UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 31, 2019February 29, 2020
¨ | 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: 000-06936
Commission Company Name: WD 40 CO
WD-40 COMPANY
(Exact name of registrant as specified in its charter)
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Delaware |
| 95-1797918 |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) |
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9715 Businesspark Avenue, San Diego, California |
| 92131 |
(Address of principal executive offices) |
| (Zip code) |
Registrant’s telephone number, including area code: (619) 275-1400
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.
Yes þ No ¨
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). Yes þ No ¨
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.
Large accelerated filer þ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
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:
Title of each class | Trading Symbol | Name of exchange on which registered | ||
Common stock, par value $0.001 per share | WDFC | NASDAQ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No þ
The number of outstanding shares of the registrant’s common stock, par value $0.001 per share, as of JulyApril 3, 20192020 was 13,728,72313,668,439.
WD-40 COMPANY
QUARTERLY REPORT ON FORM 10-Q
For the Quarter Ended May 31, 2019February 29, 2020
TABLE OF CONTENTS
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 25 |
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Item 4. |
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Item 1. |
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Item 1A. |
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Item 2. | 47 | |
Item 6. | 48 | |
PART 1 - FINANCIAL INFORMATION | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
WD-40 COMPANY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1. 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. The Company markets its maintenance products and its 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. The Company’s brands are sold in various locations around the world. Maintenance products are sold worldwide in markets throughout North, Central and South America, Asia, Australia, Europe, the Middle East and Africa. Homecare and cleaning products are sold primarily in North America, the United Kingdom (“U.K.”) and Australia. The Company’s products are sold primarily through mass retail and home center stores, warehouse club stores, grocery stores, hardware stores, automotive parts outlets, sports retailers, independent bike dealers, online retailers and industrial distributors and suppliers. Note 2. Basis of Presentation and Summary of Significant Accounting PoliciesBasis of Consolidation 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, 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 August 31, The condensed consolidated financial statements include the accounts of the Company and its Use of Estimates 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. Foreign Currency Forward Contracts 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’s U.K. subsidiary, whose functional currency is Pound Sterling, utilizes foreign currency forward contracts to limit its exposure to net asset balances held in non-functional currencies,
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 Fair Value 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 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. Under fair value accounting, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value Recently Adopted Accounting Standards In
Upon adoption, the Company elected practical expedients 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 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. The Company did not elect the hindsight practical expedient and also did not elect the package of practical expedients that would allow the Company to retain its During the implementation of Recently Issued Accounting Standards
Note 3. Inventories 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):
Note 4. Property and Equipment Property and equipment, net, consisted of the following (in thousands):
At
Note 5. Goodwill and Other Intangible Assets Goodwill The following table summarizes the changes in the carrying amounts of goodwill by segment (in thousands):
3 of the fair value hierarchy. Based on the results of the quantitative analysis, the Company determined that the estimated fair value of each of its reporting units significantly exceeded their respective carrying values. As a result, the Company concluded that 0 impairment of its goodwill existed as of December 1, 2019. In addition, 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 through February While the Company believes that the estimates and assumptions used in its goodwill impairment test and analyses are reasonable, actual events and results could differ substantially from those included in the calculation. In the event that business conditions change in the future, the Company may be required to reassess and update its forecasts and estimates used in subsequent goodwill impairment analyses. Based on the Company’s most recent annual goodwill impairment test, the estimated fair value of each of its 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 results used within any future analyses are significantly lower than current estimates. Definite-lived Intangible Assets
The Company’s definite-lived intangible assets, which include the 2000 Flushes, Spot Shot, Carpet Fresh, 1001, EZ REACH and GT85 trade names, the Belgium customer list, the GT85 customer relationships and the GT85 technology 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):
There has been Changes in the carrying amounts of definite-lived intangible assets by segment for the
The estimated amortization expense for the Company’s definite-lived intangible assets in future fiscal years is as follows (in thousands):
Included in the total estimated future amortization expense is the amortization expense for the 1001 trade name and the GT85 intangible assets, which are based on current foreign currency exchange rates, and as a result amounts in future periods may differ from those presented due to fluctuations in those rates. Note 6. Leases 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 February 29, 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 0 significant short-term leases as of February 29, 2020. Upon adoption of ASC 842 on September 1, 2019, the Company’s total assets increased by $9.0 million and total liabilities increased $9.2 million in the Company’s consolidated balance sheets. The adoption of this standard did not have a material impact on retained earnings, the consolidated statements of operations or cash flows. The Company obtained 0 significant additional right-of-use assets in exchange for lease obligations during the six months ended February 29, 2020. The Company recorded $0.5 million and $1.0 million in lease expense during the three and six months ended February 29, 2020, respectively. This lease expense was included in selling, general and administrative expenses. An insignificant amount of lease expense was classified within cost of products sold for both the three and six months ended February 29, 2020. During the three and six months ended February 29, 2020, the Company paid cash of $0.5 million and $1.0 million related to lease liabilities, respectively. Variable lease expense under the Company’s lease agreements were not significant for both the three and six months ended February 29, 2020. As of February 29, 2020, the weighted-average remaining lease term was 7.3 years and the weighted-average discount rate was 3.2% for the Company’s operating leases. There were no leases that had not yet commenced as of February 29, 2020 that will create additional significant rights and obligations for the Company. Right-of-use assets and lease liabilities consisted of the following (in thousands):
(1)Current operating lease liabilities are classified in accrued liabilities on the Company’s consolidated balance sheet. 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:
Future fiscal year minimum payments under non-cancelable operating leases in accordance with ASC 840 as of August 31, 2019 were as follows:
Note Accrued liabilities consisted of the following (in thousands):
Accrued payroll and related expenses consisted of the following (in thousands):
Note As of Note Purchase and Private Shelf Agreement On November 15, 2017, the Company entered into the 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”), pursuant to which the Company agreed to sell $20.0 million aggregate principal amount of senior notes (the “Series A Notes”) to certain of the Note Purchasers. Since November 15, 2017, this note agreement has been amended once on February 23, 2018. The Series A Notes bear interest at 3.39% per annum and will mature on November 15, 2032, unless earlier paid by the Company. Principal payments are required semi-annually in May and November of each year in equal installments of $0.4 million through May 15, 2032, and the remaining outstanding principal in the amount of $8.4 million will become due on November 15, 2032. Interest is also payable semi-annually in May and November of each year. During the Pursuant to the Note Agreement, the Company may from time to time offer for sale, in one or a series of transactions, additional senior notes of the Company (the “Shelf Notes”) in an aggregate principal amount of up to $105.0 million. The Shelf Notes will have a maturity date of no more than 15.5 years after the date of original issuance and may be issued no later than November 15, 2020. The Shelf Notes, if issued, would bear interest at a rate per annum as agreed upon amongst the Company and the purchasing parties and would have such other particular terms, as would be set forth in a confirmation of acceptance executed by the purchasing parties prior to the closing of each purchase and sale transaction. To date, the Company has issued Credit Agreement On June 17, 2011, the Company entered into an unsecured Credit Agreement (the “Credit Agreement”) with Bank of America, N.A. (“Bank of America”). Since June 17, 2011, this unsecured credit agreement has been amended Per the terms of the amended agreement, the aggregate amount of the Company’s capital stock that it may repurchase may not exceed $150.0 million during the period from January 22, 2019 to the maturity date of the agreement so long as no default exists immediately prior and after giving effect thereto. In addition, the Company may not declare or pay cash dividends in the current fiscal quarter that, when added to dividends paid in the prior three fiscal quarters, will exceed 75% of the Company’s consolidated net income for the then most recently ended four quarters for which financial statements are delivered to Bank of America as required by the Credit Agreement (the “Dividend Covenant”). The Credit Agreement also features an autoborrow agreement providing for the automatic advance of revolving loans in U.S. Dollars to the Company’s designated account at Bank of America. Per the terms of the amended agreement, the Company’s outstanding balance on the autoborrow agreement cannot exceed an aggregate amount of $30.0 million. Since the autoborrow feature provides for borrowings to be made and repaid by the Company on a daily basis, any such borrowings made under an active autoborrow agreement are classified as short-term on the Company’s consolidated balance sheets. The Company had The Company assesses its ability and intent to
Short-term and long-term borrowings consisted of the following (in thousands):
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 shares of the Company’s capital stock and enter into certain merger or consolidation transactions. The Credit Agreement includes, among other limitations on indebtedness, a $35.0 million limit on other unsecured indebtedness, including indebtedness incurred under the Series A Notes and any Shelf Notes to be offered for sale under the Note Agreement. 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 The consolidated interest coverage ratio cannot be less than As of On March 16, 2020, the Company amended and restated the existing Credit Agreement and entered into a second amendment to the Note Agreement. See Note 16 – Subsequent Events for additional information on these agreements. Note On June 19, 2018, the Company’s Board of Directors approved a share buy-back plan. Under the plan, which became effective on September 1, 2018 and will remain in effect through August 31, 2020, the Company is authorized to acquire up to $75.0 million of its outstanding
period from September 1, 2018 through Note | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Three Months Ended May 31, | Nine Months Ended May 31, | Three Months Ended February 29/28, | Six Months Ended February 29/28, | |||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||
Net income | $ | 18,139 | $ | 16,130 | $ | 47,324 | $ | 43,578 | $ | 14,327 | $ | 15,906 | $ | 26,521 | $ | 29,185 | ||||||
Less: Net income allocated to | ||||||||||||||||||||||
participating securities | (105) | (105) | (286) | (283) | (68) | (94) | (135) | (181) | ||||||||||||||
Net income available to common shareholders | $ | 18,034 | $ | 16,025 | $ | 47,038 | $ | 43,295 | $ | 14,259 | $ | 15,812 | $ | 26,386 | $ | 29,004 | ||||||
The table below summarizes the weighted-average number of common shares outstanding included in the calculation of basic and diluted EPS (in thousands):
Three Months Ended May 31, | Nine Months Ended May 31, | Three Months Ended February 29/28, | Six Months Ended February 29/28, | |||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||
Weighted-average common | ||||||||||||||||||||||
shares outstanding, basic | 13,790 | 13,905 | 13,821 | 13,949 | 13,712 | 13,828 | 13,713 | 13,837 | ||||||||||||||
Weighted-average dilutive securities | 30 | 32 | 32 | 32 | 25 | 29 | 28 | 32 | ||||||||||||||
Weighted-average common | ||||||||||||||||||||||
shares outstanding, diluted | 13,820 | 13,937 | 13,853 | 13,981 | 13,737 | 13,857 | 13,741 | 13,869 | ||||||||||||||
For the three months ended May 31, 2019, thereFebruary 29, 2020, weighted-average stock-based equity awards outstanding that are non-participating securities in the amount of 9,479 were noexcluded from the calculation of diluted EPS under the treasury stock method as they were anti-dilutive. There were 0 anti-dilutive stock-based equity awards outstanding. outstanding for the three months ended February 28, 2019. For the ninesix months ended May 31,February 29, 2020 and February 28, 2019, weighted-average stock-based equity awards outstanding that are non-participating securities in the amount of 1,4437,604 and 2,164, respectively, were excluded from the calculation of diluted EPS under the treasury stock method as they were anti-dilutive.
There were no anti-dilutive stock-based equity awards outstanding for the three and nine months ended May 31, 2018.
Note 10.11. Revenue Recognition
On September 1, 2018, the Company adopted ASC 606 using the modified retrospective method and recognized the cumulative effect of initially applying the new revenue standard as an adjustment to the opening retained earnings. As a result, the Company recognized a reduction of $0.3 million to opening retained earnings as the cumulative effect of adopting this new revenue standard. This adjustment did not have a material impact on the Company’s consolidated financial statements. Results for reporting periods beginning after September 1, 2018 are presented under ASC 606, while prior period amounts are presented under the accounting standards in effect for those respective periods.
As a result of the adoption of ASC 606 and management’s consideration of the factors in the five-step approach, the timing for recognizing revenue has been delayed for certain customers and accelerated for others, particularly for customers in the Company’s Americas segment. Under ASC 606, the timing of revenue recognition is determined when control transfers to our customers, while under the prior revenue recognition guidance, timing of revenue was focused more on the transfer of the risks and rewards. Under the prior revenue recognition guidance, the Company effectively retained the risk of loss until the goods reached the customer as if those customers had designated shipping terms. Under ASC 606, transfer of risks and rewards is just one indicator of whether control has transferred. Management determined that revenue, after considering all indicators, is recognized for those customers when goods are shipped or picked up from the Company’s warehouses. The Company assessed the financial line items impacted by adopting this standard compared to the previous revenue guidance,
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and management concluded that any differences in financial statement line items are inconsequential to the Company’s consolidated financial statements for both the three and nine months ended May 31, 2019.
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-partiesthird 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 (cooperative marketing programs and volume-based discounts), 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 most likely outcomeexpected 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 the sales incentive allowancesthese estimates accordingly on a quarterly basis.
Rebates — The Company offers various on-going trade promotion programs with customers that require management to estimate and accrue for the expected costs of such programs. 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. Costs related to rebates, cooperative advertising and other promotional activities are recorded as a reduction to sales upon delivery of the Company’s products to its customers. As of
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May February 29, 2020 and August 31, 2019, the Company had a $7.0$6.9 million and $7.5 million balance in rebate liabilities, which arerespectively, included in accrued liabilities on the Company’s condensed consolidated balance sheets, andsheets. The Company recorded approximately $4.6$4.4 million and $13.4$9.4 million in rebates as a reduction to sales during the three and nine month periodssix months ended May 31,February 29, 2020, respectively. Rebates as a reduction to sales during the three and six months ended February 28, 2019 were approximately $4.5 million and $8.8 million, respectively.
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. As of May 31, 2019, the Company had a $0.3 million balance in couponCoupon redemption liabilities, which are included in accrued liabilities on the Company’s condensed consolidated balance sheets, were not significant at February 29, 2020 and August 31, 2019. Coupons recorded approximately $0.2 million and $0.4 million in coupons as a reduction to sales during the three and nine month periodssix months ended May 31,February 29, 2020 and February 28, 2019, respectively.respectively, 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. As of MayFebruary 29, 2020, the Company did not have a significant balance in the allowance for cash discounts. As of August 31, 2019, the Company had a $0.5 million balance in the allowance for cash discounts anddiscounts. The Company recorded approximately $1.2$1.0 million and $3.2$2.0 million in cash discounts as a reduction to sales during the three and nine month periodssix months ended May 31,February 29, 2020, respectively. Cash discounts as a reduction to sales during the three and six months ended February 28, 2019 were approximately $1.0 million and $2.0 million, respectively.
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. Under the provisions ofcurrent revenue accounting standard, ASC 606, the Company is now required to present its provision for sales returns on a gross basis as a liability. The Company’s refund liability for sales returns, was $0.4 million at May 31, 2019, which is included in accrued liabilities and represents the amount expected to be owed to the customers for product returns.returns, was not significant at both February 29, 2020 and August 31, 2019. The Company now 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 $0.1 millionnot significant at May 31, 2019. In prior periods, the Company recognized a provision for estimated sales returns on a net basis, and as allowed under the modified retrospective approach, the comparative prior period information has not been restated for this change.February 29, 2020.
