 2020
compared to the corresponding period of the prior fiscal year. Sales in the Asia
distributor markets decreased $5.5 million, or 23%. Sales in China decreased
$3.1 million, or 26%, for the nine months ended May 31, 2020 compared to the
corresponding period of the prior fiscal year. These decreases in sales were
primarily due to various disruptions in the market related to the COVID-19
pandemic. Temporary closures, lockdowns and restrictions required by local
governmental authorities to combat the COVID-19 pandemic within the Asia market
limited many physical store retailers' ability to sell high volumes of our
maintenance products.
Sales in Australia increased $0.5 million, or 4%, for the nine months ended May
31, 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 $1.5 million,
or 12%, due to a higher level of promotional activities as well as the continued
growth of our business from period to period. Sales in Australia increased
primarily due to unprecedented demand for homecare and cleaning products as a
result of the COVID-19 pandemic during the third quarter of fiscal year 2020. In
addition, WD-40 Multi Use Product and WD-40 Specialist were up 4% and 8%,
respectively, from period to period. Negative sales impacts to Australia due to
the COVID-19 pandemic have been very limited in fiscal year 2020 compared to
many other countries since COVID-19 case numbers have remained relatively low in
Australia and governmental authorities have adopted less severe lockdown
requirements. This has resulted in many of our key customers remaining open for
business during the COVID-19 pandemic.
Gross Profit
Gross profit decreased to $160.2 million for the nine months ended May 31, 2020
compared to $174.1 million for the corresponding period of the prior fiscal
year. As a percentage of net sales, gross profit decreased to 54.0% for the nine
months ended May 31, 2020 compared to 55.0% for the corresponding period of the
prior fiscal year.
Gross margin was 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. Gross margin was also negatively impacted by 0.5 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 as a result of the
COVID-19 pandemic. In addition, gross margin was negatively impacted by 0.2
percentage points from period to period due to unfavorable changes in the costs
of aerosol cans in the Americas and
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EMEA segments. Advertising, promotional, and other discounts that we give to our
customers increased from period to period in the Americas and Asia-Pacific
segments, negatively impacting gross margin by 0.2 percentage points.
These unfavorable impacts to gross margin were partially offset by sales price
increases in the EMEA segment during the first nine months of fiscal year 2020,
positively impacting gross margin by 0.6 percentage points from period to
period. Gross margin was also positively affected by 0.4 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 $9.3 million and $13.0 million for the nine months
ended May 31, 2020 and 2019, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the nine months ended
May 31, 2020 decreased $4.9 million to $90.4 million from $95.3 million for the
corresponding period of the prior fiscal year. As a percentage of net sales,
SG&A expenses increased to 30.5% for the nine months ended May 31, 2020 compared
to 30.1% for the corresponding period of the prior fiscal year. The decrease in
SG&A expenses from period to period was due to a variety of factors, but most
significantly due to lower freight costs, decreased travel and meeting expenses
and the favorable impacts of changes in foreign currency exchange rates. Freight
costs associated with shipping products to our customers decreased by $3.6
million, partially due to lower sales from period to period. Travel and meeting
expenses decreased by $1.8 million from period to period, primarily due to
initiatives adopted by the Company during the third quarter of fiscal year 2020
to reduce the transmission of COVID-19, including the imposition of business
travel restrictions for all employees and the cancellation of all large
meetings, such as regional sales meetings and global leadership meetings, in
support of social distancing requirements. Favorable changes in foreign currency
exchange rates also decreased SG&A expenses by $1.1 million from period to
period. These decreases were partially offset by increased professional services
fees, including cloud-based software, which resulted in an increase of $1.1
million from period to period. In addition, employee-related costs increased by
$0.5 million due to increased headcount, annual compensation increases and
higher stock-based compensation from period to period, which were all partially
offset by lower earned incentive compensation.
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 $4.6 million
and $5.0 million for the nine months ended May 31, 2020 and 2019, respectively.
Advertising and Sales Promotion Expenses
Advertising and sales promotion expenses for the nine months ended May 31, 2020
decreased $2.2 million, or 13%, to $15.2 million from $17.4 million for the
corresponding period of the prior fiscal year. As a percentage of net sales,
these expenses decreased to 5.1% for the nine months ended May 31, 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 nine months ended May 31, 2020. The decreased
level of advertising and sales promotion expenses was primarily due to the
reduction of promotional program spending in all three segments due to indirect
effects of the COVID-19 pandemic primarily during the third quarter of fiscal
year 2020, such as the cancellations of trade shows and fewer opportunities for
physical marketing and sampling activities.
