As used in this report, the terms "we," "our," "us" and "the Company" refer to
WD-40 Company and its wholly-owned subsidiaries, unless the context suggests
otherwise. Amounts and percentages in tables and discussions may not total due
to rounding.
The following information is provided as a supplement to, and should be read in
conjunction with, the unaudited condensed consolidated financial statements and
notes thereto included in Part I-Item 1 of this Quarterly Report and the audited
consolidated financial statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations included in our
Annual Report on Form 10-K for the fiscal year ended August 31, 2020, which was
filed with the Securities and Exchange Commission ("SEC") on October 21, 2020.
In order to show the impact of changes in foreign currency exchange rates on our
results of operations, we have included constant currency disclosures, where
necessary, in the Overview and Results of Operations sections which follow.
Constant currency disclosures represent the translation of our current fiscal
year revenues and expenses from the functional currencies of our subsidiaries to
U.S. dollars using the exchange rates in effect for the corresponding period of
the prior fiscal year. We use results on a constant currency basis as one of the
measures to understand our operating results and evaluate our performance in
comparison to prior periods. Results on a constant currency basis are not in
accordance with accounting principles generally accepted in the United States of
America ("non-GAAP") and should be considered in addition to, not as a
substitute for, results prepared in accordance with GAAP.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. This report contains forward-looking
statements, which reflect the Company's current views with respect to future
events and financial performance.
These forward-looking statements include, but are not limited to, discussions
about future financial and operating results, including: growth expectations for
maintenance products; expected levels of promotional and advertising spending;
anticipated input costs for manufacturing and the costs associated with
distribution of our products; plans for and success of product innovation, the
impact of new product introductions on the growth of sales; anticipated results
from product line extension sales; expected tax rates and the impact of tax
legislation and regulatory action; the length and severity of the current
COVID-19 pandemic and its impact on the global economy and the Company's
financial results; and forecasted foreign currency exchange rates and commodity
prices. These forward-looking statements are generally identified with words
such as "believe," "expect," "intend," "plan," "could," "may," "aim,"
"anticipate," "target," "estimate" and similar expressions. The Company
undertakes no obligation to revise or update any forward-looking statements.
Actual events or results may differ materially from those projected in
forward-looking statements due to various factors, including, but not limited
to, those identified in Part I-Item 1A, "Risk Factors," in the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 2020, and in the
Company's Quarterly Reports on Form 10-Q, which may be updated from time to
time.
Overview
The Company
WD-40 Company ("the Company"), based in San Diego, California, is a global
marketing organization dedicated to creating positive lasting memories by
developing and selling products that solve problems in workshops, factories and
homes around the world. We market a wide range of maintenance products and
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 products 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
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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 nine months ended May 31, 2021:
?Consolidated net sales increased $76.0 million, or 26%, for the nine months
ended May 31, 2021 compared to the corresponding period of the prior fiscal
year. Changes in foreign currency exchange rates had a favorable impact of $13.2
million on consolidated net sales for the nine months ended May 31, 2021
compared to the corresponding period of the prior fiscal year. Thus, on a
constant currency basis, net sales would have increased by $62.8 million, or
21%, from period to period. This favorable impact from changes in foreign
currency exchange rates mainly came from our EMEA segment, which accounted for
44% of our consolidated sales for the nine months ended May 31, 2021.
?Gross profit as a percentage of net sales increased to 54.9% for the nine
months ended May 31, 2021 compared to 54.0% for the corresponding period of the
prior fiscal year.
?Consolidated net income increased $20.8 million, or 51%, for the nine months
ended May 31, 2021 compared to the corresponding period of the prior fiscal
year. Changes in foreign currency exchange rates had a favorable impact of $2.9
million on consolidated net income for the nine months ended May 31, 2021
compared to the corresponding period of the prior fiscal year. Thus, on a
constant currency basis, net income would have increased $17.9 million, or 44%,
from period to period.
?Although consolidated results for the nine months ended May 31, 2021 were
significantly improved from the same period last fiscal year due to a variety of
factors, the Company's operations and business continue to be impacted by the
COVID-19 pandemic. See the Impact of COVID-19 on Our Business section which
follows for details.
?Diluted earnings per common share for the nine months ended May 31, 2021 were
$4.48 versus $2.98 in the prior fiscal year period.
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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Impact of COVID-19 on Our Business
In fiscal year 2020, our financial results and operations were negatively
impacted for many of our markets by the COVID-19 pandemic, particularly in the
third and fourth quarters, during the early stages of the pandemic which began
in early calendar year 2020. We have since been able to reduce the adverse
impacts of the COVID-19 pandemic on our business due to the strength of our
brands, our increased focus on e-commerce, the global expansion in the
distribution of our products and a continued focus on our strategic initiatives
and our strong culture and the dedication of our employees. As a result of these
activities and the shift in consumer spending patterns towards products such as
ours during the pandemic, we have experienced increased sales period over period
in most of our markets during each of the first three quarters of fiscal year
2021. Sales during the nine months ended May 31, 2021 increased 26% compared to
the corresponding period of the prior fiscal year primarily due to a higher
level of renovation and maintenance activities by end-users during the pandemic,
recoveries in many markets due to improvements in public health and safety
related to the pandemic, and increased distribution and sales within the
e-commerce channel.
We are continuing to actively manage and monitor supply chain and transportation
disruptions and constraints that have arisen periodically within all three of
our business segments, but particularly in the Americas, during the COVID-19
pandemic. Some of the 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, as well as significant competition for freight resources and
increased raw material and other input costs that have resulted due to these
constraints. In addition, supply chains at many companies globally are being
strained due to shortages of certain materials and this is impacting the 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
Americas segment where demand for aerosols has significantly outpaced the
available production capacity in the region. We have been actively working on
various initiatives in partnership with our third-party manufacturers in order
to increase the capacity and flexibility of our supply chain to meet strong
end-user demand. Although we are not able to estimate the degree of the impact
or the costs associated with potential future disruptions within our supply
chain and distribution networks, we believe that the changes we are working to
implement as a result of the pandemic will have a positive lasting impact on our
ability to better manage any future disruptions. However, some of the additional
costs resulting from these recent constraints in our supply chain and
distribution network are expected to unfavorably impact our cost of goods sold
and lower our gross margin in the near-term.
Although several vaccines and treatments are authorized for use against
COVID-19, these vaccines and treatments are being produced and distributed at
varying rates globally. Therefore, uncertainty continues to exist regarding the
severity and duration of this rapidly evolving pandemic and it remains difficult
for us to estimate the extent to which the COVID-19 pandemic will impact our
financial results and operations in future periods. Also, as social distancing
requirements resulting from the COVID-19 pandemic continue to lessen in future
periods, it is uncertain how this will impact the high levels of renovation and
maintenance activities by end-users in recent periods, which have contributed to
our strong sales in fiscal year 2021. 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. These
measures have included requiring remote working arrangements for employees where
practicable and the imposition of travel restrictions. These policies and
initiatives will continue to impact how we operate for as long as they are in
effect and we are still working to determine and implement safe and effective
phased office reentry plans for employees at all of our office locations
globally.
See the Company's risk factors disclosed in Part I-Item 1A, "Risk Factors," in
its Annual Report on Form 10-K for the fiscal year ended August 31, 2020, which
was filed with the SEC on October 21, 2020 for information on risks associated
with pandemics in general and COVID-19 specifically.
?
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Results of Operations
Three Months Ended May 31, 2021 Compared to Three Months Ended May 31, 2020
Operating Items
The following table summarizes operating data for our consolidated operations
(in thousands, except percentages and per share amounts):
Three Months Ended May 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Net sales:
Maintenance products $ 127,374 $ 87,859 $ 39,515 45%
Homecare and cleaning products 9,031 10,388 (1,357) (13)%
Total net sales 136,405 98,247 38,158 39%
Cost of products sold 63,947 45,197 18,750 41%
Gross profit 72,458 53,050 19,408 37%
Operating expenses 45,137 33,238 11,899 36%
Income from operations $ 27,321 $ 19,812 $ 7,509 38%
Net income $ 21,006 $ 14,524 $ 6,482 45%
Earnings per common share - diluted $ 1.52 $ 1.06 $ 0.46 43%
Shares used in per share calculations - diluted 13,746 13,700 46 -
Net Sales by Segment
The following table summarizes net sales by segment (in thousands, except
percentages):
Three Months Ended May 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Americas $ 60,046 $ 50,094 $ 9,952 20%
EMEA 58,587 32,521 26,066 80%
Asia-Pacific 17,772 15,632 2,140 14%
Total $ 136,405 $ 98,247 $ 38,158 39%
?