Disaggregation of Revenue
The Company's revenue is presented on a disaggregated basis in Note 1415 – 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 consistconsists 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 $1.1 million and $0.8$1.8 million as of September 1, 2018 and May 31, 2019, respectively. All of the $1.1 million that was included in contractFebruary 29, 2020. Contract liabilities were not significant as of September 1, 2018 was recognized to revenue during the nine months ended MayAugust 31, 2019. These contract2019. Contract liabilities are recorded in accrued liabilities on the Company’s condensed consolidated balance sheets. The Company did not0t have any contract assets as of September 1, 2018February 29, 2020 and MayAugust 31, 2019.
Note 11.12. Related Parties
On October 11, 2011, the Company’s Board of Directors elected Mr. Gregory A. Sandfort as a director of WD-40 Company. Mr. Sandfort iswas the Chief Executive Officer of Tractor Supply Company (“Tractor Supply”), which is a WD-40 Company customer that acquires products from the Company in the ordinary course of business.business, until January 13, 2020 when he retired as Chief Executive Officer. Since Mr. Sandfort served as an executive officer of Tractor Supply during the Company’s second quarter of fiscal year 2020, Tractor Supply is treated as a related party to the Company through January 13, 2020.
The condensed consolidated financial statements include sales to Tractor Supply of $0.6$0.4 million and $0.4$0.3 million for the three months ended May 31,February 29, 2020 and February 28, 2019, and 2018, respectively, and $1.3 million and $0.9 million and $0.7 million for the ninesix months ended May 31,February 29, 2020 and February 28, 2019, and 2018, respectively. Accounts receivable from Tractor Supply were $0.3 millionnot significant at May 31, 2019both February 29, 2020 and $0.5 million as of August 31, 2018.2019.
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Note 12.13. Commitments and Contingencies
Purchase Commitments
The Company has ongoing relationships with various suppliers (contract manufacturers) who manufacture the Company’s products. The contract manufacturers maintain title and control of certain raw materials and components, materials utilized in finished products, and of the finished products themselves until shipment to 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 two months to five months. The Company is committed to purchase the products produced by the contract manufacturers based on the projections provided.
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 May 31, 2019, noFebruary 29, 2020, 0 such commitments were outstanding.
Litigation
From time to time, the Company is subject to various claims, lawsuits,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. Except as disclosed herein,matters. As of February 29, 2020, there are nowere
0 unasserted claims or pending proceedings for claims against the Company that the Company believes will result in a probable loss for the Company and, as to claims that the Company believes may result in a reasonably possible loss, the Company believes that no reasonably possible outcome of any such claim or proceeding arising in the ordinary course of business will have a materially adverse impact on the Company’s financial condition, results of operations or cash flows.
On or about July 31, 2018, claims for damages were asserted against the Company in an “Amended Statement of Claim” filed in a civil proceeding in Malaysia before the High Court of Malaya at Shah Alam in the State of Selangor Darul Ehsan, Civil Suit No. BA-22NCvC-531-09/2017 (the “Malay Litigation”). The Malay Litigation was first filed in September 2017 by Sunway Winstar Sdn. Bhd. (“Sunway”) against a former employee of Sunway and the former employee’s new employer, Ekotrends Capital Sdn. Bdh (“Ekotrends”). Sunway was a marketing distributor for the Company for the country of Malaysia from 2004 until 2017. Ekotrends is an affiliate of Bun Seng Hardware Sdn. Bdh. (“Bun Seng”), the Company’s current marketing distributor for Malaysia. The Malay Litigation asserted that the former employee and Ekotrends misappropriated confidential information, including customer lists, associated with Sunway’s terminated relationship as the Company’s exclusive marketing distributor. By order of the court following the Company’s motion to intervene in order to protect and assert its right to ownership of the customer lists and other confidential information associated with the Company’s business in Malaysia, Sunway filed its Amended Statement of Claim to add Bun Seng as a defendant and to assert new and separate claims against the Company alleging conspiracy with Ekotrends and Bun Seng to injure the business and reputation of Sunway.
The Company denies the allegations asserted by Sunway and will vigorously defend itself in the Malay Litigation. The Company believes that an unfavorable outcome in the Malay Litigation is not probable, but that an award of damages is reasonably possible. Due to uncertainty as to the theories for recovery of damages asserted by Sunway against the Company and as to results in proceedings under Malaysian law, the Company is unable to estimate the possible loss or range of loss.
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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, 2018,2019, which was filed with the SEC on October 22, 2018.2019.
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.minimal. Thus, no0 liabilities have been recorded for these agreements as of May 31, 2019.February 29, 2020.
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 the Company with respect to most potential claims arising from such agreements and that such agreements do not otherwise have value separate and apart from the liabilities incurred in the ordinary course of the Company’s business. Thus, no0 liabilities have been recorded with respect to such indemnification agreements as of May 31, 2019.February 29, 2020.
Note 13.14. 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.
On December 20, 2017 the United States House of Representatives and the Senate passed the “Tax Cuts and Jobs Act” (the “Tax Act”), which was signed into law on December 22, 2017 and became effective beginning January 1, 2018. Due to the complexity of the Tax Act, the SEC issued guidance in SAB 118 which clarified the accounting for income taxes under ASC 740 if certain information was not yet available, prepared or analyzed in reasonable detail to complete the accounting for income tax effects of the Tax Act. SAB 118 provided for a measurement period of up to one year after the enactment of the Tax Act, during which time the required analyses and accounting must have been completed. During the measurement period, (i) income tax effects of the Tax Act must have been reported if the accounting was completed; (ii) provisional amounts must have been reported for income tax effects of the Tax Act for which the accounting was incomplete but a reasonable estimate could be determined; and (iii) provisional amounts were not required to be reported for income tax effects of the Tax Act for which a reasonable estimate could not be determined. During fiscal year 2018, the Company recorded provisional amounts for the income tax effects of the changes in tax law and tax rates, as reasonable estimates were determined by management during this period. During the first quarter of fiscal year 2019, the Company did not significantly adjust provisional amounts recorded in the prior fiscal year and the SAB 118 measurement period subsequently ended on December 22, 2018, which was during the Company’s second quarter of fiscal year 2019. Although the Company no longer considers these amounts to be provisional, the determination of the Tax Act’s income tax effects may change following future legislation or further interpretation of the Tax Act based on the publication of U.S. Treasury regulations and guidance from the Internal Revenue Service and state tax authorities.
On November 28, 2018 the U.S. Treasury released proposed regulations that specifically address, and are inconsistent with, the Company’s position regarding the interpretation and application of the Tax Act’s mandatory one-time “toll tax” on unremitted foreign earnings. Proposed regulations are subject to the regulatory review process prior to finalization and do not take precedence over enacted law. As such, the Company’s position regarding its interpretation and application of the toll tax did not change. Subsequent to May 31, 2019, these proposed regulations were finalized. See Note 15 – Subsequent Events for additional information on these finalized regulations.
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Management has assessed the fiscal year 2019 impacts of the Tax Act and has determined that the Company will lose the benefit from the Domestic Production Activities Deduction. However, the Company will also acquire certain net benefits beginning in fiscal year 2019 from the favorable impacts of the Foreign Derived Intangible Income (“FDII”) section of the Tax Act, partially offset by the unfavorable impacts of the Global Intangible Low-Taxed Income (“GILTI”). Another significant section of the Tax Act, the Base Erosion Anti-Abuse Tax (“BEAT”), will not apply to the Company’s fiscal year 2019 as the Company does not meet the minimum revenue requirements under the BEAT. The Company will continue to evaluate the BEAT to determine whether it will have any significant impact on the Company’s consolidated financial statements in future years.
The Tax Act requires taxpayers to elect an accounting method for expenses allocated to the GILTI calculation. As ASC 740, Income Taxes, does not directly address the accounting for GILTI, the FASB staff concluded that entities must make an accounting policy election to either: (1) treat GILTI as a period cost if and when incurred, or (2) recognize deferred taxes for basis differences that are expected to reverse as GILTI in future years. During the first quarter of fiscal year 2019, management made the accounting policy election to account for expenses allocated to the GILTI calculation under the period cost method.
The provision for income taxes was 19.8%17.6% and 24.3%18.7% of income before income taxes for the three months ended May 31,February 29, 2020 and February 28, 2019, and 2018, respectively. The decrease in the effective income tax rate from period to period was primarily due to an increase in excess tax benefits from settlements of stock-based equity awards during the continued impact resultingquarter that are recognized in the provision for income tax, as well as an increase of taxable earnings from the Tax Act and its effect on the Company’s fiscal yearforeign operations which are taxed at lower tax rate. As the Company’s fiscal year ends on August 31st, the Tax Act resulted in a blended federal statutory tax rate of 25.7% for fiscal year 2018. For fiscal year 2019, however, the Tax Act is in effect for the Company’s full year and resulted in a federal statutory tax rate for the year of 21%. The tax rate was also favorably impacted by the net benefit received from the application of the GILTI / FDII calculation which was partially offset by the loss of the Domestic Production Activities Deduction.rates.
The provision for income taxes was 18.8%16.3% and 22.3%18.2% of income before income taxes for the ninesix months ended May 31,February 29, 2020 and February 28, 2019, and 2018, respectively. The decrease in the effective income tax rate from period to period was primarily due to an increase in excess tax benefits from settlements of stock-based equity awards during the continued impact resultingsecond quarter that are recognized in the provision for income tax, an increase of taxable earnings from foreign operations which are taxed at lower tax rates, and a benefit from the Tax Act and its effect on the Company’s fiscal yearrelease of liabilities associated with unrecognized tax rate. As the Company’s fiscal year ends on August 31st, the Tax Actbenefits that resulted in a blended federal statutory tax rate of 25.7% for fiscal year 2018. For fiscal year 2019, however, the Tax Act is in effect for the Company’s full year and resulted in a federal statutory tax rate for the year of 21%. The tax rate was also favorably impacted by the net benefit received from the applicationexpiration of the GILTI / FDII calculation which was partially offset by the loss of the Domestic Production Activities Deduction.statutes.
The Company is subject to taxation in the U.S. and in various state and foreign jurisdictions. Due to expired statutes, and closed audits, the Company’s federal income tax returns for years prior to fiscal year 20162017 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 20152016 are no longer subject to examination. The Company has estimated that up to $0.3 million ofEstimated 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.months were not significant. Audit outcomes and the timing of settlements are subject to significant uncertainty.
Note 14.15. Business Segments and Foreign Operations
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 three3 segments: the Americas; EMEA; and Asia-Pacific. Segment data does not include inter-segment revenues. Unallocated corporate expenses are general corporate overhead expenses not directly attributable to the operatingbusiness segments and are reported separate from the Company’s identified segments. The corporate overhead costs include expenses for the Company’s accounting and finance, information technology, human resources, research and development, quality control and executive management functions, as well as all direct costs associated with public company compliance matters including legal, audit and other professional services costs. Also included in corporate overhead costs for fiscal year 2018 were corporate funded advertising and sales promotion expenses focused on increasing the Company’s digital presence and building brand awareness.
Summary information about reportable segments is as follows (in thousands):
Unallocated | Unallocated | |||||||||||||||||||||||||||
For the Three Months Ended | Americas | EMEA | Asia-Pacific | Corporate (1) | Total | Americas | EMEA | Asia-Pacific | Corporate (1) | Total | ||||||||||||||||||
May 31, 2019: | ||||||||||||||||||||||||||||
February 29, 2020: | ||||||||||||||||||||||||||||
Net sales | $ | 52,966 | $ | 44,548 | $ | 16,475 | $ | - | $ | 113,989 | $ | 46,842 | $ | 41,753 | $ | 11,454 | $ | - | $ | 100,049 | ||||||||
Income from operations | $ | 15,418 | $ | 9,918 | $ | 4,352 | $ | (6,486) | $ | 23,202 | $ | 11,400 | $ | 10,582 | $ | 3,106 | $ | (6,903) | $ | 18,185 | ||||||||
Depreciation and | ||||||||||||||||||||||||||||
amortization expense | $ | 1,137 | $ | 614 | $ | 71 | $ | 63 | $ | 1,885 | $ | 1,210 | $ | 741 | $ | 76 | $ | 40 | $ | 2,067 | ||||||||
Interest income | $ | 6 | $ | 1 | $ | 20 | $ | - | $ | 27 | $ | 9 | $ | - | $ | 19 | $ | - | $ | 28 | ||||||||
Interest expense | $ | 399 | $ | 167 | $ | 1 | $ | - | $ | 567 | $ | 390 | $ | 201 | $ | 2 | $ | - | $ | 593 | ||||||||
May 31, 2018: | ||||||||||||||||||||||||||||
February 28, 2019: | ||||||||||||||||||||||||||||
Net sales | $ | 52,999 | $ | 39,571 | $ | 14,455 | $ | - | $ | 107,025 | $ | 43,897 | $ | 40,966 | $ | 16,472 | $ | - | $ | 101,335 | ||||||||
Income from operations | $ | 15,709 | $ | 9,565 | $ | 3,298 | $ | (6,243) | $ | 22,329 | $ | 9,992 | $ | 10,630 | $ | 5,143 | $ | (6,050) | $ | 19,715 | ||||||||
Depreciation and | ||||||||||||||||||||||||||||
amortization expense | $ | 999 | $ | 685 | $ | 81 | $ | 198 | $ | 1,963 | $ | 1,132 | $ | 644 | $ | 71 | $ | 53 | $ | 1,900 | ||||||||
Interest income | $ | - | $ | 34 | $ | 73 | $ | - | $ | 107 | $ | 10 | $ | 2 | $ | 33 | $ | - | $ | 45 | ||||||||
Interest expense | $ | 1,202 | $ | - | $ | 3 | $ | - | $ | 1,205 | $ | 620 | $ | 63 | $ | 2 | $ | - | $ | 685 | ||||||||
Nine Months Ended: | ||||||||||||||||||||||||||||
May 31, 2019: | ||||||||||||||||||||||||||||
Six Months Ended: | ||||||||||||||||||||||||||||
February 29, 2020: | ||||||||||||||||||||||||||||
Net sales | $ | 144,654 | $ | 124,259 | $ | 47,693 | $ | - | $ | 316,606 | $ | 93,578 | $ | 80,998 | $ | 24,029 | $ | - | $ | 198,605 | ||||||||
Income from operations | $ | 36,712 | $ | 28,923 | $ | 13,236 | $ | (19,553) | $ | 59,318 | $ | 21,980 | $ | 19,174 | $ | 6,308 | $ | (14,573) | $ | 32,889 | ||||||||
Depreciation and | ||||||||||||||||||||||||||||
amortization expense | $ | 3,400 | $ | 1,930 | $ | 212 | $ | 168 | $ | 5,710 | $ | 2,382 | $ | 1,375 | $ | 150 | $ | 117 | $ | 4,024 | ||||||||
Interest income | $ | 22 | $ | 21 | $ | 80 | $ | - | $ | 123 | $ | 13 | $ | 1 | $ | 39 | $ | - | $ | 53 | ||||||||
Interest expense | $ | 1,727 | $ | 230 | $ | 5 | $ | - | $ | 1,962 | $ | 732 | $ | 300 | $ | 3 | $ | - | $ | 1,035 | ||||||||
May 31, 2018: | ||||||||||||||||||||||||||||
February 28, 2019: | ||||||||||||||||||||||||||||
Net sales | $ | 144,129 | $ | 114,231 | $ | 47,518 | $ | - | $ | 305,878 | $ | 91,688 | $ | 79,711 | $ | 31,218 | $ | - | $ | 202,617 | ||||||||
Income from operations | $ | 37,075 | $ | 27,933 | $ | 13,099 | $ | (19,274) | $ | 58,833 | $ | 21,294 | $ | 19,005 | $ | 8,884 | $ | (13,067) | $ | 36,116 | ||||||||
Depreciation and | ||||||||||||||||||||||||||||
amortization expense | $ | 3,139 | $ | 1,890 | $ | 234 | $ | 586 | $ | 5,849 | $ | 2,263 | $ | 1,316 | $ | 141 | $ | 105 | $ | 3,825 | ||||||||
Interest income | $ | 1 | $ | 271 | $ | 99 | $ | - | $ | 371 | $ | 16 | $ | 20 | $ | 60 | $ | - | $ | 96 | ||||||||
Interest expense | $ | 3,040 | $ | - | $ | 8 | $ | - | $ | 3,048 | $ | 1,328 | $ | 63 | $ | 4 | $ | - | $ | 1,395 | ||||||||
(1)Unallocated corporate expenses are general corporate overhead expenses not directly attributable to any one of the business segments. These expenses are reported separate from the Company’s identified segments and are included in Selling, General and Administrative expenses on the Company’s condensed consolidated statements of operations.