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 nine months ended May 31, 2020 were $14.5
million compared to $14.1 million for the corresponding period of the prior
fiscal year. Therefore, our total investment in advertising and sales promotion
activities totaled $29.7 million and $31.5 million for the nine months ended May
31, 2020 and 2019, respectively.
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Amortization of Definite-lived Intangible Assets Expense
Amortization of our definite-lived intangible assets decreased to $1.9 million
for the nine months ended May 31, 2020 compared to $2.1 million for the nine
months ended May 31, 2019.
Income from Operations by Segment
The following table summarizes income from operations by segment (in thousands,
except percentages):
Nine Months Ended May 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Americas $ 36,404 $ 36,712 $ (308) (1)%
EMEA 26,354 28,923 (2,569) (9)%
Asia-Pacific 12,044 13,236 (1,192) (9)%
Unallocated corporate (22,101) (19,553) (2,548) (13)%
Total $ 52,701 $ 59,318 $ (6,617) (11)%
Americas
Income from operations for the Americas decreased to $36.4 million, down $0.3
million, or 1%, for the nine months ended May 31, 2020 compared to the
corresponding period of the prior fiscal year, primarily due to a $1.0 million
decrease in sales and a lower gross margin, partially offset by lower operating
expenses. As a percentage of net sales, gross profit for the Americas segment
decreased from 53.6% to 52.9% period over period primarily due to increases to
advertising, promotional, and other discounts that we give to our customers and
unfavorable shifts in product and customer mix. These unfavorable impacts to
gross margin were slightly offset by the decreased costs of petroleum-based
specialty chemicals from period to period. Operating expenses decreased $1.2
million period over period, primarily due to lower accruals for earned incentive
compensation and lower travel and meeting expenses due to initiatives adopted by
the Company during the third quarter of fiscal year 2020 to reduce the
transmission of COVID-19. In addition, operating expenses decreased due to a
lower level of advertising and sales promotion expenses from period to period.
Operating income as a percentage of net sales increased from 25.4% to 25.3%
period over period.
EMEA
Income from operations for the EMEA segment decreased to $26.4 million, down
$2.6 million, or 9%, for the nine months ended May 31, 2020 compared to the
corresponding period of the prior fiscal year, primarily due to a $10.7 million
decrease in sales and a lower gross margin, partially offset by lower operating
expenses. As a percentage of net sales, gross profit for the EMEA segment
decreased from 56.8% to 55.3% period over period primarily due to increases in
warehousing, distribution and freight costs as well as unfavorable changes in
sales mix and higher miscellaneous costs. These unfavorable impacts to gross
margin were partially offset by sales price increases, as well as the decreased
costs of petroleum-based specialty chemicals from period to period. Operating
expenses decreased $5.3 million period over period, primarily due to decreased
outbound freight costs and lower accruals for earned incentive compensation. In
addition, operating expenses decreased due to lower travel and meeting expenses
due to initiatives adopted by the Company during the third quarter of fiscal
year 2020 to reduce the transmission of COVID-19, as well as a lower level of
advertising and sales promotion expenses from period to period. Operating income
as a percentage of net sales decreased from 23.3% to 23.2% period over period.
Asia-Pacific
Income from operations for the Asia-Pacific segment decreased to $12.0 million,
down $1.2 million, or 9%, for the nine months ended May 31, 2020 compared to the
corresponding period of the prior fiscal year, primarily due to a $8.0 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 54.2% period over period primarily
due to
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increases in warehousing, distribution and freight costs from period to period,
as well as increases to advertising, promotional, and other discounts that we
give to our customers. These unfavorable impacts to gross margin were partially
offset by favorable changes to the cost of petroleum-based specialty chemicals
from period to period. The lower sales were accompanied by a $3.3 million
decrease in total operating expenses period over period, primarily due to a
lower level of advertising and sales promotion expense and lower outbound
freight costs. In addition, operating expenses decreased due to lower accruals
for earned incentive compensation and lower miscellaneous expenses from period
to period, as well as lower travel and meeting expenses due to initiatives
adopted by the Company during the third quarter of fiscal year 2020 to reduce
the transmission of COVID-19. Operating income as a percentage of net sales
increased from 27.8% to 30.4% period over period.