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Americas
The following table summarizes net sales by product line for the Americas
segment (in thousands, except percentages):
Three Months Ended May 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Maintenance products $ 55,917 $ 43,551 $ 12,366 28%
Homecare and cleaning products 4,129 6,543 (2,414) (37)%
Total
$ 60,046 $ 50,094 $ 9,952 20%
% of consolidated net sales 44% 51%
Sales in the Americas segment, which includes the U.S., Canada and Latin
America, increased to $60.0 million, up $10.0 million, or 20%, for the three
months ended May 31, 2021 compared to the corresponding period of the prior
fiscal year. Changes in foreign currency exchange rates had a favorable impact
on sales for the Americas segment from period to period. Sales for the three
months ended May 31, 2021 translated at the exchange rates in effect for the
corresponding period of the prior fiscal year would have been $59.4 million in
the Americas segment. Thus, on a constant currency basis, sales would have
increased by $9.3 million, or 19%, from period to period.
Sales of maintenance products in the Americas segment increased $12.4 million,
or 28%, for the three months ended May 31, 2021 compared to the corresponding
period of the prior fiscal year. This sales increase was mainly driven by
increased sales of maintenance products in Latin America, the U.S. and Canada,
which were up $5.4 million or 151%, $5.1 million or 13%, and $1.9 million or
87%, respectively, from period to period. Sales in the corresponding period of
the prior fiscal year were negatively impacted by various disruptions and
lockdowns in the market related to the early stages of the COVID-19 pandemic. As
improvements in public health and safety restrictions have occurred in many
regions within the Americas, the Company has been more able to grow sales of its
WD-40 Multi-Use Product through increased market penetration. Sales in Latin
America increased primarily due to the transition to the direct marketing model
in Mexico. Late in the third quarter of fiscal year 2020, we shifted away from a
distribution model for Mexico where we sold products through a large wholesale
customer who then supplied various retail customers, to one where we sell direct
to these retail customers. The continued momentum from the shift in distribution
model combined with increased demand for our product and decreased COVID-19
restrictions, resulted in increased sales in Latin America during fiscal year
2021 compared to the corresponding period of the prior fiscal year. Sales of
maintenance products in the U.S. and Canada also increased from period to period
primarily as a result of a higher level of renovation and maintenance activities
exhibited by our end-users during the COVID-19 pandemic. Although the U.S.
experienced some improvements in its supply chain in the third quarter of fiscal
year 2021 resulting in higher sales of maintenance products from period to
period, it is still having periodic challenges meeting the high level of demand
for our products seen in the market, particularly for WD-40 Specialist products
which are sourced at certain third-party manufacturers that were heavily
impacted by the recent global supply chain constraints. As a result of these
challenges, sales of the WD-40 Specialist product line decreased 33% for the
three months ended March 31, 2021 compared to the corresponding period in the
prior fiscal year.
Sales of homecare and cleaning products in the Americas decreased $2.4 million,
or 37%, for the three months ended May 31, 2021 compared to the corresponding
period of the prior fiscal year. This sales decrease was experienced across all
homecare and cleaning brands in the Americas due to particularly strong sales in
the third quarter of the prior fiscal year. During the third quarter of fiscal
year 2020, we experienced a significant increase in sales of many of our
homecare and cleaning products due to increased demand for such products as a
result of the COVID-19 pandemic. During the third quarter of fiscal year 2021,
we have seen demand for these homecare and cleaning products return to more
normal levels due to improvements in public health and fewer safety restrictions
related to the pandemic in many regions within the Americas. Sales levels for
our homecare and cleaning products in the Americas were also negatively impacted
during the three months ended May 31, 2021 by the challenges in our Americas
supply chain. 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.
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For the Americas segment, 77% of sales came from the U.S., and 23% of sales came
from Canada and Latin America combined for the three months ended May 31, 2021
compared to the distribution for the three months ended May 31, 2020 when 87% of
sales came from the U.S., and 13% of sales came from Canada and Latin America.
EMEA
The following table summarizes net sales by product line for the EMEA segment
(in thousands, except percentages):
Three Months Ended May 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Maintenance products $ 56,074 $ 30,846 $ 25,228 82%
Homecare and cleaning products 2,513 1,675 838 50%
Total (1)
$ 58,587 $ 32,521 $ 26,066 80%
% of consolidated net sales 43% 33%
(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, increased to $58.6 million, up $26.1 million, or 80%, for the three
months ended May 31, 2021 compared to the corresponding period of the prior
fiscal year. Changes in foreign currency exchange rates had a favorable impact
on sales for the EMEA segment from period to period. Sales for the three months
ended May 31, 2021 translated at the exchange rates in effect for the
corresponding period of the prior fiscal year would have been $52.9 million in
the EMEA segment. Thus, on a constant currency basis, sales would have increased
by $20.4 million, or 63%, from period to period.
The countries in Europe where we sell through a direct sales force include the
U.K., Italy, France, Iberia (which includes Spain and Portugal) and the
Germanics sales region (which includes Germany, Austria, Denmark, Switzerland,
Belgium and the Netherlands). Sales in the direct markets increased to $40.2
million, up $18.5 million, or 85%, for the three months ended May 31, 2021,
compared to the corresponding period of the prior fiscal year primarily due to
increased sales of WD-40 Multi-Use Product, WD-40 Specialist and 3-In-One of
$11.5 million or 81%, $2.5 million or 94%, and $2.0 million or 112%,
respectively, throughout all of the direct markets. This increase in sales was
primarily due to increased demand for our products as a result of a higher level
of renovation and maintenance activities exhibited by our end-users during the
COVID-19 pandemic and the success of promotional programs that were conducted
during the third quarter of fiscal year 2021 to meet the high level of demand.
This increased demand and consumption of our products resulted in increased
sales, particularly within the e-commerce channel. In addition, sales levels
were much higher compared to the prior period due to severe lockdowns measures
that occurred 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. Sales from direct markets accounted for 69% of the
EMEA segment's sales for the three months ended May 31, 2021 compared to 67% for
the corresponding period of the prior fiscal year.
The regions in the EMEA segment where we sell through local distributors include
the Middle East, Africa, India, Eastern and Northern Europe. Sales in the
distributor markets increased $7.6 million, or 70%, for the three months ended
May 31, 2021 compared to the corresponding period of the prior fiscal year,
primarily due to increased sales of the WD-40 Multi-Use Product in Eastern
Europe, the Middle East and Northern Europe, which were up $2.9 million, $1.7
million, and $1.7 million, respectively. This increase in sales from period to
period was primarily due to the continued recoveries in the EMEA distributor
markets which had previously experienced more severe lockdowns during the second
half of fiscal year 2020 due to the COVID-19 pandemic. During the first nine
months of fiscal year 2021, many of these regions experienced improved economic
conditions as a result of reductions in COVID-19 related restrictions. This
allowed our marketing distributors to participate in more of our promotional
activities and to adjust to more normal levels of inventory for our product,
which
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resulted in increased sales to meet the higher level of demand caused by
increases in renovation and maintenance activities by end-users during the
pandemic. The distributor markets accounted for 31% of the EMEA segment's total
sales for the three months ended May 31, 2021, compared to 33% for the
corresponding period of the prior fiscal year.
Asia-Pacific
The following table summarizes net sales by product line for the Asia-Pacific
segment (in thousands, except percentages):
Three Months Ended May 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Maintenance products $ 15,383 $ 13,462 $ 1,921 14%
Homecare and cleaning products 2,389 2,170 219 10%
Total
$ 17,772 $ 15,632 $ 2,140 14%
% of consolidated net sales 13% 16%
Sales in the Asia-Pacific segment, which includes Australia, China and other
countries in the Asia region, increased to $17.8 million, up $2.1 million, or
14%, for the three months ended May 31, 2021 compared to the corresponding
period of the prior fiscal year. Changes in foreign currency exchange rates had
a favorable impact on sales for the Asia-Pacific segment from period to period.
