Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is designed to provide the reader of the Company's financial
statements with a narrative from the perspective of management on the Company's
financial condition, results of operations, liquidity and certain other factors
that may affect future results. This MD&A includes the following sections:
Overview, Highlights, Results of Operations, Performance Measures and Non-GAAP
Reconciliations, Liquidity and Capital Resources, Critical Accounting Policies,
and Recently Issued Accounting Standards. The MD&A is provided as a supplement
to, and should be read in conjunction with, the Company's audited consolidated
financial statements and the related notes included in Item 15 of this report.
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.
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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 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 fiscal year ended August 31, 2020:
?Consolidated net sales decreased $14.9 million, or 4%, for fiscal year 2020
compared to the prior fiscal year. Changes in foreign currency exchange rates
had an unfavorable impact of $4.9 million on consolidated net sales for fiscal
year 2020. Thus, on a constant currency basis, net sales would have decreased by
$10.0 million, or 2%, for fiscal year 2020 compared to the prior fiscal year.
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 fiscal year ended August 31, 2020.
?Gross profit as a percentage of net sales decreased to 54.6% for fiscal year
2020 compared to 54.9% for the prior fiscal year.
?Consolidated net income increased $4.8 million, or 9%, for fiscal year 2020
compared to the prior fiscal year. Changes in foreign currency exchange rates
had an unfavorable impact of $1.8 million on consolidated net income for fiscal
year 2020. Thus, on a constant currency basis, net income would have increased
by $6.6 million, or 12%, for fiscal year 2020 compared to the prior fiscal year.
Net income in fiscal year 2019 was unfavorably impacted by a reserve for an
uncertain tax position of $8.7 million that was recorded during the fourth
quarter of fiscal year 2019.
?Consolidated results for the fiscal year ended August 31, 2020 were negatively
impacted by the COVID-19 pandemic. See Significant Developments section which
follows for details.
?Diluted earnings per common share for fiscal year 2020 were $4.40 versus $4.02
in the prior fiscal year.
?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 August 31, 2020, the Company repurchased 92,583 shares at an average
price of $181.73 per share, for a total cost of $16.8 million. On April 8, 2020,
the Company elected to temporarily suspend repurchases under this plan, which
subsequently expired on August 31, 2020. The Company elected this suspension in
order to preserve cash while it continued to monitor the impact of the COVID-19
pandemic.
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 fiscal year ended August 31, 2020, our financial results and
operations were negatively impacted by the COVID-19 pandemic that began in early
calendar year 2020 and as a result, our consolidated net sales decreased by
$14.9 million or 4% compared to the prior fiscal year. The pandemic was
disruptive to our business in fiscal year 2020 as a result of the temporary
closures, lockdowns and restrictions mandated by various governmental
authorities intended to combat the COVID-19 pandemic at physical store
retailers. We were able to reduce the adverse impact of these challenging times
due to the strength of our brand, the broad distribution of our products and our
continued focus on our strategic initiatives. While we experienced significant
declines in sales levels in our markets where we do not have direct operations
(distributor markets) and certain other markets where closures and lockdown
measures were severe and extended or where sales are somewhat dependent on the
industrial channel, sales in many of our direct markets and sales via ecommerce
channels increased from period to period which helped to offset some of this
decline in the distributor markets. The direct markets in which we conduct
business were not impacted as much by the pandemic since the channels in which
we sell our products in these markets were either not included in these closures
or the closures were only temporary in nature. In addition, increased sales of
our homecare and cleaning products from period to period due to the high demand
for such products during the pandemic also helped to offset some of the sales
declines of our maintenance products in the distributor markets.
We have taken a variety of measures during the COVID-19 pandemic 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.
Due to the speed and fluidity with which the situation continues to develop and
the uncertainty on whether recurring waves of the COVID-19 pandemic will occur
later in calendar year 2020 or early in 2021, it is very difficult for us to
estimate with certainty the extent to which the COVID-19 pandemic will impact
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 in all business segments 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 we are continually monitoring and managing this situation.
See Item 1A, "Risk Factors," included herein for information on risks associated
with pandemics in general and COVID-19 specifically.
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 will have
the ability to defer the payment for the employer portion of social security
taxes as part of the CARES Act, we do not believe this assistance or any other
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
Fiscal Year Ended August 31, 2020 Compared to Fiscal Year Ended August 31, 2019
Operating Items
The following table summarizes operating data for our consolidated operations
(in thousands, except percentages and per share amounts):
Fiscal Year Ended August 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Net sales:
Maintenance products $ 369,444 $ 386,644 $ (17,200) (4)%
Homecare and cleaning products 39,054 36,706 2,348 6%
Total net sales 408,498 423,350 (14,852) (4)%
Cost of products sold 185,481 191,010 (5,529) (3)%
Gross profit 223,017 232,340 (9,323) (4)%
Operating expenses 145,797 149,958 (4,161) (3)%
Income from operations $ 77,220 $ 82,382 $ (5,162) (6)%
Net income $ 60,710 $ 55,908 $ 4,802 9%
Earnings per common share - diluted $ 4.40 $ 4.02 $ 0.38 9%
Net Sales by Segment
The following table summarizes net sales by segment (in thousands, except
percentages):
Fiscal Year Ended August 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Americas $ 200,493 $ 193,972 $ 6,521 3%
EMEA 156,241 160,615 (4,374) (3)%
Asia-Pacific 51,764 68,763 (16,999) (25)%
Total $ 408,498 $ 423,350 $ (14,852) (4)%
?