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The Company’s Chief Operating Decision Maker does not review assets by segment as part of the financial information provided. Therefore,provided, and therefore, no asset information is provided in the above table.
Net sales by product group are as follows (in thousands):
Three Months Ended May 31, | Nine Months Ended May 31, | Three Months Ended February 29/28, | Six Months Ended February 29/28, | |||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||
Maintenance products | $ | 104,533 | $ | 98,839 | $ | 289,371 | $ | 279,188 | $ | 91,147 | $ | 92,370 | $ | 180,817 | $ | 184,838 | ||||||
Homecare and cleaning products | 9,456 | 8,186 | 27,235 | 26,690 | 8,902 | 8,965 | 17,788 | 17,779 | ||||||||||||||
Total | $ | 113,989 | $ | 107,025 | $ | 316,606 | $ | 305,878 | $ | 100,049 | $ | 101,335 | $ | 198,605 | $ | 202,617 | ||||||
Note 15.16. Subsequent Events
On June 18, 2019,March 17, 2020, the Company’s Board of Directors declared a cash dividend of $0.61$0.67 per share payable on July 31, 2019April 30, 2020 to shareholders of record on July 19, 2019.April 17, 2020.
On June 14, 2019,March 16, 2020, the U.S. Treasury released finalized regulations that specifically address,Company entered into an Amended and are inconsistentRestated Credit Agreement (the “Amended and Restated Credit Agreement”) with Bank of America. The Amended and Restated Credit Agreement modifies the Company’s position regardingexisting Credit Agreement dated June 17, 2011 with Bank of America. The Amended and Restated Credit Agreement increased the interpretationrevolving commitment from $100.0 million to $150.0 million and applicationincreased the sublimit for the revolving commitment for borrowing by WD-40 Company Limited, a wholly owned operating subsidiary of the Tax Act’s mandatory one-time “toll tax”Company for Europe, the Middle East, Africa and India, from $50.0 million to $100.0 million. In addition to other non-material and technical amendments to the Credit Agreement, the Amended and Restated Credit Agreement modified certain restrictive covenants. An exception to a prohibition on unremitted foreign earnings. On June 14, 2019, the U.S. Treasury released finalized regulations that specifically address, andInvestments has been added to allow for intercompany loans or advances from any Loan Party to Subsidiaries which are inconsistent with, the Company’s position regarding the interpretation and applicationnot Loan Parties in an aggregate amount of the Tax Act’s mandatory one-time “toll tax” on unremitted foreign earnings. These newly finalized regulations do not take precedence over enacted law. The Company is currently assessing its position given these finalized regulations and a change in that position would create a significant unfavorable impact on the Company’s provision for income taxes of betweenup to $5.0 million outstanding at any time. In addition, an exception for other investments not otherwise covered by an exception has been increased from $2.5 to $5.0 million. The Amended and $7.0Restated Credit Agreement also includes a new schedule of permitted consolidated capital expenditures to permit the Company to make contemplated capital investments in the current and future fiscal years of up to $30.5 million in fiscal year 2020, $19.0 million in fiscal year 2021, and $15.0 million for fiscal years 2022, 2023, 2024 and 2025. The Amended and Restated Credit Agreement increases the carryforward from one fiscal year to the next fiscal year of unused Permitted Consolidated Capital Expenditures from $2.5 million to $5.0 million. The new maturity date for the revolving credit facility per the Amended and Restated Credit Agreement is March 16, 2025.
On March 16, 2020, the Company also entered into a second amendment (the “Second Amendment”) to its existing Note Agreement dated November 15, 2017 by and among the Company, Prudential and Note Purchasers. The Second Amendment amended the Note Agreement to permit the Company (inclusive of its subsidiaries) to enter into the Amended and Restated Credit Agreement with Bank of America and the Second Amendment includes certain conforming amendments to the Note Agreement consistent with the Amended and Restated Credit Agreement, including a schedule of permitted consolidated capital expenditures and related carryforward provisions for unused portions each fiscal year.
On April 8, 2020, the Company signed letters from Bank and America and Prudential acknowledging an agreement between the Company and both lenders to permit the Company to add back to its net income for the quarter ended August 31, 2019 a one-time, non-cash charge for an uncertain tax position associated with the Tax Cuts and Jobs Act “toll tax” in the amount of $8.7 million solely for the purpose of the Dividend Covenant as described in Note 8 – Debt.
The material terms of the Amended and Restated Credit Agreement and the Second Amendment discussed above do not purport to be complete and are qualified in their entirety by reference to Exhibit 10(b) and Exhibit 10(c), respectively, included in Part II—Item 6, “Exhibits” and incorporated by reference in this report, and by reference to Exhibits 10(d) and 10(e), respectively included in Part II – Item 6. See Note 8 – Debt for additional information on the Company’s existing debt agreements and related financial covenants as of February 29, 2020.
During the week of March 23, 2020, the Company drew an additional $80.0 million in U.S. Dollars under its line of credit with Bank of America bringing the balance on the line of credit to approximately $149.0 million. As a result of this additional borrowing, the Company has now drawn almost the entirety of the $150.0 million available under the Credit Agreement. Although the Company does not have any presently anticipated need for this additional liquidity, the Company decided to draw this additional amount to ensure future liquidity given the recent significant impact on global financial markets and the economy as a result of the novel coronavirus (“COVID-19”) outbreak. Due to the speed with which the COVID-19 situation
is developing, the Company is not able at this time to estimate the impact of COVID-19 on its consolidated financial statements and related disclosures, but the impact could be material for the remainder of fiscal year 2020 in all business segments and could be material during any future period affected either directly or indirectly by this pandemic.
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, 2018,2019, which was filed with the Securities and Exchange Commission (“SEC”) on October 22, 2018.2019.
In order to show the impact of changes in foreign currency exchange rates on our results of operations, we have included constant currency disclosures, where necessary, in the Overview and Results of Operations sections which follow. Constant currency disclosures represent the translation of our current fiscal year revenues and expenses from the functional currencies of our subsidiaries to U.S. dollars using the exchange rates in effect for the corresponding period of the prior fiscal year. We use results on a constant currency basis as one of the measures to understand our operating results and evaluate our performance in comparison to prior periods. Results on a constant currency basis are not in accordance with accounting principles generally accepted in the United States of America (“non-GAAP”) and should be considered in addition to, not as a substitute for, results prepared in accordance with GAAP.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for certain forward-looking statements. This report contains forward-looking statements, which reflect the Company’s current views with respect to future events and financial performance.
These forward-looking statements include, but are not limited to, discussions about future financial and operating results, including: growth expectations for certainmaintenance 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 “Tax Cutslength and Jobs Act”;severity of the recent COVID-19 outbreak 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,“target,” “estimate” and similar expressions. The Company undertakes no obligation to revise or update any forward lookingforward-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, 2018,2019, and in the Company’s Quarterly Reports on Form 10-Q, which may be updated from time to time.
Overview
The Company
WD-40 Company (“the Company”), based in San Diego, California, is a global marketing organization dedicated to creating positive lasting memories by developing and selling products that solve problems in workshops, factories and homes around the world. We market our maintenance products and our homecare and cleaning products under the following well-known brands: WD-40®, 3-IN-ONE®, GT85®, X-14®, 2000 Flushes®, Carpet Fresh®, no vac®, Spot Shot®, 1001®, Lava® and Solvol®. Currently included in the WD-40 brand are the WD-40 Multi-Use Product and the WD-40 Specialist® and WD-40 BIKE® product lines.
Our brands are sold in various locations around the world. Maintenance products are sold worldwide in markets throughout North, Central and South America, Asia, Australia, Europe, the Middle East and Africa. Homecare and cleaning products are sold primarily in North America, the United Kingdom (“U.K.”) and Australia. We sell our products primarily through mass retail and home center stores, warehouse club stores, grocery stores, hardware stores, automotive parts outlets, sportssport retailers, independent bike dealers, online retailers and industrial distributors and suppliers.
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The following summarizes the financial and operational highlights for our business during the ninesix months ended May 31, 2019:February 29, 2020:
Consolidated net sales increased $10.7decreased $4.0 million for the ninesix months ended May 31, 2019February 29, 2020 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact of $8.0$1.9 million on consolidated net sales for the ninesix months ended May 31, 2019February 29, 2020 compared to the corresponding period of the prior fiscal year. Thus, on a constant currency basis, net sales would have increaseddecreased by $18.7$2.1 million from period to period. This unfavorable impact from changes in foreign currency exchange rates most significantlymainly came from our EMEA segment, which accounted for 39%41% of our consolidated sales for the ninesix months ended May 31, 2019.February 29, 2020.
Consolidated net sales for the WD-40 Specialist product line were $25.6$17.3 million for the six months ended February 29, 2020 which is a 10%an increase for the nine months ended May 31, 2019of $0.8 million compared to the corresponding period of the prior fiscal year. Although the WD-40 Specialist product line is expected to provide the Company with long-term growth opportunities, we will see some volatility in sales levels from period to period due to the timing of promotional programs, the building of distribution, and various other factors that come with building a new product line.
Gross profit as a percentage of net sales decreased to 55.0%53.9% for the ninesix months ended May 31, 2019February 29, 2020 compared to 55.1%55.3% for the corresponding period of the prior fiscal year.
Consolidated net income increased $3.7decreased $2.7 million, to $47.3 millionor 9%, for the ninesix months ended May 31, 2019February 29, 2020 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact of $1.5$0.4 million on consolidated net income for the ninesix months ended May 31, 2019February 29, 2020 compared to the corresponding period of the prior fiscal year. Thus, on a constant currency basis, net income would have increased $5.2decreased $2.3 million.
Diluted earnings per common share for the ninesix months ended May 31, 2019February 29, 2020 were $3.39$1.92 versus $3.10$2.09 in the prior fiscal year period.
Net income and diluted earnings per common share were favorably impacted for the nine months ended May 31, 2019 due to the U.S. “Tax Cuts and Jobs Act” which became effective for the Company on January 1, 2018 and resulted in a lower effective income tax rate from period to period.
Share repurchases were executed under our current $75.0 million share buy-back plan, which was approved by the Company’s Board of Directors in June 2018 and became effective on September 1, 2018. During the period from September 1, 20182019 through May 31, 2019,February 29, 2020, the Company repurchased 132,18451,574 sharesat an average price of $169.32$187.24 pershare, for atotal cost of $22.4$9.7 million.
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.
During the first half of fiscal year 2020, financial results and operations for our Americas and EMEA segments were not significantly impacted by the COVID-19 outbreak that occurred in many countries beginning in early calendar year 2020. The significance of the impacts to our Asia-Pacific segment during the first half of fiscal year 2020 were material and are discussed herein. In addition, see Part II—Item 1A, “Risk Factors,” included herein for an update that we made to our existing
risk factors to include information on risks associated with pandemics in general and COVID-19 specifically. The extent to which the COVID-19 outbreak impacts our financial results and operations for fiscal year 2020 and going forward, for all three of our business segments, will depend on future developments which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the outbreak and the international actions being taken to contain and treat it.
We are taking a variety of measures to ensure the availability and functioning of our critical infrastructure, to promote the safety and security of our employees and to support the communities in which we operate. These measures include requiring remote working arrangements for employees where practicable. We are following public and private sector policies and initiatives to reduce the transmission of COVID-19, such as the imposition of travel restrictions, the promotion of social distancing and the adoption of work-from-home arrangements, and all of these policies and initiatives could impact our operations. Due to the speed with which the situation is developing, we are not able at this time to estimate the impact of COVID-19 on our financial results and operations, but the impact could be material for the remainder of fiscal year 2020 in all business segments and could be material during any future period affected either directly or indirectly by this pandemic.