Sales for the three months ended May 31, 2021 translated at the exchange rates
in effect for the corresponding period of the prior fiscal year would have been
$16.4 million in the Asia-Pacific segment. Thus, on a constant currency basis,
sales would have increased by $0.7 million, or 5%, from period to period.
Sales in Asia, which represented 66% of the total sales in the Asia-Pacific
segment, increased $1.1 million, or 10%, for the three months ended May 31, 2021
compared to the corresponding period of the prior fiscal year. Sales in the Asia
distributor markets increased $1.5 million, or 26%, for the three months ended
May 31, 2021 compared to the corresponding period of the prior fiscal year
primarily due to increased sales of WD-40 Multi-Use Product of $1.2 million or
22%, primarily due to the easing of COVID-19 lockdown measures and restrictions
compared to the corresponding period of the prior fiscal year. These reduced
lockdown measures positively impacted economic conditions during the third
quarter of fiscal year 2021 and resulted in increased demand and higher sales
period over period, particularly in the Philippines, South Korea and Indonesia.
Sales in China decreased $0.5 million, or 9%, primarily due to a higher level of
sales in the third quarter of fiscal year 2020 associated with the timing of
COVID-19 restrictions and shipping activities during that period. In the third
quarter of the prior fiscal year, China had a significant number of orders that
were expected to be shipped to customers in early February 2020 after the
Chinese New Year's holiday and those shipments could not take place due to
COVID-19. This resulted in a backlog of orders being shipped in the third
quarter of fiscal year 2020 due to the easing of COVID-19 restrictions. No such
comparable event occurred in the current fiscal year.
Sales in Australia increased $1.1 million, or 22%, for the three months ended
May 31, 2021 compared to the corresponding period of the prior fiscal year.
Changes in foreign currency exchange rates had a favorable impact on sales in
Australia. On a constant currency basis, sales in Australia would have remained
constant from period to period at $4.9 million. Negative sales impacts to
Australia due to the COVID-19 pandemic have continued to be limited in fiscal
year 2021 as COVID-19 case numbers have remained relatively low in Australia
since the initial outbreak and governmental authorities had adopted less severe
lockdown requirements. This has resulted in our key customers remaining open for
business during the COVID-19 pandemic during both fiscal year 2020 and 2021.
Sales of maintenance products in Australia during the third quarter of fiscal
year 2021 were favorably impacted by a higher level of renovation and
maintenance activities undertaken by our end-users period over period. This
increase was almost completely offset by lower sales of homecare and cleaning
products, as we have seen demand for these products return to more normal levels
due to improvements in public health and reduced safety restrictions related to
the pandemic.
?
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Gross Profit
Gross profit increased to $72.5 million for the three months ended May 31, 2021
compared to $53.1 million for the corresponding period of the prior fiscal year.
As a percentage of net sales, gross profit decreased to 53.1% for the three
months ended May 31, 2021 compared to 54.0% for the corresponding period of the
prior fiscal year.
Gross margin was unfavorably impacted by 1.8 percentage points due to increases
in manufacturing costs, changes in sales mix and higher miscellaneous costs from
period to period. The increased manufacturing costs were primarily driven by
higher labor and overhead costs at our third-party manufacturers caused by
global supply chain constraints as a result of the COVID-19 pandemic. These
pandemic-related challenges began to significantly impact the Americas segment
starting in the second quarter of fiscal year 2021 and continued in the third
quarter. No such challenges existed in the third quarter of the prior fiscal
year since it was early in the pandemic. Gross margin was unfavorably impacted
by 0.5 percentage points due to changes in foreign currency exchange rates from
period to period in the EMEA segment. Gross margin was also unfavorably impacted
by 0.1 percentage points from period to period due to unfavorable changes in the
costs of petroleum-based specialty chemicals. Although petroleum-based specialty
chemicals favorably impacted gross margin during the first half of fiscal year
2021 as compared to the prior fiscal year, such costs have increased
significantly over the last several months and is starting to negatively impact
our gross margin. There is often a delay of one quarter or more before changes
in raw material costs impact the cost of products sold due to production and
inventory life cycles. The recent increases in the price of crude oil that we
are seeing in the market are expected to unfavorably impact our cost of goods
sold for as long as these costs remain at these higher levels
These unfavorable impacts to gross margin were partially offset by favorable
changes in the costs of aerosol cans in the EMEA segment due to increased sales
which resulted in higher can rebates, positively impacting gross margin by 0.8
percentage points. In addition, gross margin was favorably impacted by 0.3
percentage points due to changes in warehousing and in bound freight costs,
primarily in our EMEA segment. Since warehousing costs are primarily fixed in
nature, gross margin was favorably impacted due to the smaller impact that such
fees had as a result of significantly higher sales in the third quarter of this
fiscal year as compared to the corresponding period of the prior fiscal year. In
bound freight costs in the third quarter of this fiscal year were lower than
last fiscal year due to additional freight costs incurred last year associated
with the movement of certain raw materials and finished goods in preparation for
Brexit. Gross margin was also positively impacted by 0.3 percentage points from
period to period due to decreases to advertising, promotional, and other
discounts that we give to our customers, primarily in the Americas and
Asia-Pacific segments. In general, the timing of advertising, promotional and
other discounts may cause fluctuations in gross margin from period to period.
The costs associated with certain promotional activities are recorded as a
reduction to sales while others are recorded as advertising and sales promotion
expenses. Advertising, promotional and other discounts that are given to our
customers are recorded as a reduction to sales, whereas advertising and sales
promotional costs associated with promotional activities that we pay to third
parties are recorded as advertising and sales promotion expenses. In addition,
gross margin was positively impacted by 0.1 percentage points from period to
period due to sales price increases, primarily in the EMEA and Americas segments
during the last twelve months.
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 $4.9 million and $3.1 million for the three months
ended May 31, 2021 and 2020, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the three months ended
May 31, 2021 increased $10.2 million to $38.1 million from $27.9 million for the
corresponding period of the prior fiscal year. As a percentage of net sales,
SG&A expenses decreased to 28.0% for the three months ended May 31, 2021
compared to 28.4% for the corresponding period of the prior fiscal year. The
increase in SG&A expenses from period to period was due to a variety of factors,
but most significantly due to increased employee-related costs of $6.1 million
as a result of increased incentive compensation accruals and higher stock-based
compensation from period to period resulting from stronger financial results
from period to period. Changes in foreign currency exchange rates from period to
period increased SG&A expenses by $1.9 million. Increases in freight costs
associated with higher sales levels as well as carrier price increases due to
constraints and limited capacity in the global distribution networks from period
to period also increased SG&A expenses by $1.5 million. In addition,
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professional services fees increased $0.8 million due to increased cloud-based
software usage and license fees. There was also a slight decrease in SG&A
expenses of $0.1 million from period to period due to lower miscellaneous costs.
We continued our research and development investment, the majority of which is
associated with our maintenance products, in support of our focus on innovation
and renovation of our products. Research and development costs were $1.3 million
and $1.4 million for the three months ended May 31, 2021 and 2020, respectively.
Our research and development team engages in consumer research, product
development, current product improvements and testing activities. This team
leverages its development capabilities by partnering with a network of outside
resources including our current and prospective third-party contract
manufacturers. The level and types of expenses incurred within research and
development can vary from period to period depending upon the types of
activities being performed.
Advertising and Sales Promotion Expenses
Advertising and sales promotion expenses for the three months ended May 31, 2021
increased $1.9 million, or 39%, to $6.7 million from $4.8 million for the
corresponding period of the prior fiscal year. As a percentage of net sales,
these expenses increased to 4.9% for the three months ended May 31, 2021
compared to 4.8% for the corresponding period of the prior fiscal year. Changes
in foreign currency exchange rates from period to period increased advertising
and sales promotion expenses by $0.4 million for the three months ended May 31,
2021. The increase in advertising and sales promotion expenses was primarily due
to a higher level of promotional programs and marketing support in all three
segments as a result of increased consumer demand and higher sales from period
to period.