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Americas
The following table summarizes net sales by product line for the Americas
segment (in thousands, except percentages):
Fiscal Year Ended August 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Maintenance products $ 178,739 $ 173,664 $ 5,075 3%
Homecare and cleaning products 21,754 20,308 1,446 7%
Total
$ 200,493 $ 193,972 $ 6,521 3%
% of consolidated net sales 49% 46%
Sales in the Americas segment, which includes the U.S., Canada and Latin
America, increased to $200.5 million, up $6.5 million, or 3%, for the fiscal
year ended August 31, 2020 compared to the prior fiscal year. Changes in foreign
currency exchange rates had an unfavorable impact on sales for the Americas
segment from period to period. Sales for the fiscal year ended August 31, 2020
translated at the exchange rates in effect for the prior fiscal year would have
been $201.2 million in the Americas segment. Thus, on a constant currency basis,
sales would have increased by $7.3 million, or 4%, for the fiscal year ended
August 31, 2020 compared to the prior fiscal year.
Sales of maintenance products in the Americas segment increased $5.1 million, or
3%, for the fiscal year ended August 31, 2020 compared to the prior fiscal year.
This sales increase was mainly driven by higher sales of WD-40 Multi Use Product
in the U.S. and Canada, which were up $5.1 million and $0.8 million, or 5% and
11%, 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 and
significantly increased sales in the fourth quarter of fiscal year 2020. The
higher level of sales in the fourth quarter of fiscal year 2020 of WD-40
Multi-Use Product in both the U.S. and Canada were partially due to increased
demand for our product as a result of a higher level of renovation and
maintenance activities exhibited by our end-users during the COVID-19 pandemic.
In addition, sales increased due to new distribution and successful promotional
programs as well as increased sales through the ecommerce channel in the U.S.
during the COVID-19 pandemic. These sales increases of WD-40 Multi-Use Product
in the U.S. and Canada were partially offset by a decrease in sales of such
products in Latin America of $1.6 million, primarily due to various disruptions
in the market related to the COVID-19 pandemic. The disruptions from the
COVID-19 pandemic primarily included decreased availability of our product in
the market 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 fourth quarter. Although sales
in Latin America decreased in total, sales in Mexico increased from period to
period. During the third quarter of fiscal year 2020, we shifted away from a
distribution model for Mexico where we sold product through a large wholesale
customer who then supplied various retail customers, to one where we sell direct
to retail customers at a higher margin. This transition to a direct model
resulted in higher sales in Mexico during the fourth quarter and full fiscal
year 2020. While we anticipate a continued successful build of our direct
customer base in Mexico in future periods under this new direct model, the
impact on sales in future periods resulting from this transition is uncertain at
this time.
Sales of homecare and cleaning products in the Americas segment increased $1.4
million, or 7%, for the fiscal year ended August 31, 2020 compared to 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 $1.5 million or 27%
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 fiscal year ended August 31,
2020 compared to the prior fiscal year when 81% of sales came from the U.S., and
19% of sales came from Canada and Latin America combined.
?
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EMEA
The following table summarizes net sales by product line for the EMEA segment
(in thousands, except percentages):
Fiscal Year Ended August 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Maintenance products $ 146,540 $ 151,112 $ (4,572) (3)%
Homecare and cleaning products 9,701 9,503 198 2%
Total (1)
$ 156,241 $ 160,615 $ (4,374) (3)%
% of consolidated net sales 38% 38%
(1)While the Company's reporting currency is the U.S. Dollar, the functional
currency of our U.K. subsidiary, the entity in which the EMEA results are
generated, is Pound Sterling. Although the functional currency of this
subsidiary is Pound Sterling, approximately 50% of its sales are generated in
Euro and 15-20% 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 $156.2 million, down $4.4 million, or 3%, for the fiscal
year ended August 31, 2020 compared to 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 fiscal year ended August 31, 2020
translated at the exchange rates in effect for the prior fiscal year would have
been $159.0 million in the EMEA segment. Thus, on a constant currency basis,
sales would have decreased by $1.7 million, or 1%, for the fiscal year ended
August 31, 2020 compared to the prior fiscal year.