Non-Operating Items
The following table summarizes non-operating income and expenses for our
consolidated operations (in thousands):
Nine Months Ended May 31,
2020 2019 Change
Interest income $ 73 $ 123 $ (50)
Interest expense $ 1,813 $ 1,962 $ (149)Other (expense) income, net $ (197) $ 828 $ (1,025)
Provision for income taxes $ 9,719 $ 10,983 $ (1,264)
Interest Income
Interest income was insignificant for both the nine months ended May 31, 2020
and 2019.
Interest Expense
Interest expense decreased $0.1 million for the nine months ended May 31, 2020
compared to the corresponding period of the prior fiscal year primarily due to
lower interest rates related to draws on our revolving credit facility,
partially offset by higher outstanding balances on this facility from period
over period
Other (Expense) Income, Net
Other (expense) income, net changed by $1.0 million for the nine months ended
May 31, 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 $0.7 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. A significant portion of the foreign currency exchange gains that were
recorded for the nine months ended May 31, 2019 were related to the large
repatriations from our U.K. subsidiary which were transacted during the first
half of fiscal year 2019.
Provision for Income Taxes
The provision for income taxes was 19.1% and 18.8% of income before income taxes
for the nine months ended May 31, 2020 and 2019, respectively. The increase in
the effective income tax rate from period to period was primarily due to a
decrease in the net benefit received from the application of GILTI / FDII
calculation, partially offset by an increase in excess tax benefits from
settlements of stock-based equity awards during the first six months of fiscal
year 2020 that are recognized in the provision for income tax.
Net Income
Net income was $41.0 million, or $2.98 per common share on a fully diluted
basis, for the nine months ended May 31, 2020 compared to $47.3 million, or
$3.39 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 $0.8 million on net income for the nine
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months ended May 31, 2020 compared to the corresponding period of the prior
fiscal year. On a constant currency basis, net income would have decreased by
$5.5 million from period to period.
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 May Nine Months Ended May
31, 31,
2020 2019 2020 2019
Gross margin - GAAP 54% 54% 54% 55%
Cost of doing business as a
percentage
of net sales - non-GAAP 32% 33% 35% 35%
EBITDA as a percentage of net
sales - non-GAAP (1) 22% 22% 20% 21%
(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 May 31, Nine Months Ended May 31,
2020 2019 2020 2019
Total operating expenses - GAAP $ 33,238 $ 38,881 $ 107,494 $ 114,754
Amortization of definite-lived
intangible assets (552) (655) (1,856) (2,056)
Depreciation (in operating
departments) (1,050) (978) (3,046) (2,876)
Cost of doing business $ 31,636 $ 37,248 $ 102,592 $ 109,822
Net sales $ 98,247 $ 113,989 $ 296,852 $ 316,606
Cost of doing business as a
percentage
of net sales - non-GAAP 32% 33% 35% 35%
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EBITDA (in thousands, except percentages)
Three Months Ended May 31, Nine Months Ended May 31,
2020 2019 2020 2019
Net income - GAAP $ 14,524 $ 18,139 $ 41,045 $ 47,324
Provision for income taxes 4,557 4,478 9,719 10,983
Interest income (20) (27) (73) (123)
Interest expense 778 567 1,813 1,962
Amortization of definite-lived
intangible assets 552 655 1,856 2,056
Depreciation 1,515 1,230 4,254 3,654
EBITDA $ 21,906 $ 25,042 $ 58,614 $ 65,856
Net sales $ 98,247 $ 113,989 $ 296,852 $ 316,606
EBITDA as a percentage of net
sales - non-GAAP 22% 22% 20% 21%
Liquidity and Capital Resources
Overview
The Company's financial condition and liquidity remain strong. Net cash provided
by operations was $40.8 million for the nine months ended May 31, 2020 compared
to $36.3 million for the corresponding period of the prior fiscal year. Although
there continues to be uncertainty related to the anticipated impact of the
current COVID-19 pandemic on the Company's future results, we believe our
efficient business model and the steps that we took during March 2020 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 for additional information on these agreements. Included in
Note 8 - Debt is information on the Credit Agreement that we amended and
restated with Bank of America on March 16, 2020 which includes, among other
amended provisions, an increase in the revolving commitment from $100.0 million
to $150.0 million.
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
nine months ended May 31, 2020, the Company repaid $0.5 million in short-term
borrowings outstanding under the line of credit and drew an additional $90.0
million in short-term borrowings in U.S. Dollars, which included $80.0 million
that we drew in U.S. Dollars in March 2020 in response to the COVID-19 pandemic.