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 $6.7 million and $5.0 million for three months ended
May 31, 2021 and 2020, respectively. Therefore, our total investment in
advertising and sales promotion activities totaled $13.4 million and $9.8
million for the three months ended May 31, 2021 and 2020, respectively.
Amortization of Definite-lived Intangible Assets Expense
Amortization of our definite-lived intangible assets decreased to $0.4 million
for the three months ended May 31, 2021 compared to $0.6 million for the
corresponding period in the prior year 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):
Three Months Ended May 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Americas $ 15,582 $ 14,424 $ 1,158 8%
EMEA 15,288 7,180 8,108 113%
Asia-Pacific 5,241 5,736 (495) (9)%
Unallocated corporate (1) (8,790) (7,528) (1,262) (17)%
Total $ 27,321 $ 19,812 $ 7,509 38%
Americas
Income from operations for the Americas increased to $15.6 million, up $1.2
million, or 8%, for the three months ended May 31, 2021 compared to the
corresponding period of the prior fiscal year, primarily due to a $10.0 million
increase in sales, partially offset by both a lower gross margin and higher
operating expenses. Operating expenses increased period over period primarily
due to higher accruals for incentive compensation and stock-based compensation,
as well as higher outbound freight
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costs due to the increase in sales and higher freight costs in our distribution
networks from period to period. As a percentage of net sales, gross profit for
the Americas segment decreased from 53.1% to 51.2% period over period primarily
due to increases in costs at our third-party manufacturers from period to period
due to supply chain constraints as a result of the COVID-19 pandemic. These
unfavorable impacts to gross margin were partially offset by the combined
favorable impacts of decreased costs of petroleum-based specialty chemicals and
aerosol cans as well as decreases to advertising, promotional, and other
discounts that we give to our customers, from period to period. Operating income
as a percentage of net sales decreased from 28.8% to 26.0% period over period.
EMEA
Income from operations for the EMEA segment increased to $15.3 million, up $8.1
million, or 113% from period to period, primarily due to a $26.1 million
increase in sales, partially offset by a lower gross margin and a $5.9 million
increase in operating expenses. As a percentage of net sales, gross profit for
the EMEA segment decreased from 54.9% to 54.4% period over period primarily due
to increased costs of petroleum-based specialty chemicals, unfavorable changes
to exchange rates and increases in costs at our third-party manufacturers from
period to period. These unfavorable impacts to gross margin were partially
offset by the decreased costs of aerosol cans and lower warehousing,
distribution and freight costs from period to period. The increased sales were
accompanied by a $5.9 million increase in total operating expenses period over
period, primarily due to higher accruals for incentive compensation and
stock-based compensation as well as increased advertising and promotional
expenses and outbound freight costs due to the higher sales volumes. Operating
income as a percentage of net sales increased from 22.1% to 26.1% period over
period.
Asia-Pacific
Income from operations for the Asia-Pacific segment decreased to $5.2 million,
down $0.5 million, or 9%, for the three months ended May 31, 2021 compared to
the corresponding period of the prior fiscal year, primarily due to a $1.7
million increase in operating expenses, partially offset by higher sales and a
slightly higher gross margin. As a percentage of net sales, gross profit for the
Asia-Pacific segment increased from 55.2% to 55.3% period over period primarily
due to decreases to the cost of petroleum-based specialty chemicals, as well as
decreases to advertising, promotional, and other discounts that we give to our
customers from period to period. These favorable impacts to gross margin were
almost completely offset by unfavorable changes in both sales product mix and
market mix, as well as increased costs of aerosol cans from period to period.
The increased sales were accompanied by a $1.7 million increase in total
operating expenses period over period, primarily due to higher accruals for
incentive compensation and a higher level of advertising and sales promotion
expenses. Operating income as a percentage of net sales decreased from 36.7% to
29.5% period over period.
Non-Operating Items
The following table summarizes non-operating income and expenses for our
consolidated operations (in thousands):
Three Months Ended May 31,
2021 2020 Change
Interest income $ 21 $ 20 $ 1
Interest expense $ 615 $ 778 $ (163)
Other (expense) income, net $ 183 $ 27 $ 156
Provision for income taxes $ 5,904 $ 4,557 $ 1,347
?
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Interest Income
Interest income was insignificant for both the three months ended May 31, 2021
and 2020.
Interest Expense
Interest expense decreased to $0.6 million for the three months ended May 31,
2021 compared to $0.8 million during the corresponding period of the prior
fiscal year, primarily due to a lower balance on our line of credit from period
to period.
Other Income (Expense), Net
Other income (expense), net was insignificant for both the three months ended
May 31, 2021 and 2020.
Provision for Income Taxes
The provision for income taxes was 21.9% and 23.9% of income before income taxes
for the three months ended May 31, 2021 and 2020, respectively. The decrease in
the effective income tax rate from period to period was primarily due to higher
earnings from foreign operations resulting in an increase in the benefit
received from the application of the Foreign-Derived Intangible Income
calculation, coupled with a one-time benefit received in fiscal year 2021 from
an Investment Tax Credit.
Net Income
Net income was $21.0 million, or $1.52 per common share on a fully diluted
basis, for the three months ended May 31, 2021 compared to $14.5 million, or
$1.06 per common share on a fully diluted basis, for the corresponding period of
the prior fiscal year. Changes in foreign currency exchange rates had a
favorable impact of $1.4 million on net income for the three months ended May
31, 2021 compared to the corresponding period of the prior fiscal year. On a
constant currency basis, net income would have increased by $5.1 million from
period to period.
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Nine Months Ended May 31, 2021 Compared to Nine Months Ended May 31, 2020
Operating Items
The following table summarizes operating data for our consolidated operations
(in thousands, except percentages and per share amounts):
Nine Months Ended May 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Net sales:
Maintenance products $ 344,446 $ 268,676 $ 75,770 28%
Homecare and cleaning products 28,423 28,176 247 1%
Total net sales 372,869 296,852 76,017 26%
Cost of products sold 168,158 136,657 31,501 23%
Gross profit 204,711 160,195 44,516 28%
Operating expenses 128,343 107,494 20,849 19%
Income from operations $ 76,368 $ 52,701 $ 23,667 45%
Net income $ 61,820 $ 41,045 $ 20,775 51%
Earnings per common share - diluted $ 4.48 $ 2.98 $ 1.50 50%
Shares used in per share calculations - diluted 13,727 13,727 - -
Net Sales by Segment
The following table summarizes net sales by segment (in thousands, except
percentages):
Nine Months Ended May 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Americas $ 160,390 $ 143,672 $ 16,718 12%
EMEA 163,150 113,519 49,631 44%
Asia-Pacific 49,329 39,661 9,668 24%
Total $ 372,869 $ 296,852 $ 76,017 26%
?
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Americas
The following table summarizes net sales by product line for the Americas
segment (in thousands, except percentages):
Nine Months Ended May 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Maintenance products $ 145,729 $ 127,662 $ 18,067 14%
Homecare and cleaning products 14,661 16,010 (1,349) (8)%
Total
$ 160,390 $ 143,672 $ 16,718 12%
% of consolidated net sales 43% 48%
Sales in the Americas segment, which includes the U.S., Canada and Latin
America, increased to $160.4 million, up $16.7 million, or 12%, for the nine
months ended May 31, 2021 compared to the corresponding period of the prior
fiscal year. Changes in foreign currency exchange rates did not have a material
impact on sales for the Americas segment from period to period.