The countries in Europe where we sell through a direct sales force include the
U.K., Italy, France, Iberia (which includes Spain and Portugal) and the
Germanics sales region (which includes Germany, Austria, Denmark, Switzerland,
Belgium and the Netherlands). Sales in the direct markets increased $2.4
million, or 2%, for the fiscal year ended August 31, 2020 compared to the prior
fiscal year, primarily due to an increase in sales of the WD-40 BIKE and WD-40
Specialist product lines of $1.4 million and $1.1 million, or 105% and 10%,
respectively, throughout the direct markets. The increase in sales of WD-40 BIKE
products was primarily due to strong demand in countries where our end-users
were following recommendations to exercise outdoors in socially distanced
settings due to the COVID-19 pandemic. The increase in sales of WD-40 Specialist
was primarily due to increased distribution across all direct markets and a
higher level of sales in the ecommerce channel for this product line from period
to period. Sales of WD-40 Multi-Use Product were relatively constant for fiscal
year 2020 compared to the prior fiscal year due to various disruptions in the
direct markets during fiscal year 2020, primarily in the third quarter, related
to the COVID-19 pandemic. These disruptions included severe lockdowns measures
during the third quarter of fiscal year 2020 which limited many retailers'
ability to participate in promotional activities and sell high volumes of
certain products, such as our WD-40 Multi-Use Product. However, a significant
rebound in sales volumes during the fourth quarter as a result of these lockdown
measures being reduced by governmental authorities and higher sales during the
first half of fiscal year 2020 offset these negative impacts and resulted in a
slight increase in sales of WD-40 Multi-Use Product across the direct markets
for fiscal year 2020 compared to the prior fiscal year. Sales from direct
markets accounted for 70% of the EMEA segment's sales for the fiscal year ended
August 31, 2020 compared to 67% of the EMEA segment's sales for 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 $6.7 million, or 13%, for the fiscal year ended
August 31, 2020 compared to the prior fiscal year, primarily due to lower sales
of the WD-40 Multi-Use Product in Eastern Europe and the Middle East, which were
down 25% and 12%, 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 second half of fiscal year 2020 due to the COVID-19 pandemic.
Although sales in the EMEA direct markets rebounded in the fourth quarter of
fiscal year 2020, the COVID-19 pandemic continued to negatively impact sales in
the distributor markets in the fourth quarter as a result of the comprehensive
lockdown measures that continued to be in place in many of these markets. The
distributor markets accounted for 30% of the EMEA segment's total sales for the
fiscal year ended August 31, 2020, compared to 33% for 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):
Fiscal Year Ended August 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Maintenance products $ 44,166 $ 61,868 $ (17,702) (29)%
Homecare and cleaning products 7,598 6,895 703 10%
Total
$ 51,764 $ 68,763 $ (16,999) (25)%
% of consolidated net sales 13% 16%
Sales in the Asia-Pacific segment, which includes Australia, China and other
countries in the Asia region, decreased to $51.8 million, down $17.0 million, or
25%, for the fiscal year ended August 31, 2020 compared to 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 fiscal
year ended August 31, 2020 translated at the exchange rates in effect for the
prior fiscal year would have been $53.2 million in the Asia-Pacific segment.
Thus, on a constant currency basis, sales would have decreased by $15.6 million,
or 23%, for the fiscal year ended August 31, 2020 compared to the prior fiscal
year.
Sales in Asia, which represented 65% of the total sales in the Asia-Pacific
segment, decreased $18.0 million, or 35%, for the fiscal year ended August 31,
2020 compared to the prior fiscal year. Sales in the Asia distributor markets
decreased $12.3 million, or 38%. Sales in China decreased $5.7 million, or 30%,
for the fiscal year ended August 31, 2020 compared to the prior fiscal year.
These decreases in sales were primarily due to various disruptions in these
markets related to the COVID-19 pandemic. Extended 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. Although China had a reduction
of certain restrictions required by local governmental authorities beginning in
the third quarter of fiscal year 2020 in relation to the COVID-19 pandemic, the
hardware and industrial channels continued to be significantly impacted by the
COVID-19 pandemic through the remainder of fiscal year 2020 and this has
resulted in reduced sales for China from period to period. Overall, we have not
yet experienced a sustained or significant rebound in sales in either the Asia
distributor markets or in China due to continuing market disruptions and
comprehensive lockdown measures in these markets.
Sales in Australia increased $1.0 million, or 6%, for the fiscal year ended
August 31, 2020 compared to 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 $1.9 million, or 11%, 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 and fourth quarters of fiscal year 2020. In
addition, WD-40 Multi Use Product and WD-40 Specialist were up 3% and 12%,
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 $223.0 million for the fiscal year ended August 31,
2020 compared to $232.3 million for the prior fiscal year. As a percentage of
net sales, gross profit decreased to 54.6% for the fiscal year ended August 31,
2020 compared to 54.9% for the prior fiscal year.
Gross margin was negatively impacted by 0.9 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 0.8 percentage points
due to the combined effects of increases in other miscellaneous costs and
unfavorable sales mix changes from period to period in all three segments. The
unfavorable impacts in the Americas were primarily due to higher miscellaneous
charges related to inventory during the fourth quarter of fiscal year 2020. The
unfavorable impacts in the EMEA segment were primarily due to changes in sales
mix changes, resulting from a larger proportion of sales to lower margin
customers from period to period. The unfavorable impacts in the Asia-Pacific
segment were primarily due to market mix changes resulting from lower sales in
China as a result of the COVID-19 pandemic. 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 0.1
percentage points. In general, the timing of advertising, promotional and other
discounts may cause fluctuations in gross margin from period to period. The
costs
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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.
