Wd 40 Co 10-Q for FY2021 Q1
Wd 40 Co (WDFC)
About this 10-Q
Wd 40 Co filed this 10-Q on January 7, 2021, covering the quarter ended November 30, 2020 (FY2021 Q1).
Headline figures
Quarter ended November 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $124.56M
- up 26.4% from $98.56M a year earlier
- Net income
- $23.62M
- up 93.7% from net income of $12.19M a year earlier
- Diluted EPS
- $1.72
- up 95.5% from $0.88 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ______
Commission File Number:
Commission Company Name: WD 40 CO
(Exact name of registrant as specified in its charter)
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code: (
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No
The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of January 4, 2021 was
WD-40 COMPANY
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended November 30, 2020
TABLE OF CONTENTS
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Item 1. |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 |
Item 3. | 35 | |
Item 4. | 35 | |
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Item 1. | 36 | |
Item 1A. | 36 | |
Item 2. | 36 | |
Item 6. | 37 | |
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PART 1 - FINANCIAL INFORMATION | |||||
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Item 1. Financial Statements | |||||
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WD-40 COMPANY | |||||
CONDENSED CONSOLIDATED BALANCE SHEETS | |||||
(Unaudited and in thousands, except share and per share amounts) | |||||
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| November 30, |
| August 31, | ||
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Assets |
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Current assets: |
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Cash and cash equivalents | $ | |
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Trade accounts receivable, less allowance for doubtful |
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accounts of $ |
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and August 31, 2020, respectively |
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Inventories |
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Other current assets |
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Total current assets |
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Property and equipment, net |
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Goodwill |
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Other intangible assets, net |
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Operating lease right-of-use assets |
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Deferred tax assets, net |
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Other assets |
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Total assets | $ | |
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Liabilities and Shareholders' Equity |
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Current liabilities: |
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Accounts payable | $ | |
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Accrued liabilities |
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Accrued payroll and related expenses |
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Short-term borrowings |
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Income taxes payable |
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Total current liabilities |
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Long-term borrowings |
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Deferred tax liabilities, net |
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Long-term operating lease liabilities |
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Other long-term liabilities |
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Total liabilities |
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Commitments and Contingencies (Note 12) |
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Shareholders' equity: |
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Common stock ― authorized |
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August 31, 2020, respectively; and |
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outstanding at November 30, 2020 and August 31, 2020, respectively |
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Additional paid-in capital |
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Retained earnings |
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Accumulated other comprehensive loss |
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Common stock held in treasury, at cost ― |
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shares at November 30, 2020 and August 31, 2020, respectively |
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Total shareholders' equity |
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Total liabilities and shareholders' equity | $ | |
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See accompanying notes to condensed consolidated financial statements. | |||||
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WD-40 COMPANY | |||||
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | |||||
(Unaudited and in thousands, except per share amounts) | |||||
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| Three Months Ended November 30, | ||||
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Net sales | $ | |
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Cost of products sold |
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Gross profit |
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Operating expenses: |
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Selling, general and administrative |
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Advertising and sales promotion |
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Amortization of definite-lived intangible assets |
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Total operating expenses |
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Income from operations |
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Other income (expense): |
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Interest income |
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Interest expense |
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Other income (expense), net |
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Income before income taxes |
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Provision for income taxes |
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Net income | $ | |
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Earnings per common share: |
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Basic | $ | |
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Diluted | $ | |
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Shares used in per share calculations: |
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Basic |
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Diluted |
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See accompanying notes to condensed consolidated financial statements. | |||||
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WD-40 COMPANY | |||||
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME | |||||
(Unaudited and in thousands) | |||||
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| Three Months Ended November 30, | ||||
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Net income | $ | |
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Other comprehensive income (loss): |
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Foreign currency translation adjustment |
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Total comprehensive income | $ | |
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See accompanying notes to condensed consolidated financial statements. | |||||
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WD-40 COMPANY | |||||||||||||||||||||
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY | |||||||||||||||||||||
(Unaudited and in thousands, except share and per share amounts) | |||||||||||||||||||||
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| Accumulated |
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| Additional |
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| Other |
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| Total | ||||||
| Common Stock |
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| Treasury Stock |
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| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Shares |
| Amount |
| Equity | ||||||
Balance at August 31, 2020 | |
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Issuance of common stock under share-based |
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compensation plan, net of shares withheld for taxes | |
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Stock-based compensation |
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Cash dividends ($ |
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Foreign currency translation adjustment |
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Net income |
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Balance at November 30, 2020 | |
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| Accumulated |
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| Additional |
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| Other |
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| Total | ||||||
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| Comprehensive |
| Treasury Stock |
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| Shares |
| Amount |
| Capital |
| Earnings |
| Income (Loss) |
| Shares |
| Amount |
| Equity | ||||||
Balance at August 31, 2019 | |
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Issuance of common stock under share-based |
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compensation plan, net of shares withheld for taxes | |
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Stock-based compensation |
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Cash dividends ($ |
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Acquisition of treasury stock |
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Foreign currency translation adjustment |
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Net income |
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Balance at November 30, 2019 | |
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See accompanying notes to condensed consolidated financial statements. | |||||||||||||||||||||
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WD-40 COMPANY | |||||
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||
(Unaudited and in thousands) | |||||
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| Three Months Ended November 30, | ||||
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| 2019 | ||
Operating activities: |
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Net income | $ | |
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Adjustments to reconcile net income to net cash provided by |
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operating activities: |
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Depreciation and amortization |
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Net gains on sales and disposals of property and equipment |
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Deferred income taxes |
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Stock-based compensation |
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Unrealized foreign currency exchange losses |
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Provision for bad debts |
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Changes in assets and liabilities: |
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Trade accounts receivable |
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Inventories |
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Other assets |
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Operating lease assets and liabilities, net |
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Accounts payable and accrued liabilities |
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Accrued payroll and related expenses |
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Other long-term liabilities and income taxes payable |
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Net cash provided by operating activities |
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Investing activities: |
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Purchases of property and equipment |
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Proceeds from sales of property and equipment |
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Net cash used in investing activities |
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Financing activities: |
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Treasury stock purchases |
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Dividends paid |
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Proceeds from issuance of long-term senior notes |
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Repayments of long-term senior notes |
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Net (repayments) proceeds of revolving credit facility |
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Shares withheld to cover taxes upon conversions of equity awards |
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Net cash used in financing activities |
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Effect of exchange rate changes on cash and cash equivalents |
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Net increase in cash and cash equivalents |
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Cash and cash equivalents at beginning of period |
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Cash and cash equivalents at end of period | $ | |
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Supplemental disclosure of noncash investing activities: |
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Accrued capital expenditures | $ | |
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See accompanying notes to condensed consolidated financial statements. | |||||
WD-40 COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
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. The Company markets 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.
Note 2. Basis of Presentation and Summary of Significant Accounting Policies
The condensed consolidated financial statements included herein have been prepared by the Company, without audit, according to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. The August 31, 2020 year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by U.S. GAAP.
In the opinion of management, the unaudited financial information for the interim periods shown reflects all adjustments necessary for a fair statement thereof and such adjustments are of a normal recurring nature. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended
The condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany transactions and balances have been eliminated in consolidation.
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Operating results for interim periods are not necessarily indicative of operating results for an entire fiscal year.
The COVID-19 pandemic has adversely impacted global economic conditions and has contributed to significant volatility in financial markets beginning in early calendar year 2020, as described in the “Significant Developments” section included in Part I – Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Although the Company’s current estimates contemplate current conditions, the inputs into certain of the Company’s significant and critical accounting estimates include judgments and assumptions about the economic implications of the COVID-19 pandemic and how management expects them to change in the future, as appropriate. It is reasonably possible that actual results experienced
may differ materially from the Company’s estimates in future periods, which could materially affect our results of operations and financial condition.
