WD-40 COMPANY 
As used in this report, the terms "we," "our," "us" and "the Company" refer to
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
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
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 our financial results; the impacts from inflationary trends and supply chain constraints; 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. We undertake 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 our Annual Report on
Form 10-K for the fiscal year ended
Overview
The Company
Our products are sold in various locations around the world. Maintenance
products are sold worldwide in markets throughout North, Central and
19
--------------------------------------------------------------------------------
warehouse club stores, hardware stores, automotive parts outlets, industrial distributors and suppliers, mass retail and home center stores, value retailers, grocery stores, online retailers, farm supply, sport retailers, and independent bike dealers.
Highlights
The following summarizes the financial and operational highlights for our
business during the three months ended
?Consolidated net sales increased
?Gross profit as a percentage of net sales decreased to 50.8% for the three
months ended
?Consolidated net income decreased
?Diluted earnings per common share for the three months ended
Our strategic initiatives and the areas where we will continue to focus our time, talent and resources in future periods include: (i) building a business for the future; (ii) attracting, developing and engaging outstanding tribe members; (iii) striving for operational excellence; (iv) growing WD-40 Multi-Use Product; (v) growing WD-40 Specialist product line; and (vi) expanding and supporting portfolio opportunities that help us grow.
Impact of COVID-19 on Our Business
Our financial results and operations continue to be impacted by the COVID-19 pandemic that began during our fiscal year 2020. The ongoing COVID-19 pandemic has impacted global economies, the rate of inflation, supply chains, distribution networks and consumer behavior around the world. We have experienced both favorable and unfavorable impacts to our financial results and our operations as a result of the direct and indirect effects of the COVID-19 pandemic. For example, although sales have been negatively impacted at varying times in the regions in which we operate due to health and safety restrictions required by local governmental authorities, those negative sales impacts have generally been more than offset by increased demand for our products as a result of the shift in consumer spending patterns compared to periods before the pandemic. This shift in spending patterns, which has included increased renovation and maintenance activities as well as increased online purchases, contributed to record sales for the Company in fiscal year 2021. However, global supply chain issues have resulted in increased raw material and other input costs, as well as significantly higher competition for freight resources and labor constraints within distribution networks, which has also caused increased costs. These increased costs started to negatively impact our gross margin and financial results in our fiscal year 2021, but we began to experience more significant negative impacts from this inflationary environment in the first quarter of fiscal year 2022 as evidenced by our lower gross margin as compared to the first quarter of the prior fiscal year.
Some of the supply chain challenges that we have experienced include general aerosol production capacity constraints and competition for such capacity by other companies who utilize the same third-party manufacturers for their aerosol production. Supply chains at many companies globally are being strained due to shortages of certain materials and this is impacting the
20
--------------------------------------------------------------------------------
ability of our third-party manufacturers to procure certain of the raw materials
needed to manufacture our products. These challenges have periodically resulted
in us not being able to meet the high level of demand for our products by
customers and end-users in certain markets, most significantly those markets in
our
Although several vaccines and treatments are authorized for use against COVID-19, these vaccines and treatments are being produced, distributed and accepted at varying rates globally and circumstances continue to evolve with COVID-19 case count rates and new variants. The severity and duration of this rapidly evolving pandemic remains uncertain and it is difficult for us to estimate the extent to which the COVID-19 pandemic will impact our financial results and operations in future periods. It is also uncertain how more stable conditions surrounding the pandemic or the end of the pandemic will impact the high levels of renovation and maintenance activities that we have seen by end-users in recent periods. If such activities decrease in future periods, this could adversely impact our financial results.
We have continued to follow a variety of measures to promote the safety and security of our employees, support the communities in which we operate and ensure the availability and functioning of our critical infrastructure. During the pandemic, these measures have included allowing for or requiring remote working arrangements for employees in some regions and the imposition of various travel restrictions. In addition, we continue to develop and monitor plans to support a safe working environment for our employees which includes reentry plans for various office locations in which we operate around the world. These plans vary by region based on the evolving situation within those regions. In connection with these plans, we have put in place our "Work from Where" philosophy to support work-life integration, and enable management and employees to align on where work is completed.
See our risk factors disclosed in Part I-Item 1A, "Risk Factors," in our Annual
Report on Form 10-K for the fiscal year ended
?