Sales of maintenance products in the Americas segment increased $18.1 million,
or 14%, for the nine months ended May 31, 2021 compared to the corresponding
period of the prior fiscal year. This sales increase was mainly driven by
increased sales of maintenance products in the Latin America, the U.S. and
Canada, which were up $10.1 million or 60%, $5.0 million or 5% and $3.0 million
or 42%, respectively, from period to period. Increased demand for our products
as a result of a higher level of renovation and maintenance activities exhibited
by our end-users during the COVID-19 pandemic resulted in increased sales of
maintenance products in all three regions. In addition, sales in Latin America
increased due to the transition to the direct marketing model in Mexico. Early
in the third quarter of fiscal year 2020, we shifted away from a distribution
model for Mexico where we sold products through a large wholesale customer who
then supplied various retail customers, to one where we sell direct to these
retail customers. This resulted in increased sales in Latin America during the
first nine months of fiscal year 2021 compared to the corresponding period of
the prior fiscal year. Although the U.S. experienced some improvements in its
supply chain in the third quarter of fiscal year 2021 resulting in higher sales
of maintenance products from period to period, it is still having challenges
meeting customer and end user demand, particularly for its WD-40 Specialist
products. As a result of these challenges, sales of the WD-40 Specialist product
line decreased 15% for the nine months ended March 31, 2021 compared to the
corresponding period in the prior fiscal year.
Sales of homecare and cleaning products in the Americas decreased $1.4 million,
or 8%, for the nine months ended May 31, 2021 compared to the corresponding
period of the prior fiscal year. This sales decrease was driven primarily by a
decrease in sales of Lava and X-14 brand products in the U.S., which were down
$0.9 million or 40% and $0.6 million or 42%, respectively, from period to
period. We experienced a significant increase in sales of most of our homecare
and cleaning products during the second half of fiscal year 2020 due to
increased demand for such products as a result of the COVID-19 pandemic. During
the third quarter of fiscal year 2021, we have seen demand for these homecare
and cleaning products return to more normal levels due to improvements in public
health and safety restrictions related to the pandemic in many regions within
the Americas. Sales levels for our homecare and cleaning products in the
Americas were also negatively impacted during the nine months ended May 31, 2021
by the challenges in our Americas supply chain. 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 fiscal
years prior to the start of the COVID-19 pandemic.
For the Americas segment, 76% of sales came from the U.S., and 24% of sales came
from Canada and Latin America combined for the nine months ended May 31, 2021
compared to the distribution for the nine months ended May 31, 2020 when 82% of
sales came from the U.S., and 18% of sales came from Canada and Latin America.
?
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EMEA
The following table summarizes net sales by product line for the EMEA segment
(in thousands, except percentages):
Nine Months Ended May 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Maintenance products $ 156,188 $ 106,720 $ 49,468 46%
Homecare and cleaning products 6,962 6,799 163 2%
Total
$ 163,150 $ 113,519 $ 49,631 44%
% of consolidated net sales 44% 38%
Sales in the EMEA segment, which includes Europe, the Middle East, Africa and
India, increased to $163.2 million, up $49.6 million, or 44%, for the nine
months ended May 31, 2021 compared to the corresponding period of the prior
fiscal year. Changes in foreign currency exchange rates had a favorable impact
on sales for the EMEA segment from period to period. Sales for the nine months
ended May 31, 2021 translated at the exchange rates in effect for the
corresponding period of the prior fiscal year would have been $152.9 million in
the EMEA segment. Thus, on a constant currency basis, sales would have increased
by $39.3 million, or 35%, from period to period.
The countries in Europe where we sell through a direct sales force include the
U.K., Italy, France, Iberia (which includes Spain and Portugal) and the
Germanics sales region (which includes Germany, Austria, Denmark, Switzerland,
Belgium and the Netherlands). Sales in the direct markets increased to $108.9
million, up $32.8 million, or 43%, for the nine months ended May 31, 2021
compared to the corresponding period of the prior fiscal year primarily due to
increased sales of WD-40 Multi-Use Product, WD-40 Specialist and WD-40 Bike of
$21.5 million or 41%, $5.2 million or 61% and $2.2 million or 145%,
respectively, throughout all of the direct markets. Additionally, sales of
3-In-One increased $2.9 million or 49% during the period. These increases in
sales were primarily due to increased demand for our products as a result of a
higher level of renovation and maintenance activities exhibited by our end-users
during the COVID-19 pandemic and the success of promotional programs that were
conducted during the third quarter of fiscal year 2021 to meet the high level of
demand. This increased demand and consumption of our products resulted in
increased sales, particularly within the e-commerce channel. In addition, sales
levels were much higher in the third quarter of fiscal year 2021 compared to the
prior period due to severe lockdowns measures that occurred 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. Sales from
direct markets accounted for 67% of the EMEA segment's sales for the nine months
ended May 31, 2021 compared to 67% for the corresponding period of the prior
fiscal year.
The regions in the EMEA segment where we sell through local distributors include
the Middle East, Africa, India, Eastern and Northern Europe. Sales in the
distributor markets increased $16.8 million, or 45%, for the nine months ended
May 31, 2021 compared to the corresponding period of the prior fiscal year,
primarily due to increased sales of the WD-40 Multi-Use Product in Northern
Europe, Eastern Europe, India, and the Middle East, which were up $5.0 million,
$4.1 million, $3.9 million and $3.1 million, respectively. This increase in
sales from period to period was primarily due to recoveries experienced during
fiscal year 2021 in distributor markets that previously experienced more severe
lockdowns during the second half of fiscal year 2020 due to the COVID-19
pandemic. During fiscal year 2021, many of these regions experienced improved
economic conditions as a result of reductions in COVID-19 related restrictions.
This allowed our marketing distributors to participate in more of our
promotional activities and to adjust to more normal levels of inventory for our
product, which resulted in increased sales to meet the higher level of demand
caused by increases in renovation and maintenance activities by end-users during
the pandemic. The distributor markets accounted for 33% of the EMEA segment's
total sales for the nine months ended May 31, 2021, compared to 33% for the
corresponding period of the prior fiscal year.
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Asia-Pacific
The following table summarizes net sales by product line for the Asia-Pacific
segment (in thousands, except percentages):
Nine Months Ended May 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Maintenance products $ 42,529 $ 34,294 $ 8,235 24%
Homecare and cleaning products 6,800 5,367 1,433 27%
Total
$ 49,329 $ 39,661 $ 9,668 24%
% of consolidated net sales 13% 14%
Sales in the Asia-Pacific segment, which includes Australia, China and other
countries in the Asia region, increased to $49.3 million, up $9.7 million, or
24%, for the nine months ended May 31, 2021 compared to the corresponding period
of the prior fiscal year. Changes in foreign currency exchange rates had a
favorable impact on sales for the Asia-Pacific segment from period to period.
Sales for the nine months ended May 31, 2021 translated at the exchange rates in
effect for the corresponding period of the prior fiscal year would have been
$46.6 million in the Asia-Pacific segment. Thus, on a constant currency basis,
sales would have increased by $7.0 million, or 18%, from period to period.
Sales in Asia, which represented 67% of the total sales in the Asia-Pacific
segment, increased $6.0 million, or 22%, for the nine months ended May 31, 2021
compared to the corresponding period of the prior fiscal year. Sales in China
increased $4.0 million, or 46%, primarily due to improved market conditions as a
result of the reduction of COVID-19 lockdown measures compared to the
corresponding period of the prior fiscal year when the COVID-19 outbreak
resulted in significant governmental restrictions on movement and commerce.
Sales in the Asia distributor markets increased $1.9 million, or 11%, for the
nine months ended May 31, 2021 compared to the corresponding period of the prior
fiscal year. These increased sales were primarily due to the easing of COVID-19
lockdown measures in many of the Asia markets during fiscal year 2021 compared
to late in fiscal year 2020. These reduced lockdown measures have positively
impacted economic conditions and resulted in increased demand and higher sales
period over period, particularly in the Philippines, South Korea, Indonesia and
Hong Kong, during the nine months ended May 31, 2021.
Sales in Australia increased $3.7 million, or 31%, for the nine months ended May
31, 2021 compared to the corresponding period of the prior fiscal year. Changes
in foreign currency exchange rates had a favorable impact on sales in Australia.
On a constant currency basis, sales in Australia would have increased by $1.8
million, or 14%, partially due to continued increased demand for homecare and
cleaning products, which were up $1.4 million, or 27%, as a result of the
COVID-19 pandemic. In addition, sales of maintenance products were up $2.3
million, or 31%, from period to period primarily due to a higher level of
renovation and maintenance activities undertaken by our end-users during the
COVID-19 pandemic which resulted in increased sales. Negative sales impacts to
Australia due to the COVID-19 pandemic have continued to be limited in fiscal
year 2021 since COVID-19 case numbers have remained relatively low in Australia
since the initial outbreak and governmental authorities have adopted less severe
lockdown requirements. This has resulted in our key customers remaining open for
business during the COVID-19 pandemic.