Results of Operations
Three Months Ended May 31, 2019February 29, 2020 Compared to Three Months Ended May 31, 2018February 28, 2019
Operating Items
The following table summarizes operating data for our consolidated operations (in thousands, except percentages and per share amounts):
Three Months Ended May 31, | Three Months Ended February 29/28, | |||||||||||||||||||||
Change from | Change from | |||||||||||||||||||||
2019 | 2018 | Dollars | Percent | 2020 | 2019 | Dollars | Percent | |||||||||||||||
Net sales: | ||||||||||||||||||||||
Maintenance products | $ | 104,533 | $ | 98,839 | $ | 5,694 | 6% | $ | 91,147 | $ | 92,370 | $ | (1,223) | (1)% | ||||||||
Homecare and cleaning products | 9,456 | 8,186 | 1,270 | 16% | 8,902 | 8,965 | (63) | (1)% | ||||||||||||||
Total net sales | 113,989 | 107,025 | 6,964 | 7% | 100,049 | 101,335 | (1,286) | (1)% | ||||||||||||||
Cost of products sold | 51,906 | 48,367 | 3,539 | 7% | 46,447 | 45,177 | 1,270 | 3% | ||||||||||||||
Gross profit | 62,083 | 58,658 | 3,425 | 6% | 53,602 | 56,158 | (2,556) | (5)% | ||||||||||||||
Operating expenses | 38,881 | 36,329 | 2,552 | 7% | 35,417 | 36,443 | (1,026) | (3)% | ||||||||||||||
Income from operations | $ | 23,202 | $ | 22,329 | $ | 873 | 4% | $ | 18,185 | $ | 19,715 | $ | (1,530) | (8)% | ||||||||
Net income | $ | 18,139 | $ | 16,130 | $ | 2,009 | 12% | $ | 14,327 | $ | 15,906 | $ | (1,579) | (10)% | ||||||||
Earnings per common share - diluted | $ | 1.30 | $ | 1.15 | $ | 0.15 | 13% | $ | 1.04 | $ | 1.14 | $ | (0.10) | (9)% | ||||||||
Shares used in per share calculations - diluted | 13,820 | 13,937 | (117) | (1)% | 13,737 | 13,857 | (120) | (1)% | ||||||||||||||
Net Sales by Segment
The following table summarizes net sales by segment (in thousands, except percentages):
Three Months Ended May 31, | Three Months Ended February 29/28, | |||||||||||||||||||||
Change from | Change from | |||||||||||||||||||||
2019 | 2018 | Dollars | Percent | 2020 | 2019 | Dollars | Percent | |||||||||||||||
Americas | $ | 52,966 | $ | 52,999 | $ | (33) | - | $ | 46,842 | $ | 43,897 | $ | 2,945 | 7% | ||||||||
EMEA | 44,548 | 39,571 | 4,977 | 13% | 41,753 | 40,966 | 787 | 2% | ||||||||||||||
Asia-Pacific | 16,475 | 14,455 | 2,020 | 14% | 11,454 | 16,472 | (5,018) | (30)% | ||||||||||||||
Total | $ | 113,989 | $ | 107,025 | $ | 6,964 | 7% | $ | 100,049 | $ | 101,335 | $ | (1,286) | (1)% | ||||||||
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Americas
The following table summarizes net sales by product line for the Americas segment (in thousands, except percentages):
Three Months Ended May 31, | Three Months Ended February 29/28, | |||||||||||||||||||||
Change from | Change from | |||||||||||||||||||||
2019 | 2018 | Dollars | Percent | 2020 | 2019 | Dollars | Percent | |||||||||||||||
Maintenance products | $ | 48,284 | $ | 47,915 | $ | 369 | 1% | $ | 42,421 | $ | 39,202 | $ | 3,219 | 8% | ||||||||
Homecare and cleaning products | 4,682 | 5,084 | (402) | (8)% | 4,421 | 4,695 | (274) | (6)% | ||||||||||||||
Total | $ | 52,966 | $ | 52,999 | $ | (33) | - | $ | 46,842 | $ | 43,897 | $ | 2,945 | 7% | ||||||||
% of consolidated net sales | 47% | 50% | 47% | 43% | ||||||||||||||||||
Sales in the Americas segment, which includes the U.S., Canada and Latin America, remained constant at $53.0increased to $46.8, up $2.9 million, or 7%, for both the three months ended May 31, 2019 and 2018.February 29, 2020 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates did not have a materialsignificant impact on sales for the three months ended May 31, 2019February 29, 2020 compared to the corresponding period of the prior fiscal year.
Sales of maintenance products in the Americas segment increased $0.4$3.2 million, or 1%8%, for the three months ended May 31, 2019February 29, 2020 compared to the corresponding period of the prior fiscal year. This sales increase was mainly driven by higher sales of maintenance productsWD-40 Multi Use Product in the U.S., which were up $2.2$1.8 million, or 6%7% from period to period primarily due to the success of certain promotional activities in the second quarter of fiscal year 2020. Sales of maintenance products in Canada also increased $0.6 million, or 25%, from period to period primarily due to successful promotional programs during the three months ended February 29, 2020 and the timing of customer orders from period to period. Also contributing to the overall sales increase of the maintenance products in the Americas segment from period to period were higher sales of the WD-40 Specialist product line, which were up $1.0$0.6 million, or 30%15%, duefrom period to new distribution and successful promotional programs during the three months ended May 31, 2019. In addition, sales in the U.S. also increasedperiod due to successful promotional programs for the WD-40 Multi-Use Productand expanded distribution in the third quarter of fiscal year 2019. These increases in sales in the United States were partially offset by lower sales due to the timing of the rotation of products that periodically occurs in the warehouse clubonline channel as well as certain customers buying product in the third quarter of fiscal year 2018 in advance of a price increase that began in the fourth quarter of fiscal year 2018. The sales increase in the U.S. was significantly offset by a decrease in sales of maintenance products in both Latin America and Canada, which were down 16% and 18%, respectively, from period to period primarily due to certain customers buying product in the third quarter of fiscal year 2018 in advance of price increases which went into effect in the fourth quarter of fiscal year 2018. In addition, sales in Canada were negatively impacted by the timing of customer orders and promotional programs from period to period.
Sales of homecare and cleaning products in the Americas decreased $0.4$0.3 million, or 8%6%, for the three months ended May 31, 2019 February 29, 2020compared to the corresponding period of the prior fiscal year. This sales decrease was driven primarily by a decrease in sales of the Spot Shot and 2000 FlushesLava brand products in the U.S., which were down 10%15% and 6%20%, respectively, from period to period. While each of our homecare and cleaning products continue to generate positive cash flows, we have continued to experience decreased or flat sales for many of these products primarily due to lost distribution, reduced product offerings, competition, category declines and the volatility of orders from promotional programs with certain of our customers, particularly those in the warehouse club and mass retail channels.
For the Americas segment, 81% of sales came from the U.S., and 19% of sales came from Canada and Latin America combined for the three months ended May 31, 2019 compared to the distribution for the three months ended May 31, 2018 when 78% of sales came from the U.S., and 22% of sales came from Canada and Latin America.
three months ended February 29, 2020 and February 28, 2019.
EMEA
The following table summarizes net sales by product line for the EMEA segment (in thousands, except percentages):
Three Months Ended May 31, | Three Months Ended February 29/28, | |||||||||||||||||||||
Change from | Change from | |||||||||||||||||||||
2019 | 2018 | Dollars | Percent | 2020 | 2019 | Dollars | Percent | |||||||||||||||
Maintenance products | $ | 41,495 | $ | 38,372 | $ | 3,123 | 8% | $ | 38,974 | $ | 38,457 | $ | 517 | 1% | ||||||||
Homecare and cleaning products | 3,053 | 1,199 | 1,854 | 155% | 2,779 | 2,509 | 270 | 11% | ||||||||||||||
Total (1) | $ | 44,548 | $ | 39,571 | $ | 4,977 | 13% | $ | 41,753 | $ | 40,966 | $ | 787 | 2% | ||||||||
% of consolidated net sales | 39% | 37% | 42% | 41% | ||||||||||||||||||
(1)While the Company’s reporting currency is the U.S. Dollar, the functional currency of our U.K. subsidiary, the entity in which the EMEA results are generated, is Pound Sterling. Although the functional currency of this subsidiary is Pound Sterling, approximately 50% of its sales are generated in Euro and 20% are generated in U.S. Dollar. As a result, the Pound Sterling sales and earnings for the EMEA segment can be negatively or positively impacted from period to period upon translation from these currencies depending on whether the Euro and U.S. Dollar are weakening or strengthening against the Pound Sterling.
Sales in the EMEA segment, which includes Europe, the Middle East, Africa and India, increased to $44.5$41.8 million, up $5.0$0.8 million, or 13%2%, for the three months ended May 31, 2019February 29, 2020 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorablea favorable impact on sales for the EMEA segment from period to period. Sales for the three months ended May 31, 2019February 29, 2020 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $47.3$41.3 million in the EMEA segment. Thus, on a constant currency basis, sales would have increased by $7.8$0.3 million, or 20%1%, 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 $4.0$1.9 million, or 16%,7% for the three months ended May 31, 2019February 29, 2020 compared to the corresponding period of the prior fiscal year, primarily due to a $3.6$1.5 million, or 20%8%, increase in sales of the WD-40 Multi-Use Product throughout most markets.This increase in sales was primarily due to a higher level of promotional activities and increased distributionthe timing of WD-40 EZ-REACH Flexible productcustomer orders from period to period. Also contributing to the overall sales increase in the direct markets was higher In addition, sales of 1001 Carpet Fresh which were up $1.8in the U.K. increased $0.3 million, or 154%10%, as a result of the favorable impacts of digital marketing associated with this brand. Sales from direct markets accounted for 68%71% of the EMEA segment’s sales for the three months ended May 31, 2019February 29, 2020 compared to 66% of the EMEA segment’s sales68% 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 $1.0decreased $1.1 million, or 7%8%, for the three months ended May 31, 2019February 29, 2020 compared to the corresponding period of the prior fiscal year, primarily due to higherlower sales of the WD-40 Multi-Use Product in Eastern Europe particularly Russia,and India, which were down 13% and 38%, respectively. This decrease in sales from period to period was up 60%, as aprimarily the result of shipments of product being delayed to customers in these regions due to extraordinary weather conditions near the timingend of customer orders and more stable economic conditions in the region. second quarter of fiscal year 2020. The distributor markets accounted for 32%29% of the EMEA segment’s total sales for the three months ended May 31, 2019,February 29, 2020, compared to 34%32% for the corresponding period of the prior fiscal year.
Asia-Pacific
The following table summarizes net sales by product line for the Asia-Pacific segment (in thousands, except percentages):
Three Months Ended May 31, | Three Months Ended February 29/28, | |||||||||||||||||||||
Change from | Change from | |||||||||||||||||||||
2019 | 2018 | Dollars | Percent | 2020 | 2019 | Dollars | Percent | |||||||||||||||
Maintenance products | $ | 14,753 | $ | 12,552 | $ | 2,201 | 18% | $ | 9,751 | $ | 14,711 | $ | (4,960) | (34)% | ||||||||
Homecare and cleaning products | 1,722 | 1,903 | (181) | (10)% | 1,703 | 1,761 | (58) | (3)% | ||||||||||||||
Total | $ | 16,475 | $ | 14,455 | $ | 2,020 | 14% | $ | 11,454 | $ | 16,472 | $ | (5,018) | (30)% | ||||||||
% of consolidated net sales | 14% | 13% | 11% | 16% | ||||||||||||||||||
Sales in the Asia-Pacific segment, which includes Australia, China and other countries in the Asia region, increaseddecreased to $16.5$11.5 million, up $2.0down $5.0 million, or 14%30%, for the three months ended May 31, 2019February 29, 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 February 29, 2020 compared to the corresponding period of the prior fiscal year.
Sales in Asia, which represented 67% of the total sales in the Asia-Pacific segment, decreased $4.7 million, or 38%, for the three months ended February 29, 2020 compared to the corresponding period of the prior fiscal year. Sales in the Asia distributor markets decreased $1.3 million, or 17%, primarily attributable to the timing of customer orders from period to period, particularly in Indonesia, South Korea and Thailand. Sales in China decreased $3.4 million, or 70%, for the three months ended February 29, 2020 compared to the corresponding period of the prior fiscal year due to various disruptions in the market. These disruptions include those related to supply chain, transportation and demand for our product, as a result of the government’s response to the public health crisis caused by COVID-19 during the second quarter of fiscal year 2020. The impact to sales due to these disruptions were material since China had a significant number of orders that were expected to be shipped to customers after the Chinese New Year’s holiday in early February 2020 and those shipments could not take place due to COVID-19. The ongoing financial and operational impact to the Asia region from COVID-19 will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the outbreak of this virus and the actions being taken to contain it.
Sales in Australia decreased $0.3 million, or 8%, for the three months ended February 29, 2020 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact on sales for the Asia-Pacific segment from period to period. Sales for the three months ended May 31, 2019 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $17.1 million in the Asia-Pacific segment. Thus, on a constant currency basis, sales would have increased by $2.6 million, or 18%, from period to period.
Sales in Asia, which represented 75% of the total sales in the Asia-Pacific segment, increased $2.5 million, or 26%, for the three months ended May 31, 2019 compared to the corresponding period of the prior fiscal year. Sales in the Asia distributor markets increased $2.8 million, or 50%, primarily due to higher sales of WD-40 Multi-Use Product in South Korea, Malaysia and the Philippines as a result of various successful promotional programs as well as the timing of customer orders from period to period. Sales in China decreased $0.3 million, or 6%, from period to period, primarily due to the unfavorable impacts of foreign currency exchange rates. On a constant currency basis, sales would have remained constant from period to period.
Sales in Australia decreased $0.5 million, or 11%, for the three months ended May 31, 2019 compared to the corresponding period of the prior fiscal year primarily due to the unfavorable impacts of foreign currency exchange rates.Australian sales. On a constant currency basis, sales would have decreased by $0.1 million, or 3% primarily due to a lower level of promotional activities from period to period..
Gross Profit
Gross profit increaseddecreased to $62.1$53.6 million for the three months ended May 31, 2019February 29, 2020 compared to $58.7$56.2 million for the corresponding period of the prior fiscal year. As a percentage of net sales, gross profit decreased to 54.5%53.6% for the three months ended May 31, 2019February 29, 2020 compared to 54.8%55.4% for the corresponding period of the prior fiscal year.
Gross margin was negatively impacted by 1.61.2 percentage points from period to period due to the combined effects of unfavorable impacts of changes to the sales mix changes and increases in other miscellaneous costs primarilyfrom period to period in all three segments. The unfavorable impacts in the Americas and EMEA segments were primarily due to unfavorable shifts in product and customer mix, as well as higher miscellaneous costs from period to period. The unfavorable sales mix impact in the Asia-Pacific segment was primarily attributable to market mix changes resulting from lower sales in China from period to period due to various disruptions in the market. These disruptions include those related to supply chain, transportation and demand for our product, as a result of the government’s response to the public health crisis caused by COVID-19 during the second quarter of fiscal year 2020. Gross margin was also negatively impacted by 0.51.1 percentage points from period to period due to increasedhigher warehousing and in-bound freight costs, primarily in the EMEA segment. In addition, gross margin was negatively impacted by 0.3 percentage points from period to period due to unfavorable changes in the costs of aerosol cans in the Americas and Asia-Pacific segments, as well as unfavorable net changes in the costs of petroleum-based specialty chemicals in the EMEA and Asia-Pacific segments, from period to period. There is often a delay of one quarter or more before changes in raw material costs impact cost of products sold due to production and inventory life cycles. The average cost of crude oil which flowed through our cost of goods sold was higher in the third quarter of fiscal year 2019 compared to the corresponding period of the prior fiscal year, thus resulting in negative 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.
These unfavorable impacts to gross margin were significantly offset by sales price increases in all three segments over the last twelve months positively impacting gross margin by 1.2 percentage points from period to period.segments. Gross margin was also positivelynegatively impacted by 0.4 percentage points due to lower manufacturing, warehousing and in-bound freight costs, primarily in the Asia-Pacific segment, as well as favorable changes in foreign currency exchange rates from period to period in the EMEA segment.
These unfavorable impacts to gross margin were partially offset by sales price increases in the EMEA segment over the last twelve months positively impacting gross margin by 0.7 percentage points from period to period. In addition, decreases to advertising, promotional and other discounts that we give to our customers decreased from
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period to period in all three segments, positively impactingimpacted gross margin by 0.20.3 percentage points. In general, the timing of advertising, promotional and other discounts may cause fluctuations in gross margin from period to period. The costs associated with certain promotional activities are recorded as a reduction to sales while others are recorded as advertising and sales promotion expenses. Advertising, promotional and other discounts that are given to our customers are recorded as a reduction to sales, whereas advertising and sales promotional costs associated with promotional activities that we pay to third parties are recorded as advertising and sales promotion expenses. Gross margin was also positively affected by 0.2 percentage points from period to period due to favorable changes in the costs of petroleum-based specialty chemicals, primarily in the Americas segment. Beginning in late February 2020, the price of crude oil dropped significantly from recent levels. However, there is often a delay of one quarter or more before changes in raw material costs impact cost of products sold due to production and inventory life cycles. Although we expect favorability in fiscal year 2020 as a result of this decline in oil prices, the level to which gross margin will be impacted by such costs in future periods is uncertain due to the volatility of the price of crude oil.