In the normal course of business, the Company employs established policies and procedures to manage its exposure to fluctuations in foreign currency exchange rates. The Company utilizes foreign currency forward contracts to limit its exposure to net asset balances held in non-functional currencies, primarily at its U.K. subsidiary. The Company regularly monitors its foreign currency exchange rate exposures to ensure the overall effectiveness of its foreign currency hedge positions. While the Company engages in foreign currency hedging activity to reduce its risk, for accounting purposes, none of its foreign currency forward contracts are designated as hedges.
Foreign currency forward contracts are carried at fair value, with net realized and unrealized gains and losses recognized currently in other income (expense) in the Company’s consolidated statements of operations. Cash flows from settlements of foreign currency forward contracts are included in operating activities in the consolidated statements of cash flows. Foreign currency forward contracts in an asset position at the end of the reporting period are included in other current assets, while foreign currency forward contracts in a liability position at the end of the reporting period are included in accrued liabilities in the Company’s consolidated balance sheets. At November 30, 2020, the Company had a notional amount of $
Accounting Standards Codification (“ASC”) 820, “Fair Value Measurements and Disclosures”, defines fair value as the exchange price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company categorizes its financial assets and liabilities measured at fair value into a hierarchy that categorizes fair value measurements into the following three levels based on the types of inputs used in measuring their fair value:
Level 1: Observable inputs such as quoted market prices in active markets for identical assets or liabilities;
Level 2: Observable market-based inputs or observable inputs that are corroborated by market data; and
Level 3: Unobservable inputs reflecting the Company’s own assumptions.
In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes” under ASC 740, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. This guidance is effective for fiscal years beginning after
Inventories consist primarily of raw materials and components, finished goods, and product held at third-party contract manufacturers. Inventories are stated at the lower of cost or market and cost is determined based on a first-in, first-out method or, for a portion of raw materials inventory, the average cost method. Inventories consisted of the following (in thousands):
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| November 30, |
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Product held at third-party contract manufacturers | $ | |
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Raw materials and components |
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Work-in-process |
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Finished goods |
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Total | $ | |
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Property and equipment, net, consisted of the following (in thousands):
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| November 30, |
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Machinery, equipment and vehicles | $ | |
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Buildings and improvements |
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Computer and office equipment |
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Software |
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Furniture and fixtures |
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Capital in progress |
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Land |
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Subtotal |
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Less: accumulated depreciation and amortization |
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Total | $ | |
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Goodwill
The following table summarizes the changes in the carrying amounts of goodwill by segment (in thousands):
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| Americas |
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| Total | ||||
Balance as of August 31, 2020 | $ | |
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Translation adjustments |
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| ( |
Balance as of November 30, 2020 | $ | |
| $ | |
| $ | |
| $ | |
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There were no indicators of impairment identified as a result of the Company’s review of events and circumstances related to its goodwill subsequent to December 1, 2019, the date of its most recent annual goodwill impairment test, which was conducted during the second quarter of fiscal year 2020. Based on the results of the annual goodwill impairment test, the estimated fair value of each of the Company’s reporting units exceeded their respective carrying values so significantly that an impairment charge to the Company’s goodwill balances is remote, even in the event that the impacts of the novel
coronavirus (“COVID-19”) pandemic significantly lower results in future periods. To date, there have been
Definite-lived Intangible Assets
The Company’s definite-lived intangible assets, which include the Spot Shot, Carpet Fresh, 1001, EZ REACH and GT85 trade names, are included in other intangible assets, net in the Company’s condensed consolidated balance sheets. The following table summarizes the definite-lived intangible assets and the related accumulated amortization (in thousands):
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| November 30, |
| August 31, | ||
| 2020 |
| 2020 | ||
Gross carrying amount | $ | |
| $ | |
Accumulated amortization |
| ( |
|
| ( |
Net carrying amount | $ | |
| $ | |
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There has been
Changes in the carrying amounts of definite-lived intangible assets by segment for the three months ended November 30, 2020 are summarized below (in thousands):
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| Americas |
| EMEA |
| Asia-Pacific |
| Total | ||||
Balance as of August 31, 2020 | $ | |
| $ | |
| $ |
|
| $ | |
Amortization expense |
| ( |
|
| ( |
|
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|
|
| ( |
Translation adjustments |
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| ( |
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| ( |
Balance as of November 30, 2020 | $ | |
| $ | |
| $ |
|
| $ | |
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The estimated amortization expense for the Company’s definite-lived intangible assets in future fiscal years is as follows (in thousands):
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| Trade Names |
| Customer-Based | ||
Remainder of fiscal year 2021 | $ | |
| $ | |
Fiscal year 2022 |
| |
|
| |
Fiscal year 2023 |
| |
|
| - |
Fiscal year 2024 |
| |
|
| - |
Fiscal year 2025 |
| |
|
| - |
Thereafter |
| |
|
| - |
Total | $ | |
| $ | |
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The Company leases real estate for its regional sales offices, a research and development facility, and offices located at its international subsidiaries and branch locations. In addition, the Company leases an automobile fleet in the United States. The Company has also identified warehouse leases within certain third-party distribution center service contracts. All other leases are insignificant to the Company’s consolidated financial statements. To determine if a contract contains a lease, the Company assesses its contracts and determines if there is an identified asset for which the Company has obtained the right to control, as defined in ASC 842.
The Company records right-of-use assets and lease liabilities on its consolidated balance sheets for leases with an expected term greater than one year. The lease term includes the committed lease term, also taking into account early termination and renewal options that management is reasonably certain to exercise. For leases that do not have a readily determinable implicit rate, the Company uses its estimated secured incremental borrowing rate based on the information available at the lease commencement date to determine the present value of lease payments. The Company’s estimated secured incremental borrowing rate is determined using a portfolio approach based on the rate of interest the Company would have to pay to borrow an amount equal to the lease payments on a collateralized basis over a similar term. The Company uses the unsecured borrowing rate and risk-adjusts that rate to approximate a collateralized rate in the currency of the lease. As of November 30, 2020, finance leases were not significant and all leases recorded on the Company’s consolidated balances sheets were operating leases. Residual value guarantees, restrictions, covenants, sublease income, net gains or losses from sale and leaseback transactions, and transactions with related parties associated with leases are also not significant. The Company has made the accounting policy election to use certain ongoing practical expedients made available by ASC 842 to: (i) not separate lease components from nonlease components for real estate – office buildings, machinery and equipment, lab equipment, office equipment, furniture and fixtures, and IT equipment; and (ii) exclude leases with an initial term of 12 months or less (“short-term” leases) from the consolidated balance sheets and will recognize related lease payments in the consolidated statements of operations on a straight-line basis over the lease term. However, the Company had
The Company recorded $
Right-of-use assets and lease liabilities consisted of the following (in thousands):
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| November 30, |
| August 31, | ||
| 2020 |
| 2020 | ||
Assets: |
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|
Operating lease right-of-use assets | $ | |
| $ | |
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Liabilities: |
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Current operating lease liabilities(1) |
| |
|
| |
Long-term operating lease liabilities |
| |
|
| |
Total operating lease liabilities | $ | |
| $ | |
(1)
The Company’s maturities of its operating lease liabilities, including early termination and renewal options that management is reasonably certain to exercise, are as follows (in thousands):
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| Operating | |
| Leases | |
Remainder of fiscal year 2021 | $ | |
Fiscal year 2022 |
| |
Fiscal year 2023 |
| |
Fiscal year 2024 |
| |
Fiscal year 2025 |
| |
Thereafter |
| |
Total undiscounted future cash flows | $ | |
Less: Interest |
| ( |
Present value of lease liabilities | $ | |
Accrued liabilities consisted of the following (in thousands):
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| November 30, |
| August 31, | ||
| 2020 |
| 2020 | ||
Accrued advertising and sales promotion expenses | $ | |
| $ | |
Accrued professional services fees |
| |
|
| |
Accrued sales taxes and other taxes |
| |
|
| |
Short-term operating lease liability |
| |
|
| |
Other |
| |
|
| |
Total | $ | |
| $ | |
|
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|
|
Accrued payroll and related expenses consisted of the following (in thousands):
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| November 30, |
| August 31, | ||
| 2020 |
| 2020 | ||
Accrued incentive compensation | $ | |
| $ | |
Accrued payroll |
| |
|
| |
Accrued profit sharing |
| |
|
| |
Accrued payroll taxes |
| |
|
| |
Other |
| |
|
| |
Total | $ | |
| $ | |
|
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|
As of November 30, 2020, the Company held borrowings under
Note Purchase and Private Shelf Agreement
The Company holds borrowings under its Note Purchase and Private Shelf Agreement (the “Note Agreement”) by and among the Company, PGIM, Inc. (“Prudential”), and certain affiliates and managed accounts of Prudential (the “Note Purchasers”). The note agreement has been amended three times, most recently on September 30, 2020 (the “Third Amendment”). The Third Amendment permitted the Company to enter into the first amendment of its existing amended and restated revolving credit agreement with Bank of America and also included certain conforming amendments to the credit agreement, including the revision of financial and restrictive covenants.