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Gross Profit
Gross profit increased to $204.7 million for the nine months ended May 31, 2021
compared to $160.2 million for the corresponding period of the prior fiscal
year. As a percentage of net sales, gross profit increased to 54.9% for the nine
months ended May 31, 2021 compared to 54.0% for the corresponding period of the
prior fiscal year.
Gross margin was favorably impacted by 1.2 percentage points from period to
period due to favorable changes in the costs of petroleum-based specialty
chemicals in all three segments. Beginning in late February 2020, which was late
in the second quarter of our fiscal year 2020, the price of crude oil dropped
significantly for a period of several months. Although the price of crude oil
has recently recovered to the prices seen in early calendar year 2020, the
average cost of crude oil which flowed through our cost of goods sold was lower
during the first nine months of fiscal year 2021 compared to the corresponding
period of the prior fiscal year, thus resulting in favorable impacts to our
gross margin from period to period. There is often a delay of one quarter or
more before changes in raw material costs impact the cost of products sold due
to production and inventory life cycles. Gross margin was also positively
impacted by 0.8 percentage points due to favorable changes in the costs of
aerosol cans in the EMEA and Americas segments. In addition, gross margin was
positively impacted by 0.2 percentage points from period to period due to sales
price increases in all three segments during the last twelve months.
These favorable impacts to gross margin were partially offset by an unfavorable
impact of 1.0 percentage points due to increases in manufacturing costs and
higher miscellaneous costs from period to period. The increased manufacturing
costs were primarily driven by higher labor and overhead costs at our
third-party manufacturers caused by global supply chain constraints as a result
of the COVID-19 pandemic. These pandemic-related challenges began to
significantly impact the Americas segment starting in the second quarter of
fiscal year 2021 and continued in the third quarter. No such challenges existed
in the corresponding periods of the prior fiscal year. Gross margin was also
negatively impacted by 0.2 percentage points from period to period due to higher
warehousing and in-bound freight costs, primarily in the Americas and EMEA
segments. Changes in foreign currency exchange rates from period to period in
the EMEA segment negatively impacted 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 $12.5 million and $9.3 million for the nine months
ended May 31, 2021 and 2020, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the nine months ended
May 31, 2021 increased $19.2 million to $109.6 million from $90.4 million for
the corresponding period of the prior fiscal year. As a percentage of net sales,
SG&A expenses decreased to 29.4% for the nine months ended May 31, 2021 compared
to 30.5% for the corresponding period of the prior fiscal year. The increase in
SG&A expenses from period to period was due to a variety of factors, but most
significantly due to increased employee-related costs of $15.1 million due to
increased incentive compensation accruals and higher stock-based compensation
from period to period resulting from stronger financial results from period to
period. Changes in foreign currency exchange rates from period to period
increased SG&A expenses by $3.0 million. Increases in freight costs associated
with higher sales levels as well as carrier price increases due to constraints
and limited capacity in the global distribution networks from period to period
also increased SG&A expenses by $2.8 million. In addition, professional services
fees increased $1.7 million due to increased cloud-based software usage and
license fees. Other miscellaneous expenses also increased $0.6 million from
period to period. These increases to SG&A expenses were offset by a decrease in
travel and meeting expenses of $4.0 million from period to period. Travel and
meeting expenses decreased primarily due to continued initiatives 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.
We continued our research and development investment, the majority of which is
associated with our maintenance products, in support of our focus on innovation
and renovation of our products. Research and development costs were $4.2 million
and $4.6 million for the nine months ended May 31, 2021 and 2020, respectively.
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Advertising and Sales Promotion Expenses
Advertising and sales promotion expenses for the nine months ended May 31, 2021
increased $2.5 million, or 16%, to $17.7 million from $15.2 million for the
corresponding period of the prior fiscal year. As a percentage of net sales,
these expenses decreased to 4.7% for the nine months ended May 31, 2021 from
5.1% for the corresponding period of the prior fiscal year. Changes in foreign
currency exchange rates increased advertising and sales promotion expenses by
$0.7 million for the nine months ended May 31, 2021. The increase in advertising
and sales promotion expenses was primarily due to a higher level of promotional
programs and marketing support in all three segments as a result of increased
consumer demand and higher sales from period to period. These increases were
partially offset by the decrease of physical marketing and sampling activities
from period to period, such as the cancellations of trade shows, due to the
continued indirect effects of the COVID-19 pandemic during the first nine months
of fiscal year 2021 and this resulted in a decreased in advertising and sales
promotion expenses as a percentage of net sales from period to period.
As a percentage of net sales, advertising and sales promotion expenses may
fluctuate period to period based upon the type of marketing activities we employ
and the period in which the costs are incurred. Total promotional costs recorded
as a reduction to sales for the nine months ended May 31, 2021 were $18.4
million compared to $14.5 million for the corresponding period of the prior
fiscal year. Therefore, our total investment in advertising and sales promotion
activities totaled $36.1 million and $29.7 million for the nine months ended May
31, 2021 and 2020, respectively.
Amortization of Definite-lived Intangible Assets Expense
Amortization of our definite-lived intangible assets decreased to $1.1 million
for the nine months ended May 31, 2021 compared to $1.9 million for the nine
months ended May 31, 2020 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):
Nine Months Ended May 31,
Change from
?Prior Year
2021 2020 Dollars Percent
Americas $ 40,564 $ 36,404 $ 4,160 11%
EMEA 47,207 26,354 20,853 79%
Asia-Pacific 15,488 12,044 3,444 29%
Unallocated corporate (26,891) (22,101) (4,790) (22)%
Total $ 76,368 $ 52,701 $ 23,667 45%
Americas
Income from operations for the Americas increased to $40.6 million, up $4.2
million, or 11%, for the nine months ended May 31, 2021 compared to the
corresponding period of the prior fiscal year, primarily due to a $16.7 million
increase in sales which was partially offset by higher operating expenses. As a
percentage of net sales, gross profit for the Americas segment remained constant
at 52.9%. The combined favorable impacts of decreased costs of petroleum-based
specialty chemicals and aerosol cans as well as decreases to advertising,
promotional, and other discounts that we give to our customers increased our
gross margin from period to period. These favorable impacts to gross margin were
completely offset by higher third-party manufacturing costs as well as increased
warehousing, distribution and freight costs. The increased sales were
accompanied by a $4.7 million increase in total operating expenses period over
period, primarily due to higher accruals for incentive compensation and
stock-based compensation, as well as higher outbound freight costs due to
increased sales and higher freight costs in the market from period to period.
These increases in operating expenses were partially offset by lower travel and
meeting expenses due to initiatives adopted by the Company during the third
quarter of fiscal year 2020 to reduce the
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transmission of COVID-19. In addition, operating expenses were favorably
impacted by decreased amortization associated with the 2000 Flushes trade name,
which became fully amortized during the third quarter of fiscal year 2020.
Operating income as a percentage of net sales remained stable at 25.3% from
period to period.
EMEA
Income from operations for the EMEA segment increased to $47.2 million, up $20.9
million, or 79%, for the nine months ended May 31, 2021 compared to the
corresponding period of the prior fiscal year, primarily due to a $49.6 million
increase in sales and a higher gross margin, partially offset by higher
operating expenses. As a percentage of net sales, gross profit for the EMEA
segment increased from 55.3% to 56.5% period over period primarily due to the
combined favorable impacts of decreased costs of aerosol cans and
petroleum-based specialty chemicals, as well as sales price increases from
period to period. These favorable impacts to gross margin were partially offset
by unfavorable changes in third-party manufacturing costs, as well as increases
in warehousing, distribution and freight costs, and increases to advertising,
promotional, and other discounts that we give to our customers from period to
period. The increased sales were accompanied by a $8.5 million increase in total
operating expenses period over period, primarily due to higher accruals for
incentive compensation and stock-based compensation, as well as increased
outbound freight costs and increased advertising and sales promotion expenses
due to higher sales from period to period. Operating income as a percentage of
net sales increased from 23.2% to 28.9% period over period.