Although we do not have any presently anticipated need for this additional
liquidity, we decided to draw this additional amount on our line of credit to
ensure future liquidity given the recent significant impact on global financial
markets and the economy as a result of the COVID-19 pandemic. We regularly
convert many of our draws on our line of credit to new draws with new maturity
dates and interest rates. We have the ability to refinance any draw under the
line of credit with successive short-term borrowings through the March 16, 2025
maturity date. Outstanding draws for which we have both the ability and intent
to refinance with successive short-term borrowings for a period of at least
twelve months are classified as long-term. As of May 31, 2020, we had a $147.4
million balance of outstanding draws on the revolving credit facility, of
which $77.4 was classified as long-term and the remaining $70.0 was classified
as short-term. In addition, net repayments under the auto-borrow agreement in
the United States were $0.4 million and we paid $0.8 million in principal
payments on our Series A Notes during the first nine 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
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interest coverage ratio cannot be less than three to one. See Note 8 - Debt for
additional information on these financial covenants. At May 31, 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 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 believe that the likelihood of
being unable to satisfy these covenants is remote.
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, dividend payments, acquisitions,
new business development activities and share repurchases. Currently, we have
temporarily suspended repurchases under our current share buy-back plan in order
to preserve cash while we monitor the impacts of the COVID-19 pandemic. At May
31, 2020, we had a total of $88.6 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):
Nine Months Ended May 31,
2020 2019 Change
Net cash provided by operating activities $ 40,756 $ 36,271 $ 4,485
Net cash used in investing activities
(17,090) (8,220) (8,870)
Net cash provided by (used in) financing
activities 37,490 (38,824) 76,314
Effect of exchange rate changes on cash and
cash equivalents 166 (2,352) 2,518
Net increase (decrease) in cash and cash $ $ $
equivalents 61,322 (13,125) 74,447
Operating Activities
Net cash provided by operating activities increased $4.5 million to $40.8
million for the nine months ended May 31, 2020 from $36.3 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 nine months ended
May 31, 2020 was net income of $41.0 million, which decreased $6.3 million from
period to period. The changes in our working capital from period to period,
which increased net cash provided by operating activities, were primarily
attributable to a lower level of increases in trade accounts receivable balances
during the nine months ended May 31, 2020 compared to the corresponding period
of the prior fiscal year as a result of decreased sales from period to period.
In addition, planned increases in inventory levels in the first three quarters
of fiscal year 2019, primarily in the Americas and EMEA segments, were higher
than such increases in inventory during the first three quarters of fiscal year
2020. Both of these working capital changes were partially offset by a larger
decrease in accrued payroll and related expenses from period to period. Accrued
payroll and related expenses decreased primarily due to the payment of fiscal
year 2019 incentive compensation in the first quarter of 2020 and the much lower
earned incentive compensation accruals through the nine months ended May 31,
2020 compared to the corresponding period of the prior fiscal year as a result
of lower expected financial results for fiscal year 2020 due to the impacts of
the COVID-19 pandemic.
Investing Activities
Net cash used in investing activities increased $8.9 million to $17.1 million
for the nine months ended May 31, 2020 from $8.2 million for the corresponding
period of the prior fiscal year, primarily due to increased capital
expenditures. Capital expenditures increased by $8.7 million primarily due to
increased manufacturing-related capital expenditures within the U.K. and the
United States. In addition, capital expenditures increased due to the
renovations and equipping of the Company's new office building in Milton Keynes,
England. 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
fiscal year 2020.
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Financing Activities
Net cash provided by financing activities was $37.5 million for the nine months
ended May 31, 2020 compared to net cash used in financing activities of $38.8
million for the corresponding period of the prior fiscal year, resulting in a
net change of $76.3 million. This change was primarily due to higher proceeds
provided by the Company's revolving credit facility, which increased $73.3
million during the nine months ended May 31, 2020 compared to the corresponding
period of the prior fiscal year. This increase was primarily due the $80.0
million that we drew in U.S. Dollars in March 2020 in response to the COVID-19
pandemic. Also contributing to cash inflows was a reduction in treasury stock
purchases of $5.6 million from period to period due to us temporarily suspending
repurchases under our current share buy-back plan in early April 2020 in order
to preserve cash while we continue to monitor the impacts of the COVID-19
pandemic. Offsetting these increases in cash inflows was an increase in
dividends paid of $2.4 million from period to 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 $0.2 million for
the nine months ended May 31, 2020 as compared to a decrease in cash of $2.4
million for nine months ended May 31, 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 May 31, 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.
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Dividends
On June 16, 2020, the Company's Board of declared a cash dividend of $0.67 per
share payable on July 31, 2020 to shareholders of record on July 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.
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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