Credit Agreement
The Company’s Amended and Restated Credit Agreement (the “Credit Agreement”) with Bank of America consists of a revolving commitment for borrowing by the Company up to $
On September 30, 2020, the Company entered into a First Amendment to Credit Agreement (the “First Amendment to Credit Agreement”) with Bank of America. In addition to other non-material and technical amendments to the Credit Agreement, the First Amendment to Credit Agreement extended the maturity date from
Short-term and long-term borrowings under the Company’s Credit Agreement and Note Agreement consisted of the following (in thousands):
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| Maturities |
| November 30, |
| August 31, | ||
|
| Issuance | (calendar year) |
| 2020 |
| 2020 | ||
|
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Credit Agreement - revolving credit facility (1)(3) |
| Various |
| $ | |
| $ | | |
|
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Note Agreement |
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Series A Notes - |
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| |
|
| | ||
Series B Notes - |
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| |
|
| - | ||
Series C Notes - |
|
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| |
|
| - | ||
Total borrowings |
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|
| |
|
| |
Short-term portion of borrowings |
|
|
|
|
| ( |
|
| ( |
Total long-term borrowings |
|
|
|
| $ | |
| $ | |
(1)
(2)
(3)
Both the Note Agreement and the Credit Agreement contain representations, warranties, events of default and remedies, as well as affirmative, negative and other financial covenants customary for these types of agreements. These covenants include, among other things, certain limitations on the ability of the Company and its subsidiaries to incur indebtedness, create liens, dispose of assets, make investments, declare, make or incur obligations to make certain restricted payments, including the payment of dividends and payments for the repurchase of the Company’s capital stock and enter into certain merger or consolidation transactions. The Credit Agreement includes, among other limitations on indebtedness, a $
Each agreement also includes a most favored lender provision which requires that any time any other lender has the benefit of one or more financial or operational covenants that is different than, or similar to, but more restrictive than those contained in its own agreement, those covenants shall be immediately and automatically incorporated by reference to the other lender’s
agreement. Both the Note Agreement and the Credit Agreement require the Company to adhere to the same financial covenants. For the financial covenants, the definition of consolidated EBITDA includes the add back of non-cash stock-based compensation to consolidated net income when arriving at consolidated EBITDA. The terms of the financial covenants are as follows:
The consolidated leverage ratio cannot be greater than and a half to one. The consolidated leverage ratio means, as of any date of determination, the ratio of (a) consolidated funded indebtedness as of such date to (b) consolidated EBITDA for the most recently completed four fiscal quarters.
The consolidated interest coverage ratio cannot be less than
Note 10. Earnings per Common Share
The table below reconciles net income to net income available to common shareholders (in thousands):
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| Three Months Ended November 30, | ||||
| 2020 |
| 2019 | ||
Net income | $ | |
| $ | |
Less: Net income allocated to |
|
|
|
|
|
participating securities |
| ( |
|
| ( |
Net income available to common shareholders | $ | |
| $ | |
|
|
|
|
|
|
The table below summarizes the weighted-average number of common shares outstanding included in the calculation of basic and diluted EPS (in thousands):
|
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| Three Months Ended November 30, | ||||
| 2020 |
| 2019 | ||
Weighted-average common |
|
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|
|
shares outstanding, basic |
| |
|
| |
Weighted-average dilutive securities |
| |
|
| |
Weighted-average common |
|
|
|
|
|
shares outstanding, diluted |
| |
|
| |
|
|
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|
|
Note 11. Revenue Recognition
The following paragraphs detail the Company’s revenue recognition policies and provide additional information used in its determination of net sales and contract balances under ASC 606.
Revenue Recognition
The Company generates revenue from sales of its products to customers in its Americas, EMEA and Asia-Pacific segments. Product sales for the Company include maintenance products and homecare and cleaning products. The Company recognizes revenue related to the sale of these products when it satisfies a performance obligation in an amount reflecting the consideration to which it expects to be entitled. Sales are recorded net of allowances for damaged goods and other sales returns, sales incentives, trade promotions and cash discounts. The Company applies 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.
Contracts with customers are renewable periodically and contain terms and conditions with respect to payment, delivery, sales incentives, warranty and supply, but do not require mandatory purchase commitments. In the absence of a specific sales agreement with a customer, the Company’s standard terms and conditions at the time of acceptance of purchase orders apply to the sales transaction. The Company’s standard terms and conditions are either included in a standalone document or on the Company’s price lists or both, and these standard terms and conditions are provided to the customer prior to the sales transaction. The Company considers the customer purchase orders, governed by specific sales agreements or the Company’s standard terms and conditions, to be the contract with the customer. The Company considers each transaction to sell products as separate and distinct, with no additional promises made, and as a result, all of the Company's sales are single performance obligation arrangements for which the transaction price is equivalent to the stated price of the product, net of any variable consideration for items such as sales returns, discounts, rebates and other sales incentives. The Company recognizes sales at a point in time upon transferring control of its 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.
Taxes imposed by governmental authorities on the Company's revenue, such as sales taxes and value added taxes, are excluded from net sales. Sales commissions are paid to certain third parties based upon specific sales levels achieved during a defined time period. Since the Company’s contracts related to these sales commissions do not exceed one year, the Company has elected as a practical expedient to expense these payments as incurred. The Company also elected the practical expedient related to shipping and handling fees which allows the Company to account for freight costs as fulfillment activities instead of assessing such activities as performance obligations. The Company’s freight costs are sometimes paid by the customer, while other times, the freight costs are included in the sales price. The Company does not account for freight costs as a separate performance obligation, but rather as an activity performed to transfer the products to its customers.
Variable Consideration - Sales Incentives
In determining the transaction price, the Company evaluates whether the price is subject to refund or adjustment related to variable consideration to determine the net consideration to which the Company expects to be entitled. The Company records 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 customers associated with failing to adhere to contractual obligations), coupon offers, cash discount allowances, and sales returns, as a reduction of sales in its 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, 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. The Company reviews its assumptions and adjusts these estimates accordingly on a quarterly basis.
Rebates/Other Discounts — The Company offers various on-going trade promotion programs with customers and provides other discounts to customers that require management to estimate and accrue for the expected costs of such programs or discounts. These programs include cooperative marketing, volume-based discounts, shelf price reductions, consideration and allowances given to retailers for shelf space and/or favorable display positions in their stores and other promotional activities.