Asia-Pacific
Income from operations for the Asia-Pacific segment increased to $15.5 million,
up $3.4 million, or 29%, for the nine months ended May 31, 2021 compared to the
corresponding period of the prior fiscal year, primarily due to a $9.7 million
increase in sales and a higher gross margin, which were partially offset by
higher operating expenses. As a percentage of net sales, gross profit for the
Asia-Pacific segment increased from 54.2% to 56.3% period over period primarily
due to decreases to the cost of petroleum-based specialty chemicals and
favorable changes in both sales product mix and market mix from period to
period. These favorable impacts to gross margin were slightly offset by the
unfavorable impact of increased costs of aerosol cans from period to period. The
increased sales were accompanied by a $2.8 million increase in total operating
expenses period over period, primarily due to higher accruals for incentive
compensation and other employee costs, as well as a higher level of advertising
and sales promotion expenses and increased outbound freight costs from period to
period. Operating income as a percentage of net sales increased from 30.4% to
31.4% period over period.
Non-Operating Items
The following table summarizes non-operating income and expenses for our
consolidated operations (in thousands):
Nine Months Ended May 31,
2021 2020 Change
Interest income $ 59 $ 73 $ (14)
Interest expense $ 1,795 $ 1,813 $ (18)
Other income (expense), net $ 513 $ (197) $ 710
Provision for income taxes $ 13,325 $ 9,719 $ 3,606
Interest Income
Interest income was insignificant for both the nine months ended May 31, 2021
and 2020.
Interest Expense
Interest expense remained relatively constant at $1.8 million for the nine
months ended May 31, 2021 compared to the corresponding period of the prior
fiscal year.
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Other Income (Expense), Net
Other income (expense), net changed by $0.7 million for the nine months ended
May 31, 2021 compared to the corresponding period of the prior fiscal year
primarily due to foreign currency exchange gains of $0.3 million in the current
year compared to $0.4 million of foreign currency losses during the
corresponding period of the prior fiscal year as a result of fluctuations in the
foreign currency exchange rates for both the U.S. Dollar and the Euro against
the Pound Sterling.
Provision for Income Taxes
The provision for income taxes was 17.7% and 19.1% of income before income taxes
for the nine months ended May 31, 2021 and 2020, respectively. The decrease in
the effective income tax rate from period to period was primarily due to a
benefit from the High Tax Exclusion associated with Global Intangible Low Taxed
Income during the first half of fiscal year 2021, as well as an increase in
excess earnings from foreign operations resulting in an increase in the benefit
received from the application of the Foreign-Derived Intangible Income
calculation.
Net Income
Net income was $61.8 million, or $4.48 per common share on a fully diluted
basis, for the nine months ended May 31, 2021 compared to $41.0 million, or
$2.98 per common share on a fully diluted basis, for the corresponding period of
the prior fiscal year. Changes in foreign currency exchange rates had a
favorable impact of $2.9 million on net income for the nine months ended May 31,
2021 compared to the corresponding period of the prior fiscal year. On a
constant currency basis, net income would have increased by $17.9 million from
period to period.
Performance Measures and Non-GAAP Reconciliations
In managing our business operations and assessing our financial performance, we
supplement the information provided by our financial statements with certain
non-GAAP performance measures. These performance measures are part of our
current 55/30/25 business model, which includes gross margin, cost of doing
business, and earnings before interest, income taxes, depreciation and
amortization ("EBITDA"), the latter two of which are non-GAAP performance
measures. Cost of doing business is defined as total operating expenses less
amortization of definite-lived intangible assets, impairment charges related to
intangible assets and depreciation in operating departments, and EBITDA is
defined as net income (loss) before interest, income taxes, depreciation and
amortization. We target our gross margin to be at or above 55% of net sales, our
cost of doing business to be at 30% of net sales, and our EBITDA to be above 25%
of net sales. Results for these performance measures may vary from period to
period depending on various factors, including economic conditions and our level
of investment in activities for the future such as those related to quality
assurance, regulatory compliance, and intellectual property protection in order
to safeguard our WD-40 brand. The targets for these performance measures are
long-term in nature, particularly those for cost of doing business and EBITDA,
and we expect to make progress towards achieving them over time as our revenues
increase.
The following table summarizes the results of these performance measures for the
periods presented:
Three Months Ended May Nine Months Ended May
31, 31,
2021 2020 2021 2020
Gross margin - GAAP 53% 54% 55% 54%
Cost of doing business as a
percentage
of net sales - non-GAAP 32% 32% 33% 35%
EBITDA as a percentage of net
sales - non-GAAP (1) 21% 22% 22% 20%
(1)Percentages may not aggregate to EBITDA percentage due to rounding and
because amounts recorded in other income (expense), net on the Company's
consolidated statement of operations are not included as an adjustment to
earnings in the EBITDA calculation.
We use the performance measures above to establish financial goals and to gain
an understanding of the comparative performance of the Company from period to
period. We believe that these measures provide our shareholders with additional
insights into the Company's results of operations and how we run our
business. The non-GAAP financial measures are
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supplemental in nature and should not be considered in isolation or as
alternatives to net income, income from operations or other financial
information prepared in accordance with GAAP as indicators of the Company's
performance or operations. The use of any non-GAAP measure may produce results
that vary from the GAAP measure and may not be comparable to a similarly defined
non-GAAP measure used by other companies. Reconciliations of these non-GAAP
financial measures to our financial statements as prepared in accordance with
GAAP are as follows:
Cost of Doing Business (in thousands, except percentages)
Three Months Ended May 31, Nine Months Ended May 31,
2021 2020 2021 2020
Total operating expenses - GAAP $ 45,137 $ 33,238 $ 128,343 $ 107,494
Amortization of definite-lived
intangible assets
(364) (552) (1,084) (1,856)
Depreciation (in operating
departments) (1,098) (1,050) (3,217) (3,046)
Cost of doing business $ 43,675 $ 31,636 $ 124,042 $ 102,592
Net sales $ 136,405 $ 98,247 $ 372,869 $ 296,852
Cost of doing business as a
percentage
of net sales - non-GAAP 32% 32% 33% 35%
EBITDA (in thousands, except percentages)
Three Months Ended May
31, Nine Months Ended May 31,
2021 2020 2021 2020
Net income - GAAP $ 21,006 $ 14,524 $ 61,820 $ 41,045
Provision for income taxes 5,904 4,557 13,325 9,719
Interest income (21) (20) (59) (73)
Interest expense 615 778 1,795 1,813
Amortization of definite-lived
intangible assets 364 552 1,084 1,856
Depreciation 1,444 1,515 4,182 4,254
EBITDA $ 29,312 $ 21,906 $ 82,147 $ 58,614
Net sales $ 136,405 $ 98,247 $ 372,869 $ 296,852
EBITDA as a percentage of net
sales - non-GAAP 21% 22% 22% 20%
Liquidity and Capital Resources
Overview
The Company's financial condition and liquidity remain strong. Net cash provided
by operations was $64.0 million for the nine months ended May 31, 2021 compared
to $40.8 million for the corresponding period of the prior fiscal year. 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 have taken leave us
positioned to manage our business through this crisis as it continues to unfold.
We continue to manage all aspects of our business including, but not limited to,
monitoring the financial health of our customers, suppliers and other
third-party relationships, implementing gross margin enhancement strategies and
developing new opportunities for growth.
Our principal sources of liquidity are our existing cash and cash equivalents,
as well as cash generated from operations and cash currently available from our
existing unsecured Credit Agreement with Bank of America. We use proceeds of the
revolving credit facility primarily for our general working capital needs. The
Company also holds borrowings under a Note Purchase and Private Shelf Agreement.
See Note 8 - Debt for additional information on these agreements. Included in
Note
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8 - Debt is information on the Credit Agreement that we amended with Bank of
America on September 30, 2020, and a third amendment to the Note Agreement. In
the first quarter of fiscal year 2021 we 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.