Note that our gross profit and gross margin may not be comparable to those of other consumer product companies, since some of these companies include all costs related to distribution of their products in cost of products sold, whereas we exclude the portion associated with amounts paid to third parties for shipment to our customers from our distribution centers and contract manufacturers and include these costs in selling, general and administrative expenses. These costs totaled $3.1 million and $4.2 million for the three months ended February 29, 2020 and February 28, 2019, respectively.
Selling, general and administrative (“SG&A”) expenses for the three months ended February 29, 2020 decreased $0.7 million to $29.9 million from $30.6 million for the corresponding period of the prior fiscal year. As a percentage of net sales, SG&A expenses decreased to 29.9% for the three months ended February 29, 2020 compared to 30.2% for the corresponding period of the prior fiscal year. Employee-related costs, which include salaries, incentive compensation, profit sharing, stock-based compensation and other fringe benefits, decreased by $0.8 million. This decrease was primarily due to lower earned incentive compensation from period to period, partially offset by increased headcount and annual compensation increases. These decreases were slightly offset by increased other miscellaneous expenses from period to period. Changes in foreign currency exchange rates did not have a significant impact on SG&A expenses for the three months ended February 29, 2020.
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 $1.5 million for both the three months ended February 29, 2020 and February 28, 2019. Our research and development team engages in consumer research, product development, current product improvement and testing activities. This team leverages its development capabilities by partnering with a network of outside resources including our current and prospective 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 February 29, 2020 decreased $0.3 million, or 6%, to $4.9 million from $5.2 million for the corresponding period of the prior fiscal year. As a percentage of net sales, these expenses decreased to 4.9% for the three months ended February 29, 2020 from 5.1% 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 February 29, 2020. The decrease in advertising and sales promotion expenses was primarily due to a lower level of promotional programs and marketing support in the Asia-Pacific and Americas. At this time, the Company is not able to estimate its investment in global advertising and sales promotion expense for the remainder of fiscal year 2020 due to the uncertainty caused by COVID-19 and its impact on our financial results and operations.
As a percentage of net sales, advertising and sales promotion expenses may fluctuate period to period based upon the type of marketing activities we employ and the period in which the costs are incurred. Total promotional costs recorded as a reduction to sales for the three months ended February 29, 2020 were $4.5 million compared to $4.8 million for the corresponding
period of the prior fiscal year. Therefore, our total investment in advertising and sales promotion activities totaled $9.4 million and $10.0 million for the three months ended February 29, 2020 and February 28, 2019, respectively.
Amortization of our definite-lived intangible assets remained constant at $0.7 million for both the three months ended February 29, 2020 and February 28, 2019.
Income from Operations by Segment
The following table summarizes income from operations by segment (in thousands, except percentages):
Three Months Ended February 29/28, | |||||||||||
Change from | |||||||||||
2020 | 2019 | Dollars | Percent | ||||||||
Americas | $ | 11,400 | $ | 9,992 | $ | 1,408 | 14% | ||||
EMEA | 10,582 | 10,630 | (48) | - | |||||||
Asia-Pacific | 3,106 | 5,143 | (2,037) | (40)% | |||||||
Unallocated corporate (1) | (6,903) | (6,050) | (853) | (14)% | |||||||
Total | $ | 18,185 | $ | 19,715 | $ | (1,530) | (8)% | ||||
(1)Unallocated corporate expenses are general corporate overhead expenses not directly attributable to any one of the operating segments. These expenses are reported separate from the Company’s identified segments and are included in Selling, General and Administrative expenses on the Company’s condensed consolidated statements of operations.
Americas
Income from operations for the Americas increased to $11.4 million, up $1.4 million, or 14%, for the three months ended February 29, 2020 compared to the corresponding period of the prior fiscal year, primarily due to a $2.9 million increase in sales and slightly lower operating expenses, which were partially offset by a lower gross margin. As a percentage of net sales, gross profit for the Americas segment decreased from 53.2% to 52.4% period over period primarily due to unfavorable shifts in product and customer mix, as well as higher miscellaneous costs and unfavorable changes in the costs of aerosol cans.These unfavorable impacts were slightly offset by the decreased costs of petroleum-based specialty chemicals and a lower level of discount that we gave our customers from period to period. Operating income as a percentage of net sales increased from 22.8% to 24.3% period over period.
EMEA
Income from operations for the EMEA segment remained relatively constant at $10.6 million from period to period. Although sales increased $0.8 million and operating expenses decreased from period to period, these favorable impacts were offset by a lower gross margin. Operating expenses decreased $0.8 million period over period, primarily due to lower accruals for earned incentive compensation. As a percentage of net sales, gross profit for the EMEA segment decreased from 58.2% to 55.0% period over period primarily due to increased warehousing, distribution and freight costs as well as unfavorable changes in sales mix and higher miscellaneous costs. These unfavorable impacts were partially offset by sales price increases, favorable changes in foreign currency exchange rates and a lower level of discounts that we gave our customers from period to period. Operating income as a percentage of net sales decreased from 25.9% to 25.3% period over period.
Asia-Pacific
Income from operations for the Asia-Pacific segment decreased to $3.1 million, down $2.0 million, or 40%, for the three months ended February 29, 2020 compared to the corresponding period of the prior fiscal year, primarily due to a $5.0 million
decrease in sales and a lower gross margin, which were partially offset by lower operating expenses from period to period. As a percentage of net sales, gross profit for the Asia-Pacific segment decreased from 54.5% to 53.1% period over period primarily due to market mix changes resulting from lower sales in China from period to period due to various disruptions in the market. These disruptions include those related to supply chain, transportation and demand for our product, as a result of the government’s response to the public health crisis caused by COVID-19 during the second quarter of fiscal year 2020. In addition, gross margin was negatively impacted by increases in warehousing, distribution and freight costs from period to period. These unfavorable impacts were partially offset by the decreased costs of petroleum-based specialty chemicals period to period. The lower sales were accompanied by a $0.9 million decrease in total operating expenses period over period, primarily due to a lower level of advertising and sales promotion expenses from period to period.Operating income as a percentage of net sales decreased from 31.2% to 27.1% period over period.
Non-Operating Items
The following table summarizes non-operating income and expenses for our consolidated operations (in thousands):
Three Months Ended February 29/28, | ||||||||
2020 | 2019 | Change | ||||||
Interest income | $ | 28 | $ | 45 | $ | (17) | ||
Interest expense | $ | 593 | $ | 685 | $ | (92) | ||
Other (expense) income, net | $ | (229) | $ | 497 | $ | (726) | ||
Provision for income taxes | $ | 3,064 | $ | 3,666 | $ | (602) | ||
Interest income was insignificant for both the three months ended February 29, 2020 and February 28, 2019.
Interest expense remained relatively constant for the three months ended February 29, 2020 compared to the corresponding period of the prior fiscal year.
Other (Expense) Income, Net
Other (expense) income, net changed by $0.7 million for the three months ended February 29, 2020 compared to the corresponding period of the prior fiscal year primarily due to foreign currency exchange losses of $0.2 million for the three months ended February 29, 2020 compared to foreign currency exchange gains of $0.5 million in the corresponding period of the prior fiscal year as a result of fluctuations in the foreign currency exchange rates for both the U.S. Dollar and the Euro against the Pound Sterling.
The provision for income taxes was 17.6% and 18.7% of income before income taxes for the three months ended February 29, 2020 and February 28, 2019, respectively. The decrease in the effective income tax rate from period to period was primarily due to an increase in excess tax benefits from settlements of stock-based equity awards during the quarter that are recognized in the provision for income tax, as well as an increase of taxable earnings from foreign operations which are taxed at lower tax rates.
Net Income
Net income was $14.3 million, or $1.04 per common share on a fully diluted basis, for the three months ended February 29, 2020 compared to $15.9 million, or $1.14 per common share on a fully diluted basis, for the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates did not have a significant impact on net income for the three months ended February 29, 2020 compared to the corresponding period of the prior fiscal year.
Six Months Ended February 29, 2020 Compared to Six Months Ended February 28, 2019
Operating Items
The following table summarizes operating data for our consolidated operations (in thousands, except percentages and per share amounts):
Six Months Ended February 29/28, | |||||||||||
Change from | |||||||||||
2020 | 2019 | Dollars | Percent | ||||||||
Net sales: | |||||||||||
Maintenance products | $ | 180,817 | $ | 184,838 | $ | (4,021) | (2)% | ||||
Homecare and cleaning products | 17,788 | 17,779 | 9 | - | |||||||
Total net sales | 198,605 | 202,617 | (4,012) | (2)% | |||||||
Cost of products sold | 91,460 | 90,628 | 832 | 1% | |||||||
Gross profit | 107,145 | 111,989 | (4,844) | (4)% | |||||||
Operating expenses | 74,256 | 75,873 | (1,617) | (2)% | |||||||
Income from operations | $ | 32,889 | $ | 36,116 | $ | (3,227) | (9)% | ||||
Net income | $ | 26,521 | $ | 29,185 | $ | (2,664) | (9)% | ||||
Earnings per common share - diluted | $ | 1.92 | $ | 2.09 | $ | (0.17) | (8)% | ||||
Shares used in per share calculations - diluted | 13,741 | 13,869 | (128) | (1)% | |||||||
Net Sales by Segment
The following table summarizes net sales by segment (in thousands, except percentages):
Six Months Ended February 29/28, | |||||||||||
Change from | |||||||||||
2020 | 2019 | Dollars | Percent | ||||||||
Americas | $ | 93,578 | $ | 91,688 | $ | 1,890 | 2% | ||||
EMEA | 80,998 | 79,711 | 1,287 | 2% | |||||||
Asia-Pacific | 24,029 | 31,218 | (7,189) | (23)% | |||||||
Total | $ | 198,605 | $ | 202,617 | $ | (4,012) | (2)% | ||||
Americas
The following table summarizes net sales by product line for the Americas segment (in thousands, except percentages):
Six Months Ended February 29/28, | |||||||||||
Change from | |||||||||||
2020 | 2019 | Dollars | Percent | ||||||||
Maintenance products | $ | 84,111 | $ | 81,620 | $ | 2,491 | 3% | ||||
Homecare and cleaning products | 9,467 | 10,068 | (601) | (6)% | |||||||
Total | $ | 93,578 | $ | 91,688 | $ | 1,890 | 2% | ||||
% of consolidated net sales | 47% | 45% | |||||||||
Sales in the Americas segment, which includes the U.S., Canada and Latin America, increased to $93.6 million, up $1.9 million, or 2%, for the six months ended February 29, 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 six months ended February 29, 2020 compared to the corresponding period of the prior fiscal year.
Sales of maintenance products in the Americas segment increased $2.5 million, or 3%, for the six months ended February 29, 2020 compared to the corresponding period of the prior fiscal year. This sales increase was mainly driven by higher sales of WD-40 Multi Use Product in the U.S., which were up $1.8 million, or 4% from period to period primarily due to the success of certain promotional activities in the second quarter of fiscal year 2020. Sales of maintenance products in Canada also increased $0.6 million, or 11%, from period to period primarily due to successful promotional programs during the three months ended February 29, 2020.
Sales of homecare and cleaning products in the Americas decreased $0.6 million, or 6%, for the six months ended February 29, 2020 compared to the corresponding period of the prior fiscal year. This sales decrease was driven primarily by a decrease in sales of the Spot Shot and Lava brand products in the U.S., which were down 16% and 14%, respectively, from period to period. While each of our homecare and cleaning products continue to generate positive cash flows, we have continued to experience decreased or flat sales for many of these products primarily due to lost distribution, reduced product offerings, competition, category declines and the volatility of orders from promotional programs with certain of our customers, particularly those in the warehouse club and mass retail channels.
For the Americas segment, 79% of sales came from the U.S., and 21% of sales came from Canada and Latin America combined for the six months ended February 29, 2020 compared to the distribution for the six months ended February 28, 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):
Six Months Ended February 29/28, | |||||||||||
Change from | |||||||||||
2020 | 2019 | Dollars | Percent | ||||||||
Maintenance products | $ | 75,874 | $ | 75,402 | $ | 472 | 1% | ||||
Homecare and cleaning products | 5,124 | 4,309 | 815 | 19% | |||||||
Total | $ | 80,998 | $ | 79,711 | $ | 1,287 | 2% | ||||
% of consolidated net sales | 41% | 39% | |||||||||
Sales in the EMEA segment, which includes Europe, the Middle East, Africa and India, increased to $81.0 million, up $1.3 million, or 2%, for the six months ended February 29, 2020 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact on sales for the EMEA segment from period to period. Sales for the six months ended February 29, 2020 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $82.4 million in the EMEA segment. Thus, on a constant currency basis, sales would have increased by $2.7 million, or 3%, 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 $54.4 million, up $2.0 million, or 4%, for the six months ended February 29, 2020, compared to the corresponding period of the prior fiscal yearprimarily due to a $1.1 million, or 3%, increase in sales of the WD-40 Multi-Use Product throughout most markets. This increase in sales was primarily due to a higher level of promotional activities and the timing of customer orders from period to period. In addition, sales of 1001 Carpet Fresh in the U.K. increased $0.8 million, or 19%, as a result of the favorable impacts of digital marketing associated with this brand. Sales from direct markets accounted for 67% of the EMEA segment’s sales for the six months ended February 29, 2020 compared to 66% for the corresponding period of the prior fiscal year.
The regions in the EMEA segment where we sell through local distributors include the Middle East, Africa, India, Eastern and Northern Europe. Sales in the distributor markets decreased $0.7 million, or 2%, for the six months ended February 29, 2020 compared to the corresponding period of the prior fiscal year, primarily due to lower sales of the WD-40 Multi-Use Product in the Eastern Europe and India, which were down 6% and 27%, respectively. This decrease in sales from period to period was primarily the result of shipments of product being delayed to customers in these regions due to extraordinary weather conditions near the end of the second quarter of fiscal year 2020. The distributor markets accounted for 33% of the EMEA segment’s total sales for the six months ended February 29, 2020, compared to 34% 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):
Six Months Ended February 29/28, | |||||||||||
Change from | |||||||||||
2020 | 2019 | Dollars | Percent | ||||||||
Maintenance products | $ | 20,832 | $ | 27,816 | $ | (6,984) | (25)% | ||||
Homecare and cleaning products | 3,197 | 3,402 | (205) | (6)% | |||||||
Total | $ | 24,029 | $ | 31,218 | $ | (7,189) | (23)% | ||||
% of consolidated net sales | 12% | 16% | |||||||||
Sales in the Asia-Pacific segment, which includes Australia, China and other countries in the Asia region, decreased to $24.0 million, down $7.2 million, or 23%, for the six months ended February 29, 2020 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact on sales for the Asia-Pacific segment from period to period. Sales for the six months ended February 29, 2020 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $24.5 million in the Asia-Pacific segment. Thus, on a constant currency basis, sales would have decreased by $6.7 million, or 21%, from period to period.