Other discounts include items such as charges from customers for services they provide related to the sale of WD-40 Company products and penalties/fees associated with WD-40 Company failing to adhere to contractual obligations (e.g., errors on purchase orders, errors on shipment, late deliveries, etc.). Costs related to rebates, cooperative advertising and other promotional activities and other discounts are recorded as a reduction to sales upon delivery of the Company’s products to its customers. The Company had a $
Coupons — Coupon costs are based upon historical redemption rates and are recorded as a reduction to sales as incurred, which is when the coupons are circulated. Coupon redemption liabilities, which are included in accrued liabilities on the Company’s condensed consolidated balance sheets, were not significant at November 30, 2020 and August 31, 2020. Coupons recorded as a reduction to sales during the three months ended November 30, 2020 and 2019 were also not significant.
Cash discounts — The Company offers certain of its customers a cash discount program to incentivize them to pay the invoice earlier than the normal payment date on the invoice. Although payment terms vary, most customers typically pay within 30 to 90 days of invoicing. The Company had a $
Sales returns — The Company recognizes revenue net of allowances for estimated returns, which is based on historical return rates, with a corresponding reduction to cost of products sold. Although the Company typically does not have definitive sales return provisions included in the contract terms with its customers, when such provisions have been included, they have not been significant. The Company presents its provision for sales returns on a gross basis as a liability. The Company’s refund liability for sales returns is included in accrued liabilities and represents the amount expected to be owed to the customers for product returns. The Company’s refund liability for sales returns was not significant at both November 30, 2020 and August 31, 2019. The Company also records an asset for the value of inventory that represents the right to recover products from customers associated with sales returns. The value of this inventory is recorded to other current assets and the balance in this account associated with product returns was not significant at November 30, 2020 and August 31, 2020.
Disaggregation of Revenue
The Company's revenue is presented on a disaggregated basis in Note 14 – Business Segments and Foreign Operations included in this report. The Company discloses certain information about its business segments, which are determined consistent with the way the Company’s Chief Operating Decision Maker organizes and evaluates financial information internally for making operating decisions and assessing performance. The Chief Operating Decision Maker assesses and measures revenue based on geographic area and product groups.
Contract Balances
Contract liabilities consist of deferred revenue related to undelivered products. Deferred revenue is recorded when payments have been received from customers for undelivered products. Revenue is subsequently recognized when revenue recognition criteria are met, generally when control of the product transfers to the customer. The Company had contract liabilities of $
Purchase Commitments
The Company has ongoing relationships with various suppliers (contract manufacturers) that manufacture the Company’s products and third-party distribution centers that warehouse and ship the Company’s 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 the Company’s customers or third-party distribution centers in accordance with agreed upon shipment terms. Although the Company has definitive minimum purchase obligations included in the contract terms with certain of its 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, supply needs are communicated by the Company to its contract manufacturers based on orders and short-term projections, ranging from
Upon the termination of contracts with contract manufacturers, the Company obtains certain inventory control rights and is obligated to work with the contract manufacturer to sell through all product held by or manufactured by the contract manufacturer on behalf of the Company during the termination notification period. If any inventory remains at the contract manufacturer at the termination date, the Company is 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, the Company may also enter into commitments with other manufacturers to purchase finished goods and components to support innovation and renovation initiatives and/or supply chain initiatives. As of November 30, 2020,
Litigation
From time to time, the Company is subject to various claims, lawsuits, investigations and proceedings arising in the ordinary course of business, including but not limited to, product liability litigation and other claims and proceedings with respect to intellectual property, breach of contract, labor and employment, tax and other matters. As of November 30, 2020, there were
For further information on the risks the Company faces from existing and future claims, suits, investigations and proceedings, 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.
Indemnifications
As permitted under Delaware law, the Company has agreements whereby it indemnifies senior officers and directors for certain events or occurrences while the officer or director is, or was, serving at the Company’s request in such capacity. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited; however, the Company maintains Director and Officer insurance coverage that mitigates the Company’s exposure with respect to such obligations. As a result of the Company’s insurance coverage, management believes that the estimated fair value of these indemnification agreements is minimal. Thus,
From time to time, the Company enters into indemnification agreements with certain contractual parties in the ordinary course of business, including agreements with lenders, lessors, contract manufacturers, marketing distributors, customers and certain vendors. All such indemnification agreements are entered into in the context of the particular agreements and are provided in an attempt to properly allocate risk of loss in connection with the consummation of the underlying contractual arrangements. Although the maximum amount of future payments that the Company could be required to make under these indemnification agreements is unlimited, management believes that the Company maintains adequate levels of insurance coverage to protect
Note 13. Income Taxes
The Company uses an estimated annual effective tax rate, which is based on expected annual income, statutory tax rates and tax planning opportunities available in the various jurisdictions in which the Company operates, to determine its quarterly provision for income taxes. Certain significant or unusual items are separately recognized in the quarter in which they occur and can be a source of variability in the effective tax rates from quarter to quarter.
The provision for income taxes was
The Company is subject to taxation in the U.S. and in various state and foreign jurisdictions. The Company is currently under examination by various state taxing authorities. Due to expired statutes, the Company’s federal income tax returns for years prior to fiscal year 2017 are not subject to examination by the U.S. Internal Revenue Service. Generally, for the majority of state and foreign jurisdictions where the Company does business, periods prior to fiscal year 2017 are no longer subject to examination. The Company is currently under audit in various state and foreign jurisdictions for fiscal years 2017 through 2019. Estimated 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 were not significant. Audit outcomes and the timing of settlements are subject to significant uncertainty.
The Company evaluates the performance of its segments and allocates resources to them based on sales and operating income. The Company is organized on the basis of geographical area into the following
Summary information about reportable segments is as follows (in thousands):
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| Unallocated |
|
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| |
For the Three Months Ended | Americas |
| EMEA |
| Asia-Pacific |
| Corporate (1) |
| Total | |||||
November 30, 2020: |
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Net sales | $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
Income from operations | $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Depreciation and |
|
|
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|
|
|
|
|
|
|
|
|
|
|
amortization expense | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Interest income | $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
Interest expense | $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
|
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|
November 30, 2019: |
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|
|
|
|
|
Net sales | $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
Income from operations | $ | |
| $ | |
| $ | |
| $ | ( |
| $ | |
Depreciation and |
|
|
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|
|
|
|
|
|
|
|
|
|
|
amortization expense | $ | |
| $ | |
| $ | |
| $ | |
| $ | |
Interest income | $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
Interest expense | $ | |
| $ | |
| $ | |
| $ | - |
| $ | |
|
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|
(1)
The Company’s Chief Operating Decision Maker does not review assets by segment as part of the financial information provided, and therefore, no asset information is provided in the above table.
Net sales by product group are as follows (in thousands):
|
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|
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|
|
|
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|
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| Three Months Ended November 30, | ||||
| 2020 |
| 2019 | ||
Maintenance products | $ | |
| $ | |
Homecare and cleaning products |
| |
|
| |
Total | $ | |
| $ | |
|
|
|
|
|
|
On
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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
warehouse club stores, hardware stores, automotive parts outlets, industrial distributors and suppliers, mass retail and home center stores, value retailers, grocery stores, online retailers, farm supply, sport retailers, and independent bike dealers
Highlights
The following summarizes the financial and operational highlights for our business during the three months ended November 30, 2020:
Consolidated net sales increased $26.0 million for the three months ended November 30, 2020 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had a favorable impact of $2.8 million on consolidated net sales for the three months ended November 30, 2020 compared to the corresponding period of the prior fiscal year. Thus, on a constant currency basis, net sales would have increased by $23.2 million 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 three months ended November 30, 2020.
Gross profit as a percentage of net sales increased to 56.4% for the three months ended November 30, 2020 compared to 54.3% for the corresponding period of the prior fiscal year.
Consolidated net income increased $11.4 million, or 94%, for the three months ended November 30, 2020 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had a favorable impact of $0.8 million on consolidated net income for the three months ended November 30, 2020 compared to the corresponding period of the prior fiscal year. Thus, on a constant currency basis, net income would have increased $10.6 million.