21
--------------------------------------------------------------------------------
Results of Operations
Three Months Ended
2020
Operating Items
The following table summarizes operating data for our consolidated operations (in thousands, except percentages and per share amounts):
Three Months Ended November 30,
Change from
?Prior Year
2021 2020 Dollars Percent
Net sales:
Maintenance products $ 126,030 $ 114,343 $ 11,687 10%
HCCP (1) 8,716 10,216 (1,500) (15)%
Total net sales 134,746 124,559 10,187 8%
Cost of products sold 66,276 54,313 11,963 22%
Gross profit 68,470 70,246 (1,776) (3)%
Operating expenses 44,410 41,854 2,556 6%
Income from operations $ 24,060 $ 28,392 $ (4,332) (15)%
Net income $ 18,555 $ 23,623 $ (5,068) (21)%
EPS - diluted $ 1.34 $ 1.72 $ (0.38) (22)%
Shares used in diluted EPS 13,752 13,706 46 -
(1)Homecare and cleaning products ("HCCP")
The following table summarizes net sales by segment (in thousands, except
percentages):
Three Months Ended November 30,
Change from
?Prior Year
2021 2020 Dollars Percent
Americas $ 56,288 $ 54,188 $ 2,100 4%
EMEA 57,555 54,749 2,806 5%
Asia-Pacific 20,903 15,622 5,281 34%
Total $ 134,746 $ 124,559 $ 10,187 8%
?
22
--------------------------------------------------------------------------------
Americas Sales
The following table summarizes net sales by product line for theAmericas segment, which includes theU.S. ,Canada andLatin America (in thousands, except percentages): Three Months Ended November 30, Change from ?Prior Year 2021 2020 Dollars Percent Maintenance products$ 51,984 $ 48,503 $ 3,481 7% HCCP 4,304 5,685 (1,381) (24)% Total$ 56,288 $ 54,188 $ 2,100 4% % of consolidated net sales 42% 44% CC Net sales - non-GAAP (1)$ 55,793 $ 54,188 $ 1,605 3%
(1)Current fiscal year constant currency ("CC") net sales translated at the exchange rates in effect for the corresponding period of the prior fiscal year, compared to prior period actual net sales.
Americas Sales - Three Months Ended -
Net sales of maintenance products in the
?
?
?
Net sales of HCCP brands in the
?Challenges in our
?While each of our homecare and cleaning products have continued to generate positive cash flows, we have experienced decreased or flat sales for many of these products in recent years prior to the COVID-19 pandemic.
For the
?
23
--------------------------------------------------------------------------------
EMEA Sales
The following table summarizes net sales by product line for the EMEA segment, which includesEurope , theMiddle East ,Africa andIndia (in thousands, except percentages): Three Months Ended November 30, Change from ?Prior Year 2021 2020 Dollars Percent Maintenance products$ 55,443 $ 52,376 $ 3,067 6% HCCP 2,112 2,373 (261) (11)% Total (1)$ 57,555 $ 54,749 $ 2,806 5% % of consolidated net sales 43% 44% CC Net sales - non-GAAP (2)$ 55,077 $ 54,749 $ 328 1%
(1)While the Company's reporting currency is the
(2)Current fiscal year constant currency net sales translated at the exchange rates in effect for the corresponding period of the prior fiscal year, compared to prior period actual net sales.
The countries and regions in
EMEA Sales - Three Months Ended -
Net sales increased in the EMEA segment primarily due to the following:
Direct Markets - EMEA (63% of net sales QTD FY2022 vs 65% QTD FY2021)
?Direct market sales increased
?These increases were partially offset by lower sales of maintenance products in
the
?Sales in our direct markets benefited from the strengthening of the Pound
Sterling, the functional currency of our
Distributor Markets - EMEA (37% of net sales QTD FY2022 vs 35% QTD FY2021)
?Distributor market sales increased
?Increased sales in distributor markets were primarily due to new distribution, successful promotional programs and favorable changes in foreign currency exchange rates.
?