Sales in Asia, which represented 67% of the total sales in the Asia-Pacific segment, decreased $7.0 million, or 30%, for the six months ended February 29, 2020 compared to the corresponding period of the prior fiscal year. Sales in the Asia distributor markets decreased $3.0 million, or 19%, primarily attributable to the timing of customer orders from period to period, particularly in Indonesia, South Korea, Malaysia and Thailand. Sales in China decreased $4.1 million, or 52%, for the six months ended February 29, 2020 compared to the corresponding period of the prior fiscal year primarily due to various disruptions in the market. These disruptions include those related to supply chain, transportation and demand for our product, as a result of the government’s response to the public health crisis caused by COVID-19 during the second quarter of fiscal year 2020. The impact to sales due to these disruptions were material since China had a significant number of orders that were expected to be shipped to customers after the Chinese New Year’s holiday in early February 2020 and those shipments could not take place due to COVID-19. The ongoing financial and operational impact to the Asia region from COVID-19 will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the outbreak of the virus and the actions being taken to contain it.
Sales in Australia decreased $0.2 million, or 2%, for the six months ended February 29, 2020 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact on Australian sales. On a constant currency basis, sales would have increased by $0.3 million, or 3%, due to a higher level of promotional activities as well as continued growth of our business from period to period.
Gross Profit
Gross profit decreased to $107.1 million for the six months ended February 29, 2020 compared to $112.0 million for the corresponding period of the prior fiscal year. As a percentage of net sales, gross profit decreased to 53.9% for the six months ended February 29, 2020 compared to 55.3% for the corresponding period of the prior fiscal year.
Gross margin was negatively impacted by 1.2 percentage points from period to period due to the combined effects of unfavorable impacts of changes to the sales mix and increases in other miscellaneous costs from period to period in all three segments. The unfavorable impacts in the Americas and EMEA segments were primarily due to unfavorable shifts in product and customer mix, as well as higher miscellaneous costs from period to period. The unfavorable sales mix impact in the Asia-Pacific segment was primarily due to market mix changes resulting from lower sales in China from period to period due to various disruptions in the market. These disruptions include those related to supply chain, transportation and demand for our product, as a result of the government’s response to the public health crisis caused by COVID-19 during the second quarter of fiscal year 2020. Gross margin was also negatively impacted by 1.0 percentage points from period to period due to higher warehousing and in-bound freight costs, primarily in the EMEA segment. In addition, gross margin was negatively impacted
by 0.2 percentage points from period to period due to unfavorable changes in the costs of aerosol cans in all three segments. Gross margin was also negatively impacted by 0.1 percentage points due to changes in foreign currency exchange rates from period to period in the EMEA segment.
These unfavorable impacts to gross margin were partially offset by sales price increases in the EMEA segment over the last twelve months positively impacting gross margin by 0.8 percentage points from period to period. Gross margin was also positively affected by 0.3 percentage points from period to period due to favorable changes in the costs of petroleum-based specialty chemicals in all three segments.
Note that our gross profit and gross margin may not be comparable to those of other consumer product companies, since some of these companies include all costs related to distribution of their products in cost of products sold, whereas we exclude the portion associated with amounts paid to third parties for shipment to our customers from our distribution centers and contract manufacturers and include these costs in selling, general and administrative expenses. These costs totaled $4.7$6.1 million and $4.6$8.3 million for the threesix months ended May 31,February 29, 2020 and February 28, 2019, and 2018, respectively.respectively.
Selling, general and administrative (“SG&A”) expenses for the threesix months ended May 31, 2019 increased $1.9February 29, 2020 decreased $0.8 million or 6%, to $32.0$62.5 million from $30.1$63.3 million for the corresponding period of the prior fiscal year. As a percentage of net sales, SG&A expenses decreasedincreased to 28.0%31.5% for the threesix months ended May 31, 2019 from 28.1%February 29, 2020 compared to 31.3% for the corresponding period of the prior fiscal year. The increase in SG&A expenses was primarily attributable to higher employee-related costs, freight costs, and a higher level of expenses associated with travel and meetings. Employee-related costs, which include salaries, incentive compensation, profit sharing, stock-based compensation and other fringe benefits, increased by $2.4 million. This increasedecrease was primarily due to higherlower earned incentive compensation of $1.6 million and a favorable impact of $0.4 million due to changes in foreign currency exchange rates from period to period. This decrease was partially offset by increased headcount and annual compensation increases from period to period, as well as increased headcounthigher stock-based compensation expense and annual compensation increases which take effect in the first quarter of the fiscal year. Freight costs associated with shipping products to our customers increased $0.4 million primarily due to higher sales volumes in the EMEA and Asia-Pacific segmentsother miscellaneous expenses from period to period. Travel and meeting expenses increased $0.2 million due to a higher level of travel expenses in the Americas and EMEA segments associated with various sales meetings and activities in support of our strategic initiatives. Other miscellaneous expenses, the largest of which were related to sales commissions, professional service costs, and general office overhead, increased by $0.2 million period over period. These increases were partially offset by favorable changes in foreign currency exchange rates, which decreased SG&A expenses by $1.0 million from period to period, as well as a decrease of $0.3 million in new product development costs.
We continued our research and development investment, the majority of which is associated with our maintenance products, in support of our focus on innovation and renovation of our products.products. Research and development costs were $1.7$3.2 million and $2.0$3.3 million for the threesix months ended May 31,February 29, 2020 and February 29, 2019, and 2018, respectively. Our research and development team engages in consumer research, product development, current product improvement and testing activities. This team leverages its development capabilities by partnering with a network of outside resources including our current and prospective outsourced suppliers. The level and types of expenses incurred within research and development can vary from period to period depending upon the types of activities being performed.
Advertising and Sales Promotion Expenses
Advertising and sales promotion expenses for the threesix months ended May 31, 2019 increased $0.8February 29, 2020 decreased $0.7 million, or 14%6%, to $6.3$10.4 million from $5.5$11.1 million for the corresponding period of the prior fiscal year. As a percentage of net sales, these expenses increased to 5.5%5.3% for the threesix months ended May 31, 2019February 29, 2020 from 5.1%5.5% for the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates haddid not have a favorablesignificant impact on such expenses of $0.2 million from period to period. Thus, on a constant currency basis, advertising and sales promotion expenses for the threesix months ended May 31, 2019 would have increased $1.0 million compared to the corresponding period of the prior fiscal year.February 29, 2020. The increasedecrease in advertising and sales promotion expenses was primarily due to a higherlower level of promotional programs and marketing support in the Americas and EMEA segments from period to period. Investment in global advertising and sales promotion expenses for fiscal year 2019 is expected to be between 5.5% and 6.0% of net sales.Asia-Pacific segment.
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 threesix months ended May 31, 2019February 29, 2020 were $5.0$9.5 million compared to $5.7$9.1 million for the corresponding period of the prior fiscal year. Therefore, our total investment in advertising and sales promotion activities totaled $11.3$19.9 million and $11.2$20.2 million for the threesix months ended May 31,February 29, 2020 and February 28, 2019, and 2018, respectively.
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Amortization of our definite-lived intangible assets remained constant at $0.7decreased to $1.3 million for both the threesix months ended May 31, 2019 and 2018.February 29, 2020 compared to $1.4 million for the six months ended February 28, 2019.
Income from Operations by Segment
The following table summarizes income from operations by segment (in thousands, except percentages):
Three Months Ended May 31, | |||||||||||
Change from | |||||||||||
2019 | 2018 | Dollars | Percent | ||||||||
Americas | $ | 15,418 | $ | 15,709 | $ | (291) | (2)% | ||||
EMEA | 9,918 | 9,565 | 353 | 4% | |||||||
Asia-Pacific | 4,352 | 3,298 | 1,054 | 32% | |||||||
Unallocated corporate (1) | (6,486) | (6,243) | (243) | (4)% | |||||||
Total | $ | 23,202 | $ | 22,329 | $ | 873 | 4% | ||||
(1)Unallocated corporate expenses are general corporate overhead expenses not directly attributable to any one of the operating segments. These expenses are reported separate from the Company’s identified segments and are included in Selling, General and Administrative expenses on the Company’s condensed consolidated statements of operations.
Six Months Ended February 29/28, | |||||||||||
Change from | |||||||||||
2020 | 2019 | Dollars | Percent | ||||||||
Americas | $ | 21,980 | $ | 21,294 | $ | 686 | 3% | ||||
EMEA | 19,174 | 19,005 | 169 | 1% | |||||||
Asia-Pacific | 6,308 | 8,884 | (2,576) | (29)% | |||||||
Unallocated corporate | (14,573) | (13,067) | (1,506) | (12)% | |||||||
Total | $ | 32,889 | $ | 36,116 | $ | (3,227) | (9)% | ||||
Americas
Income from operations for the Americas segment decreasedincreased to $15.4$22.0 million, down $0.3up $0.7 million, or 2%3%, for the threesix months ended May 31, 2019February 29, 2020 compared to the corresponding period of the prior fiscal year,, primarily due to highera $1.9 million increase in sales and lower operating expenses, which was partially offset by a higherlower gross margin. As a percentage of net sales, gross profit for the Americas segment increaseddecreased from 53.7% to 53.3% from 53.0%52.8% period over period. This increase in the gross margin wasperiod primarily due to sales price increasesunfavorable shifts in product and a lower levelcustomer mix, as well as higher miscellaneous costs and unfavorable changes in the costs of advertising, promotional and other discounts that we gave to our customersaerosol cans.These unfavorable impacts were slightly offset by the decreased costs of petroleum-based specialty chemicals from period to period. Operating expenses decreased $0.5 million period over period, primarily due to lower accruals for earned incentive compensation.These favorable impactsdecreases in operating expenses were partially offset by unfavorable sales mix changes and other miscellaneous costs, as well as increased costs of aerosol cans from period to period. Operatingemployee-related expenses increased $0.5 million from period to period, primarily due to a higher level of advertising and sales promotion expenses.. Operating income as a percentage of net sales decreasedincreased from 23.2% to 29.1% from 29.6%23.5% period over period.
EMEA
Income from operations for the EMEA segment increased to $9.9$19.2 million, up $0.4$0.2 million, or 4%1%, for the threesix months ended May 31, 2019February 29, 2020 compared to the corresponding period of the prior fiscal year, primarily due to a $5.0$1.3 million increase in sales and lower operating expenses, which waswere significantly offset by higher operating expenses and a lower gross margin. Operating expenses decreased $1.1 million period over period, primarily due to lower accruals for earned incentive compensation. As a percentage of net sales, gross profit for the EMEA segment decreased from 57.5% to 55.8% from 57.9%55.4% period over period primarily due to increased warehousing, distribution and freight costs as well as unfavorable changes in sales mix changes and otherhigher miscellaneous costs, increased costs of petroleum-based specialty chemicals and a higher level of advertising, promotional and other discounts that we gave to our customers from period to period.costs. These unfavorable impacts were partially offset by sales price increases from period to period. The higher sales were accompanied by a $1.6 million increase in total operating expenses period over period, primarily due to higher earned incentive compensation and a higher level of advertising and sales promotion expenses from period to period, as well as increased freight costs associated with shipping products to our customers. Operating income as a percentage of net sales decreased from 23.8% to 22.3% from 24.2%23.7% period over period.
Asia-Pacific
Income from operations for the Asia-Pacific segment increaseddecreased to $4.4$6.3 million, up $1.1down $2.6 million, or 32%29%, for the threesix months ended May 31, 2019February 29, 2020 compared to the corresponding period of the prior fiscal year, primarily due to a $2.0$7.2 million increasedecrease in sales and a higherslightly lower gross margin, which were slightlypartially offset by higherlower operating expenses. As a percentage of net sales,
32
gross profit for the Asia-Pacific segment increaseddecreased from 54.4% to 54.6% from 53.1%53.6% period over period primarily due to market mix changes resulting from lower manufacturing, warehousing and in-bound freight costs, a lower level of advertising, promotional and other discounts that we gave to our customerssales in China from period to period due to the various disruptions in the market. These disruptions include those related to supply chain, transportation and demand for our product, as well as sales price increases.a result of the government’s response to the public health crisis caused by COVID-19 during the second quarter of fiscal year 2020. In addition, gross margin was negatively impacted by increases in warehousing, distribution and freight costs from period to period. These favorableunfavorable impacts were partially offset by increasedthe decreased costs of petroleum-based specialty chemicals and aerosol cans from period to period. The higherlower sales were accompanied by a $0.3$1.5 million increasedecrease in total operating expenses period over period, primarily due to increaseda lower level of advertising and sales promotion expense, as well as decreased outbound freight costs associated with shipping products to our customers and higher earned incentive compensation from period tomiscellaneous expenses during the period.Operating income as a percentage of net sales increaseddecreased from 28.5% to 26.4% from 22.8%26.2% period over period.
Non-Operating Items
The following table summarizes non-operating income and expenses for our consolidated operations (in thousands):
Three Months Ended May 31, | Six Months Ended February 29/28, | |||||||||||||||
2019 | 2018 | Change | 2020 | 2019 | Change | |||||||||||
Interest income | $ | 27 | $ | 107 | $ | (80) | $ | 53 | $ | 96 | $ | (43) | ||||
Interest expense | $ | 567 | $ | 1,205 | $ | (638) | $ | 1,035 | $ | 1,395 | $ | (360) | ||||
Other (expense) income, net | $ | (45) | $ | 66 | $ | (111) | $ | (224) | $ | 873 | $ | (1,097) | ||||
Provision for income taxes | $ | 4,478 | $ | 5,167 | $ | (689) | $ | 5,162 | $ | 6,505 | $ | (1,343) | ||||
Interest income was not significantinsignificant for both the threesix months ended May 31, 2019February 29, 2020 and 2018.February 28, 2019.
Interest expense decreased $0.6$0.4 million for the threesix months ended May 31, 2019February 29, 2020 compared to the corresponding period of the prior fiscal year primarily due to a decreased outstanding balance on our revolving credit facility and lower interest rates related to draws on thisour credit facilityfacilities that are denominated in Euros and Pound Sterling at our U.K. subsidiary.subsidiary.
Other (Expense) Income, Net
Other (expense) income, net was not significantchanged by $1.1 million for the six months ended February 29, 2020 compared to the corresponding period of the prior fiscal year primarily due to foreign currency exchange losses of $0.4 million in the current year compared to $0.9 million of foreign currency gains during the corresponding period of the prior fiscal year as a result of fluctuations in the foreign currency exchange rates for both the three months ended May 31, 2019U.S. Dollar and 2018.the Euro against the Pound Sterling.
The provision for income taxes was 19.8%16.3% and 24.3%18.2% of income before income taxes for the threesix months ended May 31,February 29, 2020 and February 28, 2019, and 2018, respectively. The decrease in the effective income tax rate from period to period was primarily due to an increase in excess tax benefits from settlements of stock-based equity awards during the continued impact resulting fromsecond quarter that are recognized in the Tax Act and its effect on the Company’s fiscal year tax rate. As the Company’s fiscal year ends on August 31st, the Tax Act resulted in a blended federal statutory tax rate of 25.7% for fiscal year 2018. For fiscal year 2019, however, the Tax Act is in effect for the Company’s full year and resulted in a federal statutory tax rate for the year of 21%. The tax rate was also favorably impacted by the net benefit received from the application of the GILTI / FDII calculation which was partially offset by the loss of the Domestic Production Activities Deduction. For additional information on the impacts of the Tax Act on the Company’s provision for income taxestax, an increase of taxable earnings from foreign operations which are taxed at lower tax rates, and its consolidated financial statements, see Part I –Item 1, “Notes to Condensed Consolidated Statements” Note 13 – Income Taxes, included in this report.a benefit from the release of liabilities associated with unrecognized tax benefits that resulted from the expiration of statutes.