We have historically maintained a balance of outstanding draws on our line of
credit 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 first quarter of fiscal year 2021, we repaid
$50.0 million of our U.S. borrowings outstanding under our line of credit using
$52.0 million in proceeds that we received on September 30, 2020 from the
issuance and sale of the Series B and C Notes which mature in November 2027 and
2030, respectively. Our remaining outstanding balance under our line of credit
is denominated completely in Euros and Pound Sterling as of May 31, 2021. 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 draws
under the line of credit with successive short-term borrowings through the
September 30, 2025 maturity date of the Credit Agreement. Outstanding draws for
which we have both the ability and intent to refinance with successive
short-term borrowings for a period of at least twelve months are classified as
long-term. As of May 31, 2021, we had a $48.1 million balance of outstanding
draws on the revolving credit facility, all of which was classified as
long-term. In addition, we paid $0.8 million in principal payments on our Series
A Notes during the first nine months of fiscal year 2021, which had an
outstanding balance of $17.2 million as of May 31, 2021. There were no other
letters of credit outstanding or restrictions on the amount available on our
line of credit or notes. Per the terms of both the Note Agreement and the Credit
Agreement, our consolidated leverage ratio cannot be greater than three and a
half to one and our consolidated interest coverage ratio cannot be less than
three to one. See Note 8 - Debt for additional information on these financial
covenants. At May 31, 2021, 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
suspended repurchases under our most recent share buy-back plan, which
subsequently expired on August 31, 2020, in order to preserve cash while we
monitor the long-term impacts of the COVID-19 pandemic. The Company will
continue to evaluate future authorizations of share buy-backs. At May 31, 2021,
we had a total of $80.4 million in cash and cash equivalents. We do not foresee
any ongoing issues with repaying our borrowings and we closely monitor the use
of this credit facility.
Cash Flows
The following table summarizes our cash flows by category for the periods
presented (in thousands):
Nine Months Ended May 31,
2021 2020 Change
Net cash provided by operating activities $ 63,975 $ 40,756 $ 23,219
Net cash used in investing activities
(10,371) (17,090) 6,719
Net cash provided by (used in) financing
activities (30,615) 37,490 (68,105)
Effect of exchange rate changes on cash and
cash equivalents 911 166 745
Net increase in cash and cash equivalents $ 23,900 $ 61,322 $ (37,422)
Operating Activities
Net cash provided by operating activities increased $23.2 million to $64.0
million for the nine months ended May 31, 2021 from $40.8 million for the
corresponding period of the prior fiscal year. Cash flows from operating
activities depend heavily on operating performance and changes in working
capital. Our primary source of operating cash flows for the nine months ended
May 31, 2021 was net income of $61.8 million, which increased $20.8 million from
period to period. The changes in our working capital which decreased net cash
provided by operating activities were primarily attributable to increases in
trade and other accounts receivable balances during the nine months ended May
31, 2021 compared to the corresponding period of the prior fiscal year as a
result of significantly increased sales from period to period. In addition, the
change in working
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capital was impacted by increases to inventory from period to period. These
working capital changes were partially offset by increases in accounts payable
in the EMEA and the Americas segments due to higher levels of production and the
timing of payments to vendors from period to period. In addition, accrued
payroll and related expenses increased during the first nine months of fiscal
year 2021 primarily due to significantly increased accruals of incentive
compensation from period to period.
Investing Activities
Net cash used in investing activities decreased $6.7 million to $10.4 million
for the nine months ended May 31, 2021 from $17.1 million for the corresponding
period of the prior fiscal year, primarily due to decreased capital
expenditures. Capital expenditures decreased by $6.6 million primarily due to
the renovations and equipping of the Company's office building in Milton Keynes,
England that were completed in the first quarter of fiscal year 2020 and a lower
level of manufacturing-related capital expenditures within the U.K. and the
United States from period to period. Capital expenditures during fiscal year
2021 were primarily related to manufacturing equipment which is currently under
construction and will be located at our third-party manufacturers in the United
States and the United Kingdom once completed.
Financing Activities
Net cash used by financing activities was $30.6 million for the nine months
ended May 31, 2021 compared to net cash provided by financing activities of
$37.5 million for the corresponding period of the prior fiscal year resulting in
a net change of $68.1 million. This change was primarily due to $80.0 million in
net proceeds that we drew under our line of credit in March 2020 in response to
the COVID-19 pandemic with no comparable event occurring in the first nine
months of fiscal year 2021. In the first quarter of fiscal year 2021, we repaid
$50.0 million of such borrowings outstanding under our line of credit using
$52.0 million in proceeds that we received from the issuance and sale of senior
notes during the quarter. This net borrowing activity resulted in a $2.0 million
cash inflow during the period compared to $84.6 million in net proceeds on our
line of credit in the corresponding period of the prior fiscal year. In
addition, increases in dividends paid to our shareholders of $1.5 million and
increases in shares withheld to cover taxes on conversion of equity rewards of
$0.9 million, resulted in higher cash outflows from period to period. Offsetting
these increases in cash outflows was a decrease in treasury stock repurchases
due to the suspension of such repurchases beginning in the third quarter of
fiscal year 2020, which resulted in a decrease in cash outflows of $16.8 million
from period to period.
Effect of Exchange Rate Changes
All of our foreign subsidiaries currently operate in currencies other than the
U.S. Dollar and a significant portion of our consolidated cash balance is
denominated in these foreign functional currencies, particularly at our U.K.
subsidiary which operates in Pound Sterling. As a result, our cash and cash
equivalents balances are subject to the effects of the fluctuations in these
functional currencies against the U.S. Dollar at the end of each reporting
period. The net effect of exchange rate changes on cash and cash equivalents,
when expressed in U.S. Dollar terms, was an increase in cash of $0.9 million and
$0.2 million for nine months ended May 31, 2021 and 2020, respectively. These
changes were primarily due to fluctuations in various foreign currency exchange
rates from period to period, but the majority is related to the fluctuations in
the Pound Sterling against the U.S. Dollar.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined by Item 303(a)(4)(ii) of
Regulation S-K.
Commercial Commitments
We have ongoing relationships with various suppliers (contract manufacturers)
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. Although we have definitive minimum purchase obligations
included in the contract terms with certain of our contract manufacturers, when
such obligations have been included, they have either been immaterial or the
minimum amounts have been such that they are well below the volume of goods that
the Company has historically purchased. In the ordinary course of business, we
communicate supply needs to our contract manufacturers based on orders and
short-term projections, ranging from two to six
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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 products held by or manufactured by the
contract manufacturer on our behalf during the termination notification period.
If any inventory remains at the contract manufacturer at the termination date,
we are obligated to purchase such inventory which may include raw materials,
components and finished goods. The amounts for inventory purchased under
termination commitments have been immaterial.
In addition to the commitments to purchase products from contract manufacturers
described above, we may also enter into commitments with other manufacturers to
purchase finished goods and components to support innovation initiatives and/or
supply chain initiatives. As of May 31, 2021, no such commitments were
outstanding.
Share Repurchase Plan
The information required by this item is incorporated by reference to Part
I-Item 1, "Notes to Condensed Consolidated Financial Statements" Note 9 - Share
Repurchase Plan, included in this report.
Dividends
On June 15, 2021, the Company's Board of Directors declared a cash dividend of
$0.72 per share payable on July 30, 2021 to shareholders of record on July 16,
2021.
Critical Accounting Policies
Our discussion and analysis of our operating results and financial condition is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.
Critical accounting policies are those that involve subjective or complex
judgments, often as a result of the need to make estimates. The following areas
all require the use of judgments and estimates: revenue recognition, accounting
for income taxes and impairment of definite-lived intangible assets. Estimates
in each of these areas are based on historical experience and various judgments
and assumptions that we believe are appropriate. Actual results may differ from
these estimates.
There have been no material changes in our critical accounting policies from
those disclosed in Part II-Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and Note 2 to our consolidated
financial statements contained in our Annual Report on Form 10-K for the fiscal
year ended August 31, 2020, which was filed with the SEC on October 21, 2020.
Recently Issued Accounting Standards
Information on Recently Issued Accounting Standards that could potentially
impact the Company's consolidated financial statements and related disclosures
is incorporated by reference to Part I-Item 1, "Notes to Condensed Consolidated
Financial Statements" Note 2 - Basis of Presentation and Summary of Significant
Accounting Policies, included in this report.
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