Although consolidated results for the three months ended November 30, 2020 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 Significant Developments section which follows for details.
Diluted earnings per common share for the three months ended November 30, 2020 were $1.72 versus $0.88 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.
Significant Developments
Sales increased in all three segments during the three months ended November 30, 2020 as compared to the corresponding period of the prior fiscal year. Although our financial results and operations continued to be impacted by the COVID-19 pandemic that began in early calendar year 2020, we were able to reduce the adverse impacts of these challenging times due to the strength of our brands, increased focus on e-commerce, global expansion in the distribution of our products and a continued focus on our strategic initiatives. While we experienced significant sales declines in fiscal year 2020 as compared to the previous full fiscal year, sales during the first quarter of fiscal year 2021 rebounded significantly due to various reasons, including the following:
Continued increases in renovation and maintenance activities by end-users during the pandemic, particularly in North America, some countries in EMEA and in Australia;
Increased distribution and sales within the e-commerce channel;
Recoveries we are experiencing in industrial channels globally as well as in markets where we do not have direct operations (distributor markets), particularly in our EMEA and Asia distributor markets where these distributors have been participating in more of our promotional activities and have been adjusting to more normal levels of inventory for our products;
Significant increases in sales of our WD-40 Bike product; and
Continued increased sales of our homecare and cleaning products due to the high demand for such products during the pandemic.
These combined impacts produced a 26% increase in our consolidated net sales during the first quarter of fiscal year 2021 compared to the corresponding period of the prior fiscal year, a period in which the COVID-19 pandemic had not yet commenced.
Due to the speed and fluidity with which the situation continues to evolve, 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. Although sales increased during the first quarter of fiscal year 2021, many regions globally are experiencing increased COVID-19 case counts and governmental authorities are reimplementing temporary closures, lockdowns and restrictions intended to combat the COVID-19 pandemic at certain physical store retailers, suppliers and manufacturers. These increased restrictions may have negative economic impacts on our customers and may limit the ability of our customers in certain trade channels and markets to sell our products, which could adversely impact our financial results and operations for the remainder of fiscal year 2021. We also cannot predict when certain restrictions to protect our customers, retailers and our employees will be either increased or safely reduced in future periods. These impacts could be material in all business segments during any future period affected either directly or indirectly by this pandemic. Also, if social distancing requirements resulting from the COVID-19 pandemic lessen in future periods, particularly as vaccinations become more widely available, this may result in a decrease in renovation and maintenance activities by end-users which could adversely impact our financial results. In addition, if there are decreases in future periods in the benefits provided to our end-users via government assistance programs which have been put in place due to the pandemic, this may also impact the level of renovation and maintenance activities that we have experienced in recent periods and this could adversely impact our financial results.
We are continuing to actively manage and monitor supply chain and transportation disruptions and constraints that have arisen at our suppliers and other third-party distribution centers and manufacturers as a result of the COVID-19 pandemic. Some of the challenges that we have experienced at our third-party manufacturers include general capacity constraints and competition for such capacity by other companies who utilize the same third-party manufacturers. While we have been successful to date in managing such disruptions in our supply chain and the distribution of our products, we have experienced some challenges in meeting the high level of demand for our products by customers and end-users in certain markets. Although we have positioned ourselves to continue managing these challenges in our supply chain and distribution networks in future periods, we are not able at this time to estimate the impact of future disruptions within our supply chain or the additional costs that we might incur due to these challenges and we are continually monitoring and managing this situation.
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. As a result of these policies and initiatives, travel and meeting expenses have decreased significantly, positively impacting our net income. If the current social distancing requirements and policies lessen in future periods, travel and meeting expenses may return to higher levels. To date, we have been successful in conducting our daily operations and meeting the requirements in all areas of our business with these work-from-home arrangements. We are still working to determine 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 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.
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.
Three Months Ended November 30, 2020 Compared to Three Months Ended November 30, 2019
Operating Items
The following table summarizes operating data for our consolidated operations (in thousands, except percentages and per share amounts):
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| Three Months Ended November 30, | ||||||||||
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| Change from | ||||||
| 2020 |
| 2019 |
| Dollars |
| Percent | ||||
Net sales: |
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Maintenance products | $ | 114,343 |
| $ | 89,670 |
| $ | 24,673 |
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| 28% |
Homecare and cleaning products |
| 10,216 |
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| 8,886 |
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| 1,330 |
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| 15% |
Total net sales |
| 124,559 |
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| 98,556 |
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| 26,003 |
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| 26% |
Cost of products sold |
| 54,313 |
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| 45,013 |
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| 9,300 |
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| 21% |
Gross profit |
| 70,246 |
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| 53,543 |
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| 16,703 |
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| 31% |
Operating expenses |
| 41,854 |
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| 38,839 |
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| 3,015 |
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| 8% |
Income from operations | $ | 28,392 |
| $ | 14,704 |
| $ | 13,688 |
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| 93% |
Net income | $ | 23,623 |
| $ | 12,194 |
| $ | 11,429 |
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| 94% |
Earnings per common share - diluted | $ | 1.72 |
| $ | 0.88 |
| $ | 0.84 |
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| 95% |
Shares used in per share calculations - diluted |
| 13,706 |
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| 13,746 |
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| (40) |
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Net Sales by Segment
The following table summarizes net sales by segment (in thousands, except percentages):
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| Three Months Ended November 30, | ||||||||||
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| Change from | ||||||
| 2020 |
| 2019 |
| Dollars |
| Percent | ||||
Americas | $ | 54,188 |
| $ | 46,736 |
| $ | 7,452 |
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| 16% |
EMEA |
| 54,749 |
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| 39,245 |
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| 15,504 |
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| 40% |
Asia-Pacific |
| 15,622 |
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| 12,575 |
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| 3,047 |
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| 24% |
Total | $ | 124,559 |
| $ | 98,556 |
| $ | 26,003 |
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| 26% |
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Americas
The following table summarizes net sales by product line for the Americas segment (in thousands, except percentages):
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| Three Months Ended November 30, | ||||||||||
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| Change from | ||||||
| 2020 |
| 2019 |
| Dollars |
| Percent | ||||
Maintenance products | $ | 48,503 |
| $ | 41,690 |
| $ | 6,813 |
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| 16% |
Homecare and cleaning products |
| 5,685 |
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| 5,046 |
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| 639 |
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| 13% |
Total | $ | 54,188 |
| $ | 46,736 |
| $ | 7,452 |
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| 16% |
% of consolidated net sales |
| 44% |
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| 47% |
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Sales in the Americas segment, which includes the U.S., Canada and Latin America, increased to $54.2 million, up $7.5 million, or 16%, for the three months ended November 30, 2020 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates did not have a significant impact on sales for the three months ended November 30, 2020 compared to the corresponding period of the prior fiscal year.
Sales of maintenance products in the Americas segment increased $6.8 million, or 16%, for the three months ended November 30, 2020 compared to the corresponding period of the prior fiscal year. This sales increase was mainly driven by increased sales of maintenance products in the U.S. and Latin America, which were up $3.4 million and $2.8 million, or 10% and 42%, respectively, from period to period. In addition, sales of maintenance products in Canada increased $0.6 million from period to period. 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 resulted in increased sales of maintenance products across the Americas, including within the e-commerce channel. This increased demand resulted in sales increases period over period in the Americas of WD-40 Multi-Use Product, WD-40 Specialist and WD-40 Bike of 14%, 20% and 295%, respectively. In addition, sales in Latin America increased due to the transition to the direct marketing model in Mexico. 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 quarter of fiscal year 2021 compared to the corresponding period of the prior fiscal year.