These unfavorable impacts to gross margin were significantly offset by favorable
changes in the costs of petroleum-based specialty chemicals in all three
segments, positively impacting gross margin by 0.8 percentage points. 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. The average
cost of crude oil which flowed through our cost of goods sold was lower in the
fiscal year 2020 compared to prior fiscal year, thus resulting in favorable
impacts to our gross margin from period to period. Due to the volatility of the
price of crude oil, it is uncertain the level to which gross margin will be
impacted by such costs in future periods. Gross margin was also positively
affected by 0.6 percentage points from period to period due to sales price
increases, primarily in the EMEA segment, during fiscal year 2020. Favorable
changes in the costs of aerosol cans in the Americas and EMEA segments also
positively affected gross margin by 0.1 percentage points.
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 $12.9 million and $16.3 million for the fiscal
years ended August 31, 2020 and 2019, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the fiscal year ended
August 31, 2020 decreased $1.9 million to $122.0 million from $123.9 million for
the prior fiscal year. As a percentage of net sales, SG&A expenses increased to
29.9% for the fiscal year ended August 31, 2020 from 29.3% for 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 $3.1 million, partially due to lower sales from period to period.
Travel and meeting expenses decreased by $3.0 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. Favorable
changes in foreign currency exchange rates also decreased SG&A expenses by $1.0
million from period to period. These decreases were partially offset by an
increase of $3.3 million in employee-related costs 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.
Professional services fees, including those associated with cloud-based
software, also increased by $1.7 million from period to period. In addition,
other miscellaneous expenses increased by $0.2 million 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 for the fiscal
years ended August 31, 2020 and 2019 were $6.0 million and $6.5 million,
respectively. Our research and development team engages in consumer research,
product development, current product improvement and testing activities. This
team leverages its development capabilities by partnering with a network of
outside resources including our current and prospective suppliers. 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 fiscal year ended August 31,
2020 decreased $1.7 million to $21.6 million from $23.3 million for the prior
fiscal year. As a percentage of net sales, these expenses were 5.3% and 5.5% for
the fiscal years ended August 31, 2020 and 2019, respectively. Changes in
foreign currency exchange rates did not have a significant impact on advertising
and sales promotion expenses for fiscal year 2020. The decreased level of
advertising and sales promotion expenses was primarily due to the reduction of
promotional program spending in the EMEA and Asia-Pacific segments due to
indirect effects of the COVID-19 pandemic during the second half 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 fiscal year 2021 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
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to sales were $20.5 million and $18.9 million for the fiscal years ended August
31, 2020 and 2019, respectively. Therefore, our total investment in advertising
and sales promotion activities totaled $42.1 million and $42.2 million for the
fiscal years ended August 31, 2020 and 2019, respectively.
Amortization of Definite-lived Intangible Assets Expense
Amortization of our definite-lived intangible assets decreased $0.5 million to
$2.2 million for the fiscal years ended August 31, 2020, compared to $2.7
million for the prior fiscal year. This decrease from period to period was
primarily due to decreased amortization associated with the 2000 Flushes trade
name, which became fully amortized during the third quarter of fiscal year 2020.
Income from Operations by Segment
The following table summarizes income from operations by segment (in thousands,
except percentages):
Fiscal Year Ended August 31,
Change from
?Prior Year
2020 2019 Dollars Percent
Americas $ 51,089 $ 50,069 $ 1,020 2%
EMEA 37,620 37,246 374 1%
Asia-Pacific 14,982 20,813 (5,831) (28)%
Unallocated corporate (1) (26,471) (25,746) (725) 3%
Total
$ 77,220 $ 82,382 $ (5,162) (6)%
(1)Unallocated corporate expenses are general corporate overhead expenses not
directly attributable to any one of the business 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 consolidated
statements of operations.
Americas
Income from operations for the Americas segment increased to $51.1 million,
up $1.0 million, or 2%, for the fiscal year ended August 31, 2020 compared to
the prior fiscal year, primarily due to a $6.5 million increase in sales,
significantly offset by higher operating expenses and a lower gross margin. As a
percentage of net sales, gross profit for the Americas segment decreased from
53.5% to 53.2% period over period primarily due to higher miscellaneous charges
related to inventory during the fourth quarter of fiscal year 2020 and higher
discounts that were given to customers in fiscal year 2020. These unfavorable
impacts to gross margin were partially offset by the decreased costs of
petroleum-based specialty chemicals from period to period. Operating expenses
increased $1.7 million period over period, primarily due to higher earned
incentive compensation and freight costs from period to period. These increases
in operating expenses were offset by lower travel and meeting expenses due to
initiatives adopted by the Company during the third quarter of fiscal year 2020
in order to help reduce the transmission of COVID-19. Operating income as a
percentage of net sales decreased from 25.8% to 25.5% period over period.