Net Income
Net income was $18.1$26.5 million, or $1.30$1.92 per common share on a fully diluted basis, for the threesix months ended May 31, 2019February 29, 2020 compared to $16.1$29.2 million, or $1.15$2.09 per common share on a fully diluted basis, for the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact of $0.6$0.4 million on net income for the threesix months ended May 31, 2019 compared to the corresponding period of the prior fiscal year. Thus, on a constant currency basis, net income would have increased by $2.6 million from period to period.
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Nine Months Ended May 31, 2019 Compared to Nine Months Ended May 31, 2018
Operating Items
The following table summarizes operating data for our consolidated operations (in thousands, except percentages and per share amounts):
Nine Months Ended May 31, | |||||||||||
Change from | |||||||||||
2019 | 2018 | Dollars | Percent | ||||||||
Net sales: | |||||||||||
Maintenance products | $ | 289,371 | $ | 279,188 | $ | 10,183 | 4% | ||||
Homecare and cleaning products | 27,235 | 26,690 | 545 | 2% | |||||||
Total net sales | 316,606 | 305,878 | 10,728 | 4% | |||||||
Cost of products sold | 142,534 | 137,265 | 5,269 | 4% | |||||||
Gross profit | 174,072 | 168,613 | 5,459 | 3% | |||||||
Operating expenses | 114,754 | 109,780 | 4,974 | 5% | |||||||
Income from operations | $ | 59,318 | $ | 58,833 | $ | 485 | 1% | ||||
Net income | $ | 47,324 | $ | 43,578 | $ | 3,746 | 9% | ||||
Earnings per common share - diluted | $ | 3.39 | $ | 3.10 | $ | 0.29 | 9% | ||||
Shares used in per share calculations - diluted | 13,853 | 13,981 | (128) | (1)% | |||||||
Net Sales by Segment
The following table summarizes net sales by segment (in thousands, except percentages):
Nine Months Ended May 31, | |||||||||||
Change from | |||||||||||
2019 | 2018 | Dollars | Percent | ||||||||
Americas | $ | 144,654 | $ | 144,129 | $ | 525 | - | ||||
EMEA | 124,259 | 114,231 | 10,028 | 9% | |||||||
Asia-Pacific | 47,693 | 47,518 | 175 | - | |||||||
Total | $ | 316,606 | $ | 305,878 | $ | 10,728 | 4% | ||||
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Americas
The following table summarizes net sales by product line for the Americas segment (in thousands, except percentages):
Nine Months Ended May 31, | |||||||||||
Change from | |||||||||||
2019 | 2018 | Dollars | Percent | ||||||||
Maintenance products | $ | 129,904 | $ | 127,153 | $ | 2,751 | 2% | ||||
Homecare and cleaning products | 14,750 | 16,976 | (2,226) | (13)% | |||||||
Total | $ | 144,654 | $ | 144,129 | $ | 525 | - | ||||
% of consolidated net sales | 46% | 47% | |||||||||
Sales in the Americas segment, which includes the U.S., Canada and Latin America, increased to $144.6 million, up $0.5 million, for the nine months ended May 31, 2019 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact on sales for the Americas segment from period to period. Sales for the nine months ended May 31, 2019 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $145.0 million in the Americas segment. Thus, on a constant currency basis, sales would have increased by $0.9 million, or 1%, from period to period.
Sales of maintenance products in the Americas segment increased $2.8 million, or 2%, for the nine months ended May 31, 2019 compared to the corresponding period of the prior fiscal year. This sales increase was driven by higher sales of maintenance products in the U.S., which were up $4.3 million or 4% from period to period, primarily due to higher sales of the WD-40 Specialist product line, which were up $2.8 million, or 28%, due to new distribution and successful promotional programs during the nine months ended May 31, 2019. In addition, sales of WD-40 Multi-Use Product also increased in the U.S., due to expanded distribution in the online, industrial and farm trade channels, which was partially offset by the timing of the rotation of products that periodically occurs in the warehouse club channel. The sales increase in the U.S. was significantly offset by a decrease in sales of maintenance products in Latin America and Canada, which were down 6% and 5%, respectively, from period to period primarily due to certain customers buying product in the third quarter of fiscal year 2018 in advance of the price increase which went into effect in the fourth quarter of fiscal year 2018. In addition, sales in Canada were negatively impacted by the timing of customer orders and promotional programs from period to period.
Sales of homecare and cleaning products in the Americas decreased $2.2 million, or 13%, for the nine months ended May 31, 2019 compared to the corresponding period of the prior fiscal year. This sales decrease was driven primarily by a decrease in sales of the 2000 Flushes and Spot Shot brand products, which were down 22% and 8%, respectively, from period to period. While each of our homecare and cleaning products continue to generate positive cash flows, we have continued to experience decreased or flat sales for many of these products primarily due to lost distribution, reduced product offerings, competition, category declines and the volatility of orders from promotional programs with certain of our customers, particularly those in the warehouse club and mass retail channels.
For the Americas segment, 80% of sales came from the U.S., and 20% of sales came from Canada and Latin America combined for the nine months ended May 31, 2019, compared to the distribution for the nine months ended May 31, 2018 when 79% of sales came from the U.S., and 21% of sales came from Canada and Latin America combined.
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EMEA
The following table summarizes net sales by product line for the Europe segment (in thousands, except percentages):
Nine Months Ended May 31, | |||||||||||
Change from | |||||||||||
2019 | 2018 | Dollars | Percent | ||||||||
Maintenance products | $ | 116,897 | $ | 110,137 | $ | 6,760 | 6% | ||||
Homecare and cleaning products | 7,362 | 4,094 | 3,268 | 80% | |||||||
Total | $ | 124,259 | $ | 114,231 | $ | 10,028 | 9% | ||||
% of consolidated net sales | 39% | 37% | |||||||||
Sales in the EMEA segment, which includes Europe, the Middle East, Africa and India, increased to $124.3 million, up $10.0 million, or 9%, for the nine months ended May 31, 2019 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact on sales for the EMEA segment from period to period. Sales for the nine months ended May 31, 2019 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $130.1 million in the EMEA segment. Thus, on a constant currency basis, sales would have increased by $15.8 million, or 14%, 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 $6.4 million, or 8%, for the nine months ended May 31, 2019 compared to the corresponding period of the prior fiscal year, primarily due to a $4.6 million, or 9%, increase in sales of the WD-40 Multi-Use Product throughout most markets. This increase in sales was primarily due to a higher level of promotional activities, increased distribution of WD-40 EZ-REACH Flexible product as well as the timing of customer orders from period to period. Also contributing to the overall sales increase in the direct markets were higher sales of 1001 Carpet Fresh, which were up $3.3 million, or 80%, driven by the favorable impacts of digital marketing associated with this brand. Sales from direct markets accounted for 66% of the EMEA segment’s sales for the nine months ended May 31, 2019 compared to 67% of the EMEA segment’s sales 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 $3.6 million, or 10%, for the nine months ended May 31, 2019 compared to the corresponding period of the prior fiscal year, primarily due to higher sales of the WD-40 Multi-Use Product in Eastern Europe, particularly Russia, which was up 35%, as a result of the timing of customer orders and more stable economic conditions in the region. Higher sales of WD-40 Multi-Use Product in India and Northern Europe also contributed to the overall sales increase in the distributor markets. This increase was primarily due to a higher level of distribution resulting from increased brand building activities period over period. The distributor markets accounted for 34% of the EMEA segment’s total sales for the nine months ended May 31, 2019, compared to 33% for the corresponding period of the prior fiscal year.
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Asia-Pacific
The following table summarizes net sales by product line for the Asia-Pacific segment (in thousands, except percentages):
Nine Months Ended May 31, | |||||||||||
Change from | |||||||||||
2019 | 2018 | Dollars | Percent | ||||||||
Maintenance products | $ | 42,569 | $ | 41,898 | $ | 671 | 2% | ||||
Homecare and cleaning products | 5,124 | 5,620 | (496) | (9)% | |||||||
Total | $ | 47,693 | $ | 47,518 | $ | 175 | - | ||||
% of consolidated net sales | 15% | 16% | |||||||||
Sales in the Asia-Pacific segment, which includes Australia, China and other countries in the Asia region, increased to $47.7 million, up $0.2 million, for the nine months ended May 31, 2019 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact on sales for the Asia-Pacific segment from period to period. Sales for the nine months ended May 31, 2019 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $49.4 million in the Asia-Pacific segment. Thus, on a constant currency basis, sales would have increased by $1.9 million, or 4%, from period to period.
Sales in Asia, which represented 74% of the total sales in the Asia-Pacific segment, increased $1.6 million, or 5%, for the nine months ended May 31, 2019 compared to the corresponding period of the prior fiscal year. Sales in the Asia distributor markets increased $1.0 million, or 4%, primarily attributable to the timing of customer orders and various successful promotional programs in the region, particularly in South Korea, Malaysia and the Philippines. Sales in China increased $0.6 million, or 6%, for the nine months ended May 31, 2019 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact on China sales. On a constant currency basis, sales would have increased by $1.3 million, or 12%, primarily due to expanded distribution in the e-commerce retail channel and successful promotion programs that were conducted during the first three quarters of fiscal year 2019.
Sales in Australia decreased $1.4 million, or 10%, for the nine months ended May 31, 2019 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact on Australian sales. On a constant currency basis, sales would have decreased by $0.4 million, or 3%, primarily due to decreased promotional activities and the timing of customer orders from period to period.
Gross Profit
Gross profit increased to $174.1 million for the nine months ended May 31, 2019 compared to $168.6 million for the corresponding period of the prior fiscal year. As a percentage of net sales, gross profit decreased to 55.0% for the nine months ended May 31, 2018 compared to 55.1% for the corresponding period of the prior fiscal year.
Gross margin was negatively impacted by 1.2 percentage points from period to period due to unfavorable net changes in the costs of petroleum-based specialty chemicals and aerosol cans in all three segments. Gross margin was also negatively impacted by 0.3 percentage points due to the combined effects of unfavorable sales mix changes and increases in other miscellaneous costs, primarily in the Americas and EMEA segments, from period to period. In addition, advertising, promotional and other discounts that we give to our customers increased from period to period negatively impacting gross margin by 0.1 percentage points.
These unfavorable impacts to gross margin were almost completely offset by sales price increases in all three segments over the last twelve months positively impacting gross margin by 1.2 percentage points from period to period. Gross margin was also positively impacted by 0.3 percentage points due to lower manufacturing, warehousing and in-bound freight costs, primarily in the Asia-Pacific segment, as well as favorable changes in foreign currency exchange rates from period to period in the EMEA segment.
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
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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 $13.0 million and $13.5 million for the nine months ended May 31, 2019 and 2018, respectively.
Selling, general and administrative expenses for the nine months ended May 31, 2019 increased $3.6 million, or 4%, to $95.3 million from $91.7 million for the corresponding period of the prior fiscal year. As a percentage of net sales, SG&A expenses increased to 30.1% for the nine months ended May 31, 2019 from 30.0% for the corresponding period of the prior fiscal year. The increase in SG&A expenses was primarily attributable to higher employee-related costs, a higher level of expenses associated with travel and meetings, and increased professional services costs. Employee-related costs, which include salaries, incentive compensation, profit sharing, stock-based compensation and other fringe benefits, increased by $3.8 million. This increase was primarily due to higher earned incentive compensation, increased headcount and annual compensation increases, which take effect in the first quarter of the fiscal year, as well as higher stock-based compensation expense from period to period. Travel and meeting expenses increased $0.8 million due to a higher level of travel expenses in the Americas and EMEA segments associated with various sales meetings and activities in support of our strategic initiatives. In addition, professional services costs increased $0.7 million due to increased use of such services from period to period, primarily in the Americas and EMEA segments. Other miscellaneous expenses, the largest of which were related to sales commissions, general office overhead and depreciation expense, increased by $0.5 million period over period. These increases were partially offset by favorable changes in foreign currency exchange rates, which decreased SG&A expenses by $2.2 million from period to period.
We continued our research and development investment, the majority of which is associated with our maintenance products, in support of our focus on innovation and renovation of our products. Research and development costs were $5.0 million and $5.3 million for the nine months ended May 31, 2019 and 2018.
Advertising and Sales Promotion Expenses
Advertising and sales promotion expenses for the nine months ended May 31, 2019 increased $1.6 million, or 10%, to $17.4 million from $15.8 million for the corresponding period of the prior fiscal year. As a percentage of net sales, these expenses increased to 5.5% for the nine months ended May 31, 2019 from 5.2% for the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had a favorable impact on such expenses of $0.5 million from period to period. Thus, on a constant currency basis, advertising and sales promotion expenses for the nine months ended May 31, 2019 would have increased $2.1 million compared to the corresponding period of the prior fiscal year. The increase in advertising and sales promotion expenses was primarily due to a higher level of promotional programs and marketing support in the Americas and EMEA segments from period to period.
As a percentage of net sales, advertising and sales promotion expenses may fluctuate period to period based upon the type of marketing activities we employ and the period in which the costs are incurred. Total promotional costs recorded as a reduction to sales for the nine months ended May 31, 2019 were $14.1 million compared to $15.8 million for the corresponding period of the prior fiscal year. Therefore, our total investment in advertising and sales promotion activities totaled $31.5 million and $31.6 million for the nine months ended May 31, 2019 and 2018, respectively.
Amortization of our definite-lived intangible assets was $2.1 million and $2.2 million for the nine months ended May 31, 2019 and 2018, respectively.
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Income from Operations by Segment
The following table summarizes income from operations by segment (in thousands, except percentages):
Nine Months Ended May 31, | |||||||||||
Change from | |||||||||||
2019 | 2018 | Dollars | Percent | ||||||||
Americas | $ | 36,712 | $ | 37,075 | $ | (363) | (1)% | ||||
EMEA | 28,923 | 27,933 | 990 | 4% | |||||||
Asia-Pacific | 13,236 | 13,099 | 137 | 1% | |||||||
Unallocated corporate | (19,553) | (19,274) | (279) | (1)% | |||||||
Total | $ | 59,318 | $ | 58,833 | $ | 485 | 1% | ||||
Americas
Income from operations for the Americas segment decreased to $36.7 million, down $0.4 million, or 1%, for the nine months ended May 31, 2019 compared to the corresponding period of the prior fiscal year, primarily due to higher operating expenses, which was significantly offset by a $0.5 million increase in sales and a higher gross margin. As a percentage of net sales, gross profit for the Americas segment increased to 53.6% from 53.2% period over period primarily due to sales price increases and a lower level of advertising, promotional and other discounts that we gave to our customers from period to period. These favorable impacts were partially offset by the combined negative impacts of increased costs of petroleum-based specialty chemicals and aerosol cans from period to period. The higher sales were accompanied by a $1.2 million increase in total operating expenses period over period, primarily due to a higher level of advertising and sales promotion expenses and increased employee-related expenses, primarily due to increased headcount and higher earned incentive compensation, as well as higher travel and meeting expenses. These increases in operating expenses were partially offset by decreased freight costs associated with shipping products to our customers. Operating income as a percentage of net sales decreased to 25.4% from 25.7% period over period.