Sales of homecare and cleaning products in the Americas increased $0.6 million, or 13%, for the three months ended November 30, 2020 compared to the corresponding period of the prior fiscal year. This sales increase was driven primarily by an increase in sales of the 2000 Flushes brand products in the U.S., which were up $0.7 million or 47% 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 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 three months ended November 30, 2020 compared to the distribution for the three months ended November 30, 2019 when 80% of sales came from the U.S., and 20% 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):
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| Three Months Ended November 30, | ||||||||||
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| Change from | ||||||
| 2020 |
| 2019 |
| Dollars |
| Percent | ||||
Maintenance products | $ | 52,376 |
| $ | 36,900 |
| $ | 15,476 |
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| 42% |
Homecare and cleaning products |
| 2,373 |
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| 2,345 |
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| 28 |
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| 1% |
Total | $ | 54,749 |
| $ | 39,245 |
| $ | 15,504 |
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| 40% |
% of consolidated net sales |
| 44% |
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| 40% |
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Sales in the EMEA segment, which includes Europe, the Middle East, Africa and India, increased to $54.7 million, up $15.5 million, or 40%, for the three months ended November 30, 2020 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had a favorable impact on sales for the EMEA segment from period to period. Sales for the three months ended November 30, 2020 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $52.1 million in the EMEA segment. Thus, on a constant currency basis, sales would have increased by $12.8 million, or 33%, 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 $35.4 million, up $10.6 million, or 43%, for the three months ended November 30, 2020, compared to the corresponding period of the prior fiscal year primarily due to increased sales of WD-40 Multi-Use Product and WD-40 Specialist of $7.1 million or 41% and $1.7 million or 61%, respectively, throughout 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. This increased demand and consumption of our products resulted in increased sales, particularly within the e-commerce channel. Sales from direct markets accounted for 65% of the EMEA segment’s sales for the three months ended November 30, 2020 compared to 63% 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 $4.9 million, or 34%, for the three months ended November 30, 2020 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 and India, which were up 62%, 24% and 120%, respectively. This increase in sales from period to period was primarily due to recoveries experienced during the first quarter of 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 the first quarter 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 resulted in increased sales. In addition, continued increases in renovation and maintenance activities by end-users during the pandemic also positively impacted sales in some of our distributor markets. The distributor markets accounted for 35% of the EMEA segment’s total sales for the three months ended November 30, 2020, compared to 37% 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):
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| Three Months Ended November 30, | ||||||||||
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| Change from | ||||||
| 2020 |
| 2019 |
| Dollars |
| Percent | ||||
Maintenance products | $ | 13,464 |
| $ | 11,081 |
| $ | 2,383 |
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| 22% |
Homecare and cleaning products |
| 2,158 |
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| 1,494 |
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| 664 |
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| 44% |
Total | $ | 15,622 |
| $ | 12,575 |
| $ | 3,047 |
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| 24% |
% of consolidated net sales |
| 12% |
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| 13% |
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Sales in the Asia-Pacific segment, which includes Australia, China and other countries in the Asia region, increased to $15.6 million, up $3.0 million, or 24%, for the three months ended November 30, 2020 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had a favorable impact on sales for the Asia-Pacific segment from period to period. Sales for the three months ended November 30, 2020 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $15.2 million in the Asia-Pacific segment. Thus, on a constant currency basis, sales would have increased by $2.6 million, or 21%, from period to period.
Sales in Asia, which represented 67% of the total sales in the Asia-Pacific segment, increased $1.9 million, or 23%, for the three months ended November 30, 2020 compared to the corresponding period of the prior fiscal year. Sales in China increased $1.2 million, or 53%, primarily due to the timing of customer orders as well as increased sales within the e-commerce channel during the first quarter of fiscal year 2021. In addition, sales in China during the first quarter of fiscal year 2020 were negatively impacted due to activities associated with the country’s preparation for the 70th Anniversary National Day in China which resulted in temporary factory closures and slowed market conditions, with no comparable event occurring in the first quarter of the current fiscal year. Sales in the Asia distributor markets increased $0.7 million, or 11%, for the three months ended November 30, 2020 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 the first quarter of fiscal year 2021 compared to late in fiscal year 2020. These reduced lockdown measures have positively impacted economic conditions in industrial channels and resulted in marketing distributors adjusting to more normal levels of our product, which resulted in increased sales period over period.
Sales in Australia increased $1.1 million, or 28%, for the three months ended November 30, 2020 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 $0.8 million, or 21%, primarily due to continued increased demand for homecare and cleaning products, which were up $0.7 million, or 44%, as a result of the COVID-19 pandemic. In addition, sales of WD-40 Multi Use Product and WD-40 Specialist were up 20% and 25%, respectively, from period to period primarily due to a higher level of renovation and maintenance activities exhibited 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 many of our key customers remaining open for business during the COVID-19 pandemic.
Gross Profit
Gross profit increased to $70.2 million for the three months ended November 30, 2020 compared to $53.5 million for the corresponding period of the prior fiscal year. As a percentage of net sales, gross profit increased to 56.4% for the three months ended November 30, 2020 compared to 54.3% for the corresponding period of the prior fiscal year.
Gross margin was favorably impacted by 2.6 percentage points from period to period due to favorable changes in the costs of petroleum-based specialty chemicals in all three segments. Beginning in late February 2020, the price of crude oil dropped significantly for a period of several months. Although the price of crude oil has partially recovered in recent months, it has not returned to the much higher levels seen during the first quarter of the prior fiscal year. 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 average cost of crude oil which flowed through our cost of goods sold was lower during the first quarter 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. 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 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 0.4 percentage points from period to period due to sales price increases, primarily in the EMEA and Asia Pacific segments during the last twelve months.
These favorable impacts to gross margin were partially offset by higher warehousing and in-bound freight costs, primarily in the EMEA and Americas segments, negatively impacting gross margin by 1.2 percentage points from period to period. Gross margin was also negatively impacted by 0.5 percentage points from period to period due to the combined effects of unfavorable impacts of changes to sales mix, related to market, product and customer mix, as well as increases in other miscellaneous costs from period to period in the Americas and EMEA segments.
Note that our gross profit and gross margin may not be comparable to those of other consumer product companies, since some of these companies include all costs related to distribution of their products in cost of products sold, whereas we exclude the portion associated with amounts paid to third parties for shipment to our customers from our distribution centers and contract manufacturers and include these costs in selling, general and administrative expenses. These costs totaled $4.1 million and $3.0 million for the three months ended November 30, 2020 and 2019, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) expenses for the three months ended November 30, 2020 increased $3.4 million to $36.0 million from $32.6 million for the corresponding period of the prior fiscal year. As a percentage of net sales, SG&A expenses decreased to 28.9% for the three months ended November 30, 2020 compared to 33.1% 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 $3.0 million due to increased earned incentive compensation, increased headcount, and higher stock-based compensation from period to period. Increases in freight costs associated with higher sales from period to period also increased SG&A expenses by $1.0 million. Changes in foreign currency exchange rates from period to period increased SG&A expenses by $0.6 million. In addition, professional services fees, including cloud-based software, increased $0.6 million and other miscellaneous expenses increased $0.4 million from period to period. These increases to SG&A were offset by a decrease in travel and meeting expenses of $2.2 million. 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 $1.6 million and $1.7 million for the three months ended November 30, 2020 and 2019, 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 November 30, 2020 decreased $0.1 million, or 1%, to $5.5 million from $5.6 million for the corresponding period of the prior fiscal year. As a percentage of net sales, these expenses decreased to 4.4% for the three months ended November 30, 2020 from 5.7% for the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates did not have a significant impact on advertising and sales promotion expenses for the three months ended November 30, 2020. The decrease in advertising and sales promotion expenses was primarily within the Asia-Pacific segment due to differences in the timing of promotional activities from period to period as well as a lower level of trade shows and marketing activities due to the COVID-19 pandemic. Advertising and sales promotion expenses as a percentage of net sales was significantly lower in the first quarter of fiscal year 2021 compared to the corresponding period of the prior fiscal year, partially due to higher sales and a reduction of activities at physical
locations in all three segments due to indirect effects of the COVID-19 pandemic, including the cancellations of trade shows and fewer opportunities for physical marketing and sampling activities.