24
--------------------------------------------------------------------------------
Asia-Pacific Sales
The following table summarizes net sales by product line for the
Three Months Ended November 30,
Change from
?Prior Year
2021 2020 Dollars Percent
Maintenance products $ 18,603 $ 13,464 $ 5,139 38%
HCCP 2,300 2,158 142 7%
Total $ 20,903 $ 15,622 $ 5,281 34%
% of consolidated net sales 15% 12%
CC Net sales - non-GAAP (1) $ 20,456 $ 15,622 $ 4,834 31%
(1)Current fiscal year constant currency ("CC") net sales translated at the exchange rates in effect for the corresponding period of the prior fiscal year, compared to prior period actual net sales.
Asia-Pacific Sales - Three Months Ended -
Sales in the
?
?
?
?
25
--------------------------------------------------------------------------------
Gross Profit
The following general information regarding the timing and nature of our product costs is important when assessing fluctuations in our gross margin from period to period:
?There is often a delay of one quarter or more before changes in raw materials, such as specialty chemicals used in the formulation of our products, impact cost of products sold due to production and inventory life cycles;
?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 the EMEA segment, the majority of our cost of goods sold is denominated in
Pound Sterling whereas sales are generated in Pound Sterling, Euro and the
?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
The following table summarizes gross margin and gross profit (in thousands, except percentages):
Three Months Ended November 30,
Change from
2021 2020 ?Prior Year
Gross profit $ 68,470 $ 70,246 $ (1,776)
Gross margin 50.8% 56.4% (560) bps (1)
(1)Basis point ("bps") change in gross margin.
Gross Margin - Three Months Ended -
Gross margin decreased 560 bps primarily due to the following unfavorable impacts, partially offset by favorable impacts:
1010
Unfavorable Impacts Favorable Impacts
?(390) bps - Higher costs of specialty ?120 bps - Sales price increases chemicals used in the formulation of our implemented during the last 12 products.
months, primarily in the Americas and
?(140) bps - Higher warehousing, EMEA segments.
distribution and freight costs primarily
from supply chain constraints in the
Americas and EMEA segments as a result
of the COVID-19 pandemic.
Pandemic-related supply chain challenges
began to significantly impact the
Americas segment starting in the second
quarter of fiscal year 2021 and have
continued through the first quarter of
fiscal year 2022.
?(80) bps - Changes in foreign currency
exchange rates in the EMEA segment.
?(70) bps - Higher filling fees paid to
our third-party contract manufacturers,
primarily in the Americas segment.
?
26
--------------------------------------------------------------------------------
Selling, General and Administrative ("SG&A") Expenses
Three Months Ended November 30,
Change from
?Prior Year
(in thousands) 2021 2020 Dollars Percent
SG&A Expenses $ 38,423 $ 35,977 $ 2,446 7%
% of net sales 28.5% 28.9%
SG&A Expenses - Three Months Ended -
The increase in SG&A expenses from period to period was due to a variety of
factors. Changes in foreign currency exchange rates from period to period
resulted in an increase of
Note that 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
Advertising and Sales Promotion ("A&P") Expenses
Three Months Ended November 30,
Change from
?Prior Year
(in thousands) 2021 2020 Dollars Percent
A&P Expenses $ 5,624 $ 5,519 $ 105 2%
% of net sales 4.2% 4.4%
Changes in foreign currency exchange rates increased advertising and sales
promotion expenses by
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
?
27
--------------------------------------------------------------------------------
Income from Operations by Segment
The following table summarizes income from operations by segment (in thousands,
except percentages):
Three Months Ended November 30,
Change from
?Prior Year
2021 2020 Dollars Percent
Americas $ 12,017 $ 14,626 $ (2,609) (18)%
EMEA 14,213 17,743 (3,530) (20)%
Asia-Pacific 7,302 5,060 2,242 44%
Unallocated corporate (1) (9,472) (9,037) (435) (5)%
Total $ 24,060 $ 28,392 $ (4,332) (15)%
Americas
Americas Operating Income - Three Months Ended -
Income from operations for the
EMEA
EMEA Operating Income - Three Months Ended -
Income from operations for the EMEA segment decreased to
?