EMEA
Income from operations for the EMEA segment increased to
$37.6 million, up $0.4 million, or 1%, for the fiscal year ended August 31, 2020
compared to the prior fiscal year, primarily due to lower operating expenses of
$3.2 million, significantly offset by lower net sales of $4.4 million and a
lower gross margin. As a percentage of net sales, gross profit for the EMEA
segment decreased from 56.6% to 56.4% period over period primarily due to
increases in warehousing, distribution and freight costs as well as unfavorable
changes in foreign currency exchange rates from period to period. These
unfavorable impacts to gross margin were significantly offset by sales price
increases from period to period. In addition, declines in the costs of
petroleum-based specialty chemicals favorably impacted gross margin from period
to period. The impacts of these declines in oil prices in future periods is
uncertain due to the volatility of the price of crude oil. Operating expenses
decreased $3.2 million period over period, primarily due to decreased outbound
freight costs and lower 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 in order to
help 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 increased from 23.2% to 24.1% period over period.
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Asia-Pacific
Income from operations for the Asia-Pacific segment decreased to $15.0 million,
down $5.8 million, or 28%, for the fiscal year ended August 31, 2020 compared to
the prior fiscal year, primarily due to a $17.0 million decrease in sales, which
was partially offset by lower cost of goods sold and operating expenses. As a
percentage of net sales, gross profit for the Asia-Pacific segment remained
constant at 54.5% period over period. Gross margin was negatively impacted by
increases to advertising, promotional, and other discounts that we give to our
customers from period to period. Increases in warehousing, distribution and
freight costs from period to period also negatively impacted gross margin. These
unfavorable impacts to gross margin were completely offset by favorable changes
to the cost of petroleum-based specialty chemicals from period to period. The
lower sales were accompanied by a $3.5 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 decreased from 30.3% to 28.9% period over
period.
Non-Operating Items
The following table summarizes non-operating income and expenses for our
consolidated operations (in thousands):
Fiscal Year Ended August 31,
2020 2019 Change
Interest income $ 93 $ 155 $ (62)
Interest expense $ 2,439 $ 2,541 $ (102)
Other income (expense), net $ 641 $ 774 $ (133)
Provision for income taxes $ 14,805 $ 24,862 $ (10,057)
Interest Income
Interest income was not significant for both the fiscal years ended August 31,
2020 and 2019.
Interest Expense
Interest expense remained relatively constant at $2.4 million and $2.5 million
for the fiscal years ended August 31, 2020 and 2019, respectively.
Other Income (Expense), Net
Other income (expense), net decreased by an insignificant amount of $0.1 million
to $0.6 million for the fiscal year ended August 31, 2020.
Provision for Income Taxes
The provision for income taxes was 19.6% of income before income taxes for the
fiscal year ended August 31, 2020 compared to 30.8% for the prior fiscal year.
The decrease in the effective income tax rate from period to period was
primarily due to an uncertain tax position in the amount of $8.7 million
associated with the Tax Cuts and Jobs Act mandatory one-time "toll tax" on
unremitted foreign earnings that was recorded in the fourth quarter of fiscal
year 2019. This resulted in a significantly higher fiscal year 2019 effective
income tax rate compared to fiscal year 2020. In the fourth quarter of fiscal
year 2020, the U.S. Treasury released regulations related to a High-Tax
Exception for those jurisdictions subject to the Global Intangible Low Taxed
Income ("GILTI") tax. These newly released regulations resulted in an immaterial
favorable impact to the fiscal year 2020 tax provision.
Net Income
Net income was $60.7 million, or $4.40 per common share on a fully diluted
basis, for fiscal year 2020 compared to $55.9 million, or $4.02 per common share
on a fully diluted basis, for the prior fiscal year. Changes in foreign currency
exchange rates year over year had an unfavorable impact of $1.8 million on net
income for fiscal year 2020. Thus, on a constant currency basis, net income for
fiscal year 2020 would have been $62.5 million.
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Results of Operations
Fiscal Year Ended August 31, 2019 Compared to Fiscal Year Ended August 31, 2018
For discussion related to changes in financial condition and the results of
operations for fiscal year 2019 compared to fiscal year 2018, refer to Part II -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations included in the Company's Annual Report on Form 10-K for the
fiscal year ended August 31, 2019, which was filed with the SEC on October 22,
2019.