As a percentage of net sales, advertising and sales promotion expenses may fluctuate period to period based upon the type of marketing activities we employ and the period in which the costs are incurred. Total promotional costs recorded as a reduction to sales for the three months ended November 30, 2020 were $5.8 million compared to $5.0 million for the corresponding period of the prior fiscal year. Therefore, our total investment in advertising and sales promotion activities totaled $11.3 million and $10.6 million for the three months ended November 30, 2020 and 2019, 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 November 30, 2020 compared to $0.7 million for the three months ended November 30, 2019 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):
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| Three Months Ended November 30, | ||||||||||
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| Change from | ||||||
| 2020 |
| 2019 |
| Dollars |
| Percent | ||||
Americas | $ | 14,626 |
| $ | 10,580 |
| $ | 4,046 |
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| 38% |
EMEA |
| 17,743 |
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| 8,592 |
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| 9,151 |
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| 107% |
Asia-Pacific |
| 5,060 |
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| 3,202 |
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| 1,858 |
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| 58% |
Unallocated corporate |
| (9,037) |
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| (7,670) |
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| (1,367) |
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| (18)% |
Total | $ | 28,392 |
| $ | 14,704 |
| $ | 13,688 |
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| 93% |
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Americas
Income from operations for the Americas increased to $14.6 million, up $4.0 million, or 38%, for the three months ended November 30, 2020 compared to the corresponding period of the prior fiscal year, primarily due to a $7.5 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 Americas segment increased from 53.1% to 54.2% period over period primarily due to the combined favorable impacts of decreased costs of petroleum-based specialty chemicals and aerosol cans from period to period, as well as decreases to advertising, promotional, and other discounts that we give to our customers. These favorable impacts to gross margin were partially offset by increases in warehousing, distribution and freight costs as well as unfavorable changes in sales mix and higher miscellaneous costs. Operating expenses increased $0.5 million period over period, primarily due to higher accruals for earned incentive compensation and other employee-related costs, as well as higher outbound freight costs due to the increase in sales 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 transmission of COVID-19 and decreased amortization from period to period. Operating income as a percentage of net sales increased from 22.6% to 27.0% period over period.
EMEA
Income from operations for the EMEA segment increased to $17.7 million, up $9.2 million, or 107%, for the three months ended November 30, 2020 compared to the corresponding period of the prior fiscal year, primarily due to a $15.5 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 55.9% to 58.5% period over period primarily due to the combined favorable impacts of decreased costs of petroleum-based specialty chemicals and aerosol cans from period to period, as well as sales price increases from period to period. These favorable impacts to gross margin were partially offset by increases in warehousing, distribution and freight costs, as well as higher miscellaneous costs from period to period. Operating expenses
increased $0.9 million period over period, primarily due to increased outbound freight costs due to the higher sales, as well as higher accruals for earned incentive compensation and other employee-related costs. These increases in operating expenses were partially offset by lower travel and meeting expenses due to the Company’s COVID-19 pandemic reduced travel initiatives. Operating income as a percentage of net sales increased from 21.9% to 32.4% period over period.
Asia-Pacific
Income from operations for the Asia-Pacific segment increased to $5.1 million, up $1.9 million, or 58%, for the three months ended November 30, 2020 compared to the corresponding period of the prior fiscal year, primarily due to a $3.0 million increase in sales and higher gross margin, which were partially offset by slightly higher operating expenses. As a percentage of net sales, gross profit for the Asia-Pacific segment increased from 54.0% to 56.7% 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, as well as sales price increases from period to period. These favorable impacts to gross margin were slightly offset by increases to advertising, promotional, and other discounts that we give to our customers. The increased sales were accompanied by a $0.2 million increase in total operating expenses period over period, primarily due to higher accruals for earned incentive compensation and increased outbound freight costs, which were partially offset by a lower level of advertising and sales promotion expenses from period to period. Operating income as a percentage of net sales increased from 25.5% to 32.4% period over period.
Non-Operating Items
The following table summarizes non-operating income and expenses for our consolidated operations (in thousands):
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| Three Months Ended November 30, | |||||||
| 2020 |
| 2019 |
| Change | |||
Interest income | $ | 19 |
| $ | 25 |
| $ | (6) |
Interest expense | $ | 570 |
| $ | 442 |
| $ | 128 |
Other income (expense), net | $ | 179 |
| $ | 5 |
| $ | 174 |
Provision for income taxes | $ | 4,397 |
| $ | 2,098 |
| $ | 2,299 |
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Interest Income
Interest income was insignificant for both the three months ended November 30, 2020 and 2019.
Interest Expense
Interest expense increased $0.1 million for the three months ended November 30, 2020 compared to the corresponding period of the prior fiscal year primarily due to higher aggregate outstanding balances on our credit and note agreements combined from period over period.
Other Income (Expense), Net
Other income (expense), net was insignificant for both the three months ended November 30, 2020 and 2019.
Provision for Income Taxes
The provision for income taxes was 15.7% and 14.7% of income before income taxes for the three months ended November 30, 2020 and 2019, respectively. Discrete benefits, primarily those related to excess tax benefits from settlements of stock-based equity awards, reduced the effective income tax rate to a level significantly below the anticipated annual effective tax rate for each period. Although these discrete benefits increased from period to period, they decreased as a percentage of pre-tax income due to significantly higher pre-tax income during the first quarter of fiscal year 2021 and resulted in a higher effective income tax rate from period to period.