28
--------------------------------------------------------------------------------
Asia-Pacific Operating Income - Three Months Ended -
Income from operations for the
Non-Operating Items
The following table summarizes non-operating income and expenses for our consolidated operations (in thousands):
Three Months Ended November 30,
2021 2020 Change
Interest income $ 25 $ 19 $ 6
Interest expense $ 620 $ 570 $ 50
Other income (expense), net $ (329) $ 179 $ (508)
Provision for income taxes $ 4,581 $ 4,397 $ 184
Interest Income
Interest income was not significant for both the three months ended
Interest Expense
Interest expense was relatively constant for both the three months ended
Other Income (Expense), Net
Other income (expense), net was not significant for both the three months ended
Provision for Income Taxes
The provision for income taxes was 19.8% and 15.7% of income before income taxes
for the three months ended
Net Income
Net income was
?
29
--------------------------------------------------------------------------------
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.
The following table summarizes the results of these performance measures for the
periods presented:
Three Months Ended November 30,
2021 2020
Gross margin - GAAP 51% 56%
Cost of doing business as a percentage
of net sales - non-GAAP 32% 32%
EBITDA as a percentage of net sales - non-GAAP (1) 19% 24%
(1)Percentages may not aggregate to EBITDA percentage due to rounding and because amounts recorded in other income (expense), net on our 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 our comparative performance from period to period. We believe that these measures provide our shareholders with additional insights into the Company's results of operations and how we run our business. The non-GAAP financial measures are supplemental in nature and should not be considered in isolation or as alternatives to net income, income from operations or other financial information prepared in accordance with GAAP as indicators of the Company's performance or operations. The use of any non-GAAP measure may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies. Reconciliations of these non-GAAP financial measures to our financial statements as prepared in accordance with GAAP are as follows:
Cost of Doing Business (in thousands, except percentages)
Three Months Ended November 30,
2021 2020
Total operating expenses - GAAP $ 44,410 $ 41,854
Amortization of definite-lived intangible assets (363) (358)
Depreciation (in operating departments) (1,098) (1,042)
Cost of doing business $ 42,949 $ 40,454
Net sales $ 134,746 $ 124,559
Cost of doing business as a percentage
of net sales - non-GAAP 32% 32%
?
30
--------------------------------------------------------------------------------
EBITDA (in thousands, except percentages)
Three Months Ended November 30,
2021 2020
Net income - GAAP $ 18,555 $ 23,623
Provision for income taxes 4,581 4,397
Interest income (25) (19)
Interest expense 620 570
Amortization of definite-lived intangible assets 363 358
Depreciation 1,623 1,342
EBITDA $ 25,717 $ 30,271
Net sales $ 134,746 $ 124,559
EBITDA as a percentage of net sales - non-GAAP 19% 24%
Liquidity and Capital Resources
Overview
Our financial condition and liquidity remain strong. Net cash used in operations
was
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
We have historically held a balance of outstanding draws on our line of credit
in either
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
31
--------------------------------------------------------------------------------
requirements, capital expenditures, dividend payments, acquisitions, new
business development activities and share repurchases. On
Cash Flows
The following table summarizes our cash flows by category for the periods presented (in thousands):
Three Months Ended November 30,
2021 2020 Change
Net cash provided by (used in) operating
activities $ (947) $ 23,921 $ (24,868)
Net cash used in investing activities (2,362) (3,670) 1,308
Net cash provided by (used in) financing
activities (21,937) (11,089) (10,848)
Effect of exchange rate changes on cash and
cash equivalents (1,196) 220 (1,416)
Net increase (decrease) in cash and cash
equivalents $ (26,442) $ 9,382 $ (35,824)
Operating Activities
Net cash used in operating activities was
Investing Activities
Net cash used in investing activities decreased
Financing Activities
Net cash used by financing activities increased
Effect of Exchange Rate Changes
All of our foreign subsidiaries currently operate in currencies other than the
32
--------------------------------------------------------------------------------
on cash and cash equivalents, when expressed in
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 third-party suppliers (contract manufacturers) that manufacture our products and third-party distribution centers which warehouse and ship our products to customers. 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 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 we have historically purchased. In addition, in the ordinary course of business, we communicate supply needs to our contract manufacturers based on orders and short-term projections, ranging from two to six 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
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 8 - Share Repurchase Plan, included in this report.
Dividends
On
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
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 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
33
--------------------------------------------------------------------------------
financial statements contained in our Annual Report on Form 10-K for the fiscal
year ended
Recently Issued Accounting Standards
Information on Recently Issued Accounting Standards that could potentially impact our 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.
© Edgar Online, source