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 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:
Fiscal Year Ended August 31,
2020 2019 2018
Gross margin - GAAP 55% 55% 55%
Cost of doing business as a percentage of
net sales - non-GAAP 34% 34% 34%
EBITDA as a percentage of net sales -
non-GAAP (1) 21% 21% 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):
Fiscal Year Ended August 31,
2020 2019 2018
Total operating expenses - GAAP $ 145,797 $ 149,958 $ 146,659
Amortization of definite-lived intangible
assets (2,211) (2,706) (2,951)
Depreciation (in operating departments) (4,095) (3,829) (3,725)
Cost of doing business - non-GAAP $ 139,491 $ 143,423 $ 139,983
Net sales
$ 408,498 $ 423,350 $ 408,518
Cost of doing business as a percentage of
net sales - non-GAAP 34% 34% 34%
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EBITDA (in thousands, except percentages):
Fiscal Year Ended August 31,
2020 2019 2018
Net income - GAAP $ 60,710 $ 55,908 $ 65,215
Provision for income taxes 14,805 24,862 9,963
Interest income (93) (155) (454)
Interest expense 2,439 2,541 4,219
Amortization of definite-lived
intangible assets 2,211 2,706 2,951
Depreciation 5,490 4,886 4,849
EBITDA $ 85,562 $ 90,748 $ 86,743
Net sales $ 408,498 $ 423,350 $ 408,518
EBITDA as a percentage of net sales - non-GAAP 21% 21% 21%
Liquidity and Capital Resources
Overview
The Company's financial condition and liquidity remain strong. Net cash provided
by operations was $72.7 million for fiscal year 2020 compared to $62.9 million
for fiscal year 2019. Although there continues to be a certain level of
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 fiscal year 2020 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 Part IV-Item 15, "Exhibits, Financial Statement Schedules" 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. On
September 30, 2020, we entered into the first amendment to the Credit agreement
and a third amendment to the Note Agreement and refinanced existing draws under
our Credit Agreement in the United States through the issuance of new notes
under the Note Agreement in the amount of $52.0 million. See Part IV-Item 15,
"Exhibits, Financial Statement Schedules" Note 18 - Subsequent Events for
additional information on these agreements.
The Company maintains a balance of outstanding draws in U.S. Dollars in the
Americas segment, as well as in Euros and 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
fiscal year ended August 31, 2020, the Company 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 did not have any 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. The Company repaid $55.0
million of these outstanding draws in the fourth quarter of fiscal year 2020 in
anticipation of the changes that it made to its debt structure in September 2020
to include more long-term debt. See Note 18 - Subsequent Events for additional
information. 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 August 31, 2020, we had a $95.9 million balance of outstanding draws on
the revolving credit facility. This entire amount was classified as long-term as
of August 31, 2020 based on our ability and intent assessment as well as
considerations related to debt structure changes and refinancing discussed in
detail in Note 18 - Subsequent Events. 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 fiscal year 2020.
There are 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 and
Note 18 - Subsequent Events for additional information on these financial
covenants. At August 31, 2020, we were in compliance with all debt covenants. We
continue to monitor our compliance with all debt covenants. 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. On April 8, 2020 we
temporarily suspended repurchases under our approved share buy-back plan, which
subsequently expired on August 31, 2020, in order to preserve cash while we
continued to monitor the impacts of the COVID-19 pandemic. At August 31, 2020,
we had a total of $56.5 million in cash and cash equivalents. We do not foresee
any ongoing issues with repaying our borrowings and we closely monitor the use
of this credit facility.
Cash Flows
The following table summarizes our cash flows by category for the periods
presented (in thousands):
Fiscal Year Ended August 31,
2020 2019 2018
Net cash provided by operating activities $ 72,664 $ 62,851 $ 64,822
Net cash used in investing activities
(18,945) (12,680) 71,207
Net cash used in financing activities (26,709) (69,009) (121,409)
Effect of exchange rate changes on cash and
cash equivalents 2,219 (2,795) (2,836)
Net increase (decrease) in cash and cash
equivalents $ 29,229 $ (21,633) $ 11,784
Operating Activities
Net cash provided by operating activities increased $9.8 million to $72.7
million for fiscal year 2020 from $62.9 million for fiscal year 2019. Cash flows
from operating activities depend heavily on operating performance and changes in
working capital. Our primary source of operating cash flows for fiscal year
ended August 31, 2020 was net income of $60.7 million, which increased $4.8
million from period to period. Changes in our working capital further increased
net cash provided by operating activities from period to period. This was
primarily attributable to increases accounts payable and accrued liabilities
during fiscal year 2020 compared with decreases in these accounts during the
prior fiscal year. In addition, higher planned increases in inventory levels
during fiscal year 2019 compared to fiscal year 2020 when inventory levels only
increased slightly also impacted changes in working capital. These increases in
working capital were partially offset by the increase in long-term liabilities
and income taxes payable in fiscal year 2019 due to an $8.7 million uncertain
tax position that was recorded in the fourth quarter related to the Tax Act.
Such account balances only increased slightly in fiscal year 2020, resulting in
a change in working capital which decreased cash provided by operating
activities from period to period.
Investing Activities
Net cash used in investing activities was $18.9 million for fiscal year 2020
compared to $12.7 million for fiscal year 2019. This change was significantly
due to an increase of $6.0 million in capital expenditures from period to period
due to manufacturing-related capital expenditures within the U.K. and the United
States.
Financing Activities
Net cash used in financing activities decreased $42.3 million to $26.7 million
for fiscal year 2020 from $69.0 million for fiscal year 2019, primarily due to
$29.6 million in net proceeds on the Company's revolving line of credit during
fiscal year 2020, compared to $2.9 million in net repayments during fiscal year
2019. Also contributing to this decrease in total cash outflows was the
suspension of treasury stock repurchases beginning in the third quarter of
fiscal year 2020, which resulted in a decrease in treasury stock repurchases of
$12.8 million period over period. Offsetting these decreases in cash outflows
was an increase in dividends paid of $3.2 million during fiscal year 2020
compared to the prior fiscal year.