Net Income
Net income was $23.6 million, or $1.72 per common share on a fully diluted basis, for the three months ended November 30, 2020 compared to $12.2 million, or $0.88 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 $0.8 million on net income for the three months ended November 30, 2020 compared to the corresponding period of the prior fiscal year. On a constant currency basis, net income would have increased by $10.6 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:
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| Three Months Ended November 30, | ||||
| 2020 |
| 2019 | ||
Gross margin - GAAP |
| 56% |
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| 54% |
Cost of doing business as a percentage |
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of net sales - non-GAAP |
| 32% |
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| 38% |
EBITDA as a percentage of net sales - non-GAAP (1) |
| 24% |
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| 17% |
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(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)
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| Three Months Ended November 30, | ||||
| 2020 |
| 2019 | ||
Total operating expenses - GAAP | $ | 41,854 |
| $ | 38,839 |
Amortization of definite-lived intangible assets |
| (358) |
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| (650) |
Depreciation (in operating departments) |
| (1,042) |
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| (947) |
Cost of doing business | $ | 40,454 |
| $ | 37,242 |
Net sales | $ | 124,559 |
| $ | 98,556 |
Cost of doing business as a percentage |
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of net sales - non-GAAP |
| 32% |
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| 38% |
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EBITDA (in thousands, except percentages)
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| Three Months Ended November 30, | ||||
| 2020 |
| 2019 | ||
Net income - GAAP | $ | 23,623 |
| $ | 12,194 |
Provision for income taxes |
| 4,397 |
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| 2,098 |
Interest income |
| (19) |
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| (25) |
Interest expense |
| 570 |
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| 442 |
Amortization of definite-lived intangible assets |
| 358 |
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| 650 |
Depreciation |
| 1,342 |
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| 1,307 |
EBITDA | $ | 30,271 |
| $ | 16,666 |
Net sales | $ | 124,559 |
| $ | 98,556 |
EBITDA as a percentage of net sales - non-GAAP |
| 24% |
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| 17% |
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Liquidity and Capital Resources
Overview
The Company’s financial condition and liquidity remain strong. Net cash provided by operations was $23.9 million for the three months ended November 30, 2020 compared to $15.2 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 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 November 30, 2020. 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 November 30, 2020, we had a $45.9 million balance of outstanding draws on the revolving credit facility, all of which was classified as long-term. In addition, we paid $0.4 million in principal payments on our Series A Notes during the first three months of fiscal year 2021, which had an outstanding balance of $17.6 million as of November 30, 2020. 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 November 30, 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 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. Management does not expect to seek Board approval for a new share buy-back plan until it starts to see a reduced level of uncertainty regarding the pandemic’s impact on the economy. At November 30, 2020, we had a total of $65.8 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):
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| Three Months Ended November 30, | |||||||
| 2020 |
| 2019 |
| Change | |||
Net cash provided by operating activities | $ | 23,921 |
| $ | 15,206 |
| $ | 8,715 |
Net cash used in investing activities |
| (3,670) |
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| (5,770) |
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| 2,100 |
Net cash provided by (used in) financing activities |
| (11,089) |
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| (8,520) |
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| (2,569) |
Effect of exchange rate changes on cash and cash equivalents |
| 220 |
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| 531 |
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| (311) |
Net increase (decrease) in cash and cash equivalents | $ | 9,382 |
| $ | 1,447 |
| $ | 7,935 |
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Operating Activities
Net cash provided by operating activities increased $8.7 million to $23.9 million for the three months ended November 30, 2020 from $15.2 million for the corresponding period of the prior fiscal year. Cash flows from operating activities depend heavily on operating performance and changes in working capital. Our primary source of operating cash flows for the three months ended November 30, 2020 was net income of $23.6 million, which increased $11.4 million from period to period. The changes in our working capital from period to period, which decreased net cash provided by operating activities, were primarily attributable to increases in trade accounts receivable balances during the three months ended November 30, 2020 compared to the corresponding period of the prior fiscal year as a result of significantly increased sales from period to period. These working capital changes were partially offset by increases in accounts payable in the EMEA segment related to increased production and the timing of payments to vendors from period to period. In addition, accrued payroll and related expenses decreased by a lower amount during the first quarter of fiscal year 2021 primarily due to lower payments of earned incentive compensation from period to period. The change in working capital was also impacted by increases to income tax accruals related to the higher pre-tax income during the first quarter of fiscal year 2021 compared to the corresponding period of the prior fiscal year.
Investing Activities
Net cash used in investing activities decreased $2.1 million to $3.7 million for the three months ended November 30, 2020 from $5.8 million for the corresponding period of the prior fiscal year, primarily due to decreased capital expenditures. Capital expenditures decreased by $2.2 million primarily due to the renovations and equipping of the Company’s office building in Milton Keynes, England that were occurring and were completed in the first quarter of fiscal year 2020. Capital expenditures during the first quarter of 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 in financing activities increased $2.6 million to $11.1 million for the three months ended November 30, 2020 from $8.5 million for the corresponding period of the prior fiscal year. This change was primarily due to a decrease in net proceeds from our debt instruments of $5.9 million. In 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 from the issuance and sale of senior notes during the quarter. This resulted in a $2.0 million cash inflow during the period compared to $7.9 million in net proceeds on our line of credit in the corresponding period of the prior fiscal year. In addition, increases in shares withheld to cover taxes on conversion of equity rewards and dividends paid of $0.9 million and $0.8 million, respectively, 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 $5.0 million from period to period.
Effect of Exchange Rate Changes
All of our foreign subsidiaries currently operate in currencies other than the U.S. Dollar and a significant portion of our consolidated cash balance is denominated in these foreign functional currencies, particularly at our U.K. subsidiary which operates in Pound Sterling. As a result, our cash and cash equivalents balances are subject to the effects of the fluctuations in these functional currencies against the U.S. Dollar at the end of each reporting period. The net effect of exchange rate changes on cash and cash equivalents, when expressed in U.S. Dollar terms, was an increase in cash of $0.2 million and $0.5 million for the three months ended November 30, 2020 and 2019, respectively. These changes were primarily due to fluctuations in various foreign currency exchange rates from period to period. For the three months ended November 30, 2020, the majority was related to the fluctuations in the Chinese Yuan against the U.S. Dollar whereas for the three months ended November 30, 2019, it was primarily related to 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 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 November 30, 2020, no such commitments were outstanding.
Share Repurchase Plan
The information required by this item is incorporated by reference to Part I—Item 1, “Notes to Condensed Consolidated Financial Statements” Note 9 — Share Repurchase Plan, included in this report.
Dividends
On December 7, 2021, the Company’s Board of Directors declared a cash dividend of $0.67 per share payable on January 29, 2021 to shareholders of record on January 15, 2021. Our ability to pay dividends could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and loan covenants.
Critical Accounting Policies
Our discussion and analysis of our operating results and financial condition is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
Critical accounting policies are those that involve subjective or complex judgments, often as a result of the need to make estimates. The following areas all require the use of judgments and estimates: revenue recognition, accounting for income taxes 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is incorporated by reference to Part II―Item 7A, “Quantitative and Qualitative Disclosures About Market Risk,” 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.
Item 4. Controls and Procedures
The term “disclosure controls and procedures” is defined in Rules 13a-15(e) and 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended (“Exchange Act”). The term disclosure controls and procedures means controls and other procedures of a Company that are designed to ensure the information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding
required disclosures. The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures as of November 30, 2020, the end of the period covered by this report (the Evaluation Date), and they have concluded that, as of the Evaluation Date, such controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in the Company’s reports filed under the Exchange Act. Although management believes the Company’s existing disclosure controls and procedures are adequate to enable the Company to comply with its disclosure obligations, management continues to review and update such controls and procedures. The Company has a disclosure committee, which consists of certain members of the Company’s senior management.
There were no changes in our internal control over financial reporting during the three months ended November 30, 2020 that materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II — OTHER INFORMATION
Item 1. Legal Proceedings
The information required by this item is incorporated by reference to the information set forth in Part I—Item 1, “Notes to Condensed Consolidated Financial Statements” Note 12 — Commitments and Contingencies, included in this report.
Item 1A. Risk Factors
There have been no material changes in our risk factors from those disclosed in Part I—Item 1A, “Risk Factors,” 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
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On April 8, 2020, the Company elected to suspend repurchases under its previously approved share buy-back plan, which subsequently expired on August 31, 2020. The Company made this election in order to preserve cash while it continued to monitor the long-term impacts of the COVID-19 pandemic. Management does not expect to seek Board approval for a new share buy-back plan until it starts to see a reduced level of uncertainty regarding the pandemic’s impact on the economy and the Company’s business. Therefore, no repurchase transactions were made during the first quarter of fiscal year 2021.
a
Item 6. Exhibits
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Exhibit No. |
| Description |
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3(a) |
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3(b) |
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10(a) |
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10(b) |
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10(c) |
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10(d) |
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31(a) |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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31(b) |
| Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
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32(a) |
| Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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32(b) |
| Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
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101 |
| The following materials from WD-40 Company’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2020, formatted in iXBRL (inline eXtensible Business Reporting Language): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Comprehensive Income; (iv) the Condensed Consolidated Statements of Shareholders’ Equity; (v) the Condensed Consolidated Statements of Cash Flows; and (vi) Notes to the Condensed Consolidated Financial Statements. |
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104 |
| The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL and contained in Exhibit 101. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| WD-40 COMPANY Registrant | ||||||
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Date: January 7, 2021 |
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| By: |
| /s/ GARRY O. RIDGE | ||||
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| Garry O. Ridge Chief Executive Officer (Principal Executive Officer) | ||
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| By: |
| /s/ JAY W. REMBOLT | ||||
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| Jay W. Rembolt Vice President, Finance Treasurer and Chief Financial Officer | ||
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| By: |
| /s/ RAE ANN PARTLO | ||||
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| Rae Ann Partlo Vice President, Corporate Controller and Principal Accounting Officer | ||
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