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Effect of Exchange Rate Changes
All of our foreign subsidiaries currently operate in currencies other than the
U.S. Dollar and a significant portion of our consolidated cash balance is
denominated in these foreign functional currencies, particularly at our U.K.
subsidiary which operates in Pound Sterling. As a result, our cash and cash
equivalents balances are subject to the effects of the fluctuations in these
functional currencies against the U.S. Dollar at the end of each reporting
period. The net effect of exchange rate changes on cash and cash equivalents,
when expressed in U.S. Dollar terms was an increase in cash of $2.2 million in
fiscal year 2020, and a decrease in cash of $2.8 million for both fiscal years
2019 and 2018. These changes were primarily due to fluctuations in various
foreign currency exchange rates from period to period, but the majority is
related to the fluctuations in the Pound Sterling against the U.S. Dollar.
Cash Flows
Fiscal Year Ended August 31, 2019 Compared to Fiscal Year Ended August 31, 2018
For discussion related to changes in the consolidated statements of cash flows
for fiscal year 2019 compared to fiscal year 2018, refer to Part II - Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations included in the Company's Annual Report on Form 10-K for the fiscal
year ended August 31, 2019, which was filed with the SEC on October 22, 2019.
Share Repurchase Plans
The information required by this item is incorporated by reference to Part
IV-Item 15, "Exhibits, Financial Statement Schedules" Note 8 - Share Repurchase
Plans, included in this report.
Dividends
The Company has historically paid regular quarterly cash dividends on its common
stock. In December 2019, the Board of Directors declared a 10% increase in the
regular quarterly cash dividend, increasing it from $0.61 per share to $0.67 per
share. On October 5, 2020, the Company's Board of Directors declared a cash
dividend of $0.67 per share payable on October 30, 2020 to shareholders of
record on October 16, 2020. Our ability to pay dividends could be affected by
future business performance, liquidity, capital needs, alternative investment
opportunities and loan covenants.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined by Item 303(a)(4)(ii) of
Regulation S-K.
Contractual Obligations
The following table sets forth our best estimates as to the amounts and timing
of minimum contractual payments for our most significant contractual obligations
and commitments as of August 31, 2020 for the next five years and thereafter (in
thousands). Future events could cause actual payments to differ significantly
from these amounts.
Total 1 year 2-3 years 4-5 years Thereafter
Leases (1) $ 9,402 $ 2,073 $ 2,867 $ 2,041 $ 2,421
Short-term and long-term
borrowings (2) 113,898 800 1,600 97,498 14,000
Minimum purchase obligations
(3) 17,008 4,494 7,740 4,774 -
Total $ 140,308 $ 7,367 $ 12,207 $ 104,313 $ 16,421
(1)We were committed under non-cancellable financing and operating leases at
August 31, 2020. Our financing leases were not significant as of August 31,
2020.
(2)Includes anticipated cash payments for short and long-term borrowings not
inclusive of estimated interest payments, which are not expected to be material
on an annual basis. For additional details on these borrowings, including
ability and intent assessment on the Company's credit facility agreement with
Bank of America and debt structure changes
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subsequent to August 31, 2020, refer to the information set forth in Part
IV-Item 15, "Exhibits, Financial Statement Schedules", Note 8 - Debt and Note 18
- Subsequent Events. As described in Note 18, the Company amended its credit
facility agreement subsequent to August 31, 2020 and extended the maturity date
of this facility from March 16, 2025 to September 30, 2025. In addition, the
Company refinanced a portion of its draws on this credit facility through the
issuance of Series B and Series C senior notes which mature in November 2027 and
November 2030, respectively. As a result, $95.9 million of borrowings that were
due within 4 and 5 years from August 31, 2020 were subsequently amended or
refinanced and are no longer due until a period of greater than 5 years after
August 31, 2020. At this time, we are not able to estimate additional amounts we
expect to borrow during fiscal year 2021 due to the uncertainty caused by the
COVID-19 pandemic and its impact on our financial results and operations.
(3)We have ongoing relationships with various third-party suppliers (contract
manufacturers) that manufacture our products and third-party distribution
centers who 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. The table above includes
definitive minimum purchase obligations included in the master agreements with
certain of our contract manufacturers and distribution centers. 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 and these commitments are not
included in the table above. 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 and these
commitments are not included in the table above.
At August 31, 2020, the liability recorded for uncertain tax positions,
excluding associated interest and penalties, was approximately $9.4 million. For
additional details on our uncertain tax positions, refer to the information set
forth in Part IV-Item 15, "Exhibits, Financial Statement Schedules" Note 14 -
Income Taxes. We have estimated that up to $0.4 million of unrecognized tax
benefits related to income tax positions may be affected by the resolution of
tax examinations or expiring statutes of limitation within the next twelve
months.
Critical Accounting Policies
Our results of operations and financial condition, as reflected in our
consolidated financial statements, have been prepared in accordance with
accounting principles generally accepted in the United States of America.
Preparation of financial statements requires us to make estimates and
assumptions affecting the reported amounts of assets, liabilities, revenues and
expenses and the disclosures of contingent assets and liabilities. We use
historical experience and other relevant factors when developing estimates and
assumptions and these estimates and assumptions are continually evaluated. Note
2 to our consolidated financial statements included in Item 15 of this report
includes a discussion of the Company's significant accounting policies. The
accounting policies discussed below are the ones we consider to be most critical
to an understanding of our consolidated financial statements because their
application places the most significant demands on our judgment. Our financial
results may have varied from those reported had different assumptions been used
or other conditions prevailed.
Revenue Recognition
Sales are recognized as revenue at a point in time upon transferring control of
the product to the customer. This typically occurs when products are shipped or
delivered, depending on when risks of loss and title have passed to the customer
per the terms of the contract. For certain of our sales we must make judgments
and certain assumptions in order to determine when delivery has occurred.
Through an analysis of end-of-period shipments for these particular sales, we
determine an average time of transit of product to our customers, and this is
used to estimate the time of delivery and whether revenue should be recognized
during the current reporting period for such shipments. Differences in judgments
or estimates related to the lengthening or shortening of the estimated delivery
time used could result in material differences in the timing of revenue
recognition.
Sales are recorded net of allowances for damaged goods and other sales returns,
sales incentives, trade promotions and cash discounts. We apply a five-step
approach in determining the amount and timing of revenue to be recognized which
includes the following: (1) identifying the contract with a customer, (2)
identifying the performance obligations in the contract, (3) determining the
transaction price, (4) allocating the transaction price to the performance
obligations in the contract and (5) recognizing revenue when the performance
obligation is satisfied
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In determining the transaction price, management evaluates whether the price is
subject to refund or adjustment related to variable consideration to determine
the net consideration to which we expect to be entitled. We record estimates of
variable consideration, which primarily includes rebates/other discounts
(cooperative marketing programs, volume-based discounts, shelf price reductions
and allowances for shelf space, charges from customers for services they
provided to us related to the sale and penalties/fines charged to us by our
customers for failing to adhere to contractual obligations), coupon offers, cash
discount allowances, and sales returns, as a reduction of sales in the
consolidated statements of operations. These estimates are based on the expected
value method considering all reasonably available information, including current
and past trade promotion spending patterns, status of trade promotion activities
and the interpretation of historical spending trends by customer and category,
customer agreements and/or currently known factors that arise in the normal
course of business. We review our assumptions and adjust these estimates
accordingly on a quarterly basis. Our consolidated financial statements could be
materially impacted if the actual promotion rates are different from the
estimated rates. If our accrual estimates for sales incentives at August 31,
2020 were to differ by 10%, the impact on net sales would be approximately $0.9
million.
Accounting for Income Taxes
Current income tax expense is the amount of income taxes expected to be payable
for the current year. A deferred income tax liability or asset is established
for the expected future tax consequences resulting from the differences in
financial reporting and tax bases of assets and liabilities. A valuation
allowance is provided if it is more likely than not that some or all of the
deferred tax assets will not be realized. In addition to valuation allowances,
we provide for uncertain tax positions when such tax positions do not meet the
recognition thresholds or measurement standards prescribed by the authoritative
guidance on income taxes. Amounts for uncertain tax positions are adjusted in
periods when new information becomes available or when positions are effectively
settled. We recognize accrued interest and penalties related to uncertain tax
positions as a component of income tax expense.
The Company is required to make assertions on whether our foreign subsidiaries
will invest their undistributed earnings indefinitely and these assertions are
based on the capital needs of the foreign subsidiaries. Generally, unremitted
earnings of our foreign subsidiaries are not considered to be indefinitely
reinvested. However, there are exceptions regarding our newly formed subsidiary
in Mexico as well as specific statutory remittance restrictions imposed on our
China subsidiary. Costs associated with repatriating unremitted foreign
earnings, including U.S. state income taxes and foreign withholding taxes, are
immaterial to the Company's consolidated financial statements. For additional
information on income tax matters, see Part IV-Item 15, "Exhibits, Financial
Statement Schedules" Note 14 - Income Taxes, included in this report.
Impairment of Definite-Lived Intangible Assets
We assess for potential impairments to our long-lived assets when there is
evidence that events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable and/or its estimated remaining useful
life may no longer be appropriate. Any required impairment loss would be
measured as the amount by which the asset's carrying amount exceeds its fair
value, which is the amount at which the asset could be bought or sold in a
current transaction between willing market participants and would be recorded as
a reduction in the carrying amount of the related asset and a charge to results
of operations. An impairment loss would be recognized when the sum of the
expected future undiscounted net cash flows is less than the carrying amount of
the asset.
There were no indicators of potential impairment identified as a result of the
Company's review of events and circumstances related to its existing
definite-lived intangible assets for the periods ended August 31, 2020, 2019 or
2018. The Company's review of events and circumstances included consideration of
the ongoing COVID-19 pandemic.
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 IV-Item 15, "Exhibits, Financial Statement
Schedules" Note 2 - Basis of Presentation and Summary of Significant Accounting
Policies, included in this report.
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