EMEA
Income from operations for the EMEA segment increased to $28.9 million, up $1.0 million, or 4%, for the nine months ended May 31, 2019 compared to the corresponding period of the prior fiscal year, primarily due to a $10.0 million increase in sales, which was significantly offset by a lower gross margin and higher operating expenses. As a percentage of net sales, gross profit for the EMEA segment decreased to 56.8% from 58.2% period over period primarily due to unfavorable sales mix changes and other miscellaneous costs, increased costs of petroleum-based specialty chemicals and aerosol cans, as well as a higher level of advertising, promotional and other discounts that we gave to our customers from period to period. These unfavorable impacts were partially offset by sales price increases and favorable changes in foreign currency exchange rates from period to period. The higher sales were accompanied by a $3.1 million increase in total operating expenses period over period, primarily due to higher earned incentive compensation and increased headcount from period to period, as well as increased freight costs associated with shipping products to our customers and a higher level of advertising and sales promotion expenses. Operating expenses were also increased from period to period due to a higher level of professional services costs from period to period. Operating income as a percentage of net sales decreased to 23.3% from 24.5% period over period.
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Asia-Pacific
Income from operations for the Asia-Pacific segment increased to $13.2 million, up $0.1 million, or 1%, for the nine months ended May 31, 2019 compared to the corresponding period of the prior fiscal year, primarily due to a $0.2 million increase in sales and a higher gross margin, which were significantly offset by higher operating expenses. As a percentage of net sales, gross profit for the Asia-Pacific segment increased to 54.4% from 53.6% period over period primarily due to sales price increases and favorable sales mix changes, as well as lower manufacturing, warehousing and in-bound freight costs from period to period. These favorable impacts were partially offset by increased costs of petroleum-based specialty chemicals and aerosol cans and a higher level of advertising, promotional and other discounts that we gave to our customers from period to period. The higher sales were accompanied by a $0.3 million increase in total operating expenses period over period, primarily due to increased freight costs associated with shipping products to our customers, as well as higher earned incentive compensation from period to period. Operating income as a percentage of net sales increased to 27.8% from 27.6% period over period.
Non-Operating Items
The following table summarizes non-operating income and expenses for our consolidated operations (in thousands):
Nine Months Ended May 31, | ||||||||
2019 | 2018 | Change | ||||||
Interest income | $ | 123 | $ | 371 | $ | (248) | ||
Interest expense | $ | 1,962 | $ | 3,048 | $ | (1,086) | ||
Other income (expense), net | $ | 828 | $ | (87) | $ | 915 | ||
Provision for income taxes | $ | 10,983 | $ | 12,491 | $ | (1,508) | ||
Interest income decreased $0.2 million for the nine months ended May 31, 2019 compared to the corresponding period of the prior fiscal year due to a lower level of interest income in the EMEA segment from period to period.
Interest expense decreased $1.1 million for the nine months ended May 31, 2019 compared to the corresponding period of the prior fiscal year primarily due to a decreased outstanding balance on our revolving credit facility and lower interest rates related to draws on this credit facility that are denominated in Euros and Pound Sterling at our U.K. subsidiary.
Other Income (Expense), Net
Other income (expense), net changed by $0.9 million for the nine months ended May 31, 2019 compared to the corresponding period of the prior fiscal year primarily due to net foreign currency exchange gains which were recorded for the nine months ended May 31, 2019 compared to net foreign currency exchange losses which were recorded in the same period of the prior fiscal year as a result of fluctuations in the foreign currency exchange rates for both the Euro and the U.S. Dollar against the Pound Sterling. A significant portion of the foreign currency exchange gains that were recorded for the nine months ended May 31, 2019 were related to the large repatriations from our U.K. subsidiary which were transacted during the first half of fiscal year 2019.
Provision for Income Taxes
The provision for income taxes was 18.8% and 22.3% of income before income taxes for the nine months ended May 31, 2019 and 2018, respectively. The decrease in the effective income tax rate from period to period was primarily due to the continued impact resulting from the Tax Act and its effect on the Company’s fiscal year tax rate. As the Company’s fiscal year ends on August 31st, the Tax Act resulted in a blended federal statutory tax rate of 25.7% for fiscal year 2018. For fiscal year 2019, however, the Tax Act is in effect for the Company’s full year and resulted in a federal statutory tax rate for the year of 21%. The tax rate was also favorably impacted by the net benefit received from the application of the GILTI / FDII calculation which was partially offset by the loss of the Domestic Production Activities Deduction. For additional information
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on the impacts of the Tax Act on the Company’s provision for income taxes and its consolidated financial statements, see Part I –Item 1, “Notes to Condensed Consolidated Statements” Note 13 – Income Taxes, included in this report.
Net Income
Net income was $47.3 million, or $3.39 per common share on a fully diluted basis, for the nine months ended May 31, 2019 compared to $43.6 million, or $3.10 per common share on a fully diluted basis, for the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact of $1.5 million on net income for the nine months ended May 31, 2019February 29, 2020 compared to the corresponding period of the prior fiscal year. On a constant currency basis, net income would have increaseddecreased by $5.2$2.3 million from period to period.
Performance Measures and Non-GAAP Reconciliations
In managing our business operations and assessing our financial performance, we supplement the information provided by our financial statements with certain non-GAAP performance measures. These performance measures are part of our current 55/30/25 business model, which includes gross margin, cost of doing business, and earnings before interest, income taxes, depreciation and amortization (“EBITDA”), the latter two of which are non-GAAP performance measures. Cost of doing business is defined as total operating expenses less amortization of definite-lived intangible assets, impairment charges related to intangible assets and depreciation in operating departments, and EBITDA is defined as net income (loss) before interest, income taxes, depreciation and amortization. We target our gross margin to be at or above 55% of net sales, our cost of doing business to be at 30% of net sales, and our EBITDA to be above 25% of net sales. Results for these performance measures may vary from period to period depending on various factors, including economic conditions and our level of investment in activities for the future such as those related to quality assurance, regulatory compliance, and intellectual property protection in order to safeguard our WD-40 brand. The targets for these performance measures are long-term in nature, particularly those for cost of doing business and EBITDA, and we expect to make progress towards achieving them over time as our revenues increase.
The following table summarizes the results of these performance measures for the periods presented:
Three Months Ended May 31, | Nine Months Ended May 31, | Three Months Ended February 29/28, | Six Months Ended February 29/28, | |||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||
Gross margin - GAAP | 54% | 55% | 55% | 55% | 54% | 55% | 54% | 55% | ||||||||||||||
Cost of doing business as a percentage | ||||||||||||||||||||||
of net sales - non-GAAP | 33% | 32% | 35% | 34% | 34% | 34% | 36% | 36% | ||||||||||||||
EBITDA as a percentage of net sales - non-GAAP (1) | 22% | 23% | 21% | 21% | 20% | 22% | 18% | 20% | ||||||||||||||
(1)Percentages may not aggregate to EBITDA percentage due to rounding and because amounts recorded in other income (expense), net on the Company’s consolidated statement of operations are not included as an adjustment to earnings in the EBITDA calculation.
We use the performance measures above to establish financial goals and to gain an understanding of the comparative performance of the Company from period to period. We believe that these measures provide our shareholders with additional insights into the Company’s results of operations and how we run our business. The non-GAAP financial measures are 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:follows:
Cost of Doing Business (in thousands, except percentages)
Three Months Ended May 31, | Nine Months Ended May 31, | Three Months Ended February 29/28, | Six Months Ended February 29/28, | |||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||
Total operating expenses - GAAP | $ | 38,881 | $ | 36,329 | $ | 114,754 | $ | 109,780 | $ | 35,417 | $ | 36,443 | $ | 74,256 | $ | 75,873 | ||||||
Amortization of definite-lived intangible assets | (655) | (746) | (2,056) | (2,216) | (654) | (668) | (1,304) | (1,401) | ||||||||||||||
Depreciation (in operating departments) | (978) | (967) | (2,876) | (2,767) | (1,049) | (962) | (1,996) | (1,898) | ||||||||||||||
Cost of doing business | $ | 37,248 | $ | 34,616 | $ | 109,822 | $ | 104,797 | $ | 33,714 | $ | 34,813 | $ | 70,956 | $ | 72,574 | ||||||
Net sales | $ | 113,989 | $ | 107,025 | $ | 316,606 | $ | 305,878 | $ | 100,049 | $ | 101,335 | $ | 198,605 | $ | 202,617 | ||||||
Cost of doing business as a percentage | ||||||||||||||||||||||
of net sales - non-GAAP | 33% | 32% | 35% | 34% | 34% | 34% | 36% | 36% | ||||||||||||||
EBITDA (in thousands, except percentages)
Three Months Ended May 31, | Nine Months Ended May 31, | Three Months Ended February 29/28, | Six Months Ended February 29/28, | |||||||||||||||||||
2019 | 2018 | 2019 | 2018 | 2020 | 2019 | 2020 | 2019 | |||||||||||||||
Net income - GAAP | $ | 18,139 | $ | 16,130 | $ | 47,324 | $ | 43,578 | $ | 14,327 | $ | 15,906 | $ | 26,521 | $ | 29,185 | ||||||
Provision for income taxes | 4,478 | 5,167 | 10,983 | 12,491 | 3,064 | 3,666 | 5,162 | 6,505 | ||||||||||||||
Interest income | (27) | (107) | (123) | (371) | (28) | (45) | (53) | (96) | ||||||||||||||
Interest expense | 567 | 1,205 | 1,962 | 3,048 | 593 | 685 | 1,035 | 1,395 | ||||||||||||||
Amortization of definite-lived intangible assets | 655 | 746 | 2,056 | 2,216 | 654 | 668 | 1,304 | 1,401 | ||||||||||||||
Depreciation | 1,230 | 1,217 | 3,654 | 3,633 | 1,432 | 1,232 | 2,739 | 2,424 | ||||||||||||||
EBITDA | $ | 25,042 | $ | 24,358 | $ | 65,856 | $ | 64,595 | $ | 20,042 | $ | 22,112 | $ | 36,708 | $ | 40,814 | ||||||
Net sales | $ | 113,989 | $ | 107,025 | $ | 316,606 | $ | 305,878 | $ | 100,049 | $ | 101,335 | $ | 198,605 | $ | 202,617 | ||||||
EBITDA as a percentage of net sales - non-GAAP | 22% | 23% | 21% | 21% | 20% | 22% | 18% | 20% | ||||||||||||||
Liquidity and Capital Resources
Overview
The Company’s financial condition and liquidity remain strong. Net cash provided by operations was $36.3$23.4 million for the ninesix months ended May 31, 2019February 29, 2020 compared to $41.6$17.2 million for the corresponding period of the prior fiscal year. WeAlthough there is uncertainty related to the anticipated impact of the recent COVID-19 outbreak on the Company’s future results, we believe we continue to be well positioned to weather any uncertainty in the capital markets and global economy due to our strong balance sheet and efficient business model along withand the recent steps we have taken to strengthen our growing and diversified global revenues.balance sheet leave us positioned to manage our business through this crisis as it continues to unfold. We continue to manage all aspects of our business including, but not limited to, monitoring the financial health of our customers, suppliers and other third-party relationships, implementing gross margin enhancement strategies and developing new opportunities for growth.
Our principal sources of liquidity are our existing cash and cash equivalents, short-term investments,as well as cash generated from operations and cash currently available from our existing $100.0 million unsecured Credit Agreement with Bank of America, which expires on January 22, 2024. To date, we have used theAmerica. We use proceeds of the revolving credit facility for our stock repurchases and plan to continue using such proceedsprimarily for our general working capital needs and stock repurchases under our board approved share buy-back plan.needs. The Company also holds borrowings under a Note Purchase and Private Shelf Agreement. See Note 78 – Debt and Note 16 – Subsequent Events for additional information on these agreements. Included in Note 16 – Subsequent Events is information on an Amended and Restated Credit Agreement that we executed with Bank of America on March 13, 2020 which includes, among other amended provisions, an increase in the revolving commitment from $100.0 million to $150.0 million. During the week of March 23, 2020, we drew an additional $80.0 million in U.S. Dollars under this line of credit with Bank of America, bringing the balance on the line of credit to approximately $149.0 million. As a result of this additional borrowing, we have now drawn almost the entirety of the $150.0 million available under the Credit Agreement. Although we do not have any presently anticipated need for this additional liquidity, we decided to draw this additional amount to ensure for future liquidity given the recent significant impact on global financial markets and the economy as a result of the COVID-19 outbreak.
AsThe Company maintains a resultbalance of the “Tax Cuts and Jobs Act” (the “Tax Act”), we reevaluated and changed our indefinite reinvestment assertion for certain of our foreign subsidiariesoutstanding draws in May of fiscal year 2018. As a result, we no longer consider unremitted earnings of any of our foreign subsidiaries to be indefinitely reinvested. The costs associated with repatriating unremitted foreign earnings, including U.S. state income taxes and foreign withholding taxes, are immaterial to our consolidated financial statements. In the first quarter of fiscal year 2019, we repatriated a portion of our unremitted foreign earningsDollars in the amount of $20.0 million from our U.K. subsidiary and used these funds to repay $20.0 million of short-term outstanding draws on our line of credit. During the second quarter of fiscal year 2019, the Company repatriated additional unremitted foreign earnings from its U.K. subsidiary and paid its entire $44.0 million U.S. Dollar balance of long-term outstanding draws and replaced them with an equivalent amount of drawsAmericas segment, as well as in Euros and Pound Sterling at our U.K. subsidiary. 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 ninesix months ended May 31, 2019,February 29, 2020, the Company borrowed an additional $20.0repaid $5.0 million onin short-term borrowings outstanding under the line of credit and drew an additional $10.0 million in short-term borrowings in U.S. Dollars which it intends to repay in less than twelve months. Dollars. We regularly convert many of our draws on our line of credit to new draws with new maturity dates and interest rates. As of May 31, 2019,February 29, 2020, we had a $63.2$68.5 million balance of outstanding draws on the revolving credit facility, of which $43.2 million$43.5 was classified as long-term and the remaining $20.0 million$25.0 was classified as short-term. In addition, net borrowings made under the autoborrowauto-borrow agreement in the United States were $11.3$15.5 million and we paid $0.8$0.4 million in principal payments on our Series A Notes during the ninefirst six months ended May 31, 2019.of fiscal year 2020. There were no other letters of credit outstanding or restrictions on the amount available on this line of credit or the Series A Notes. Per the terms of both the Note Agreement and the Credit Agreement, our consolidated leverage ratio cannot be greater than three to one and our consolidated interest coverage ratio cannot be less than three to one. See Note 78 – Debt for additional information on these financial covenants. At May 31, 2019,February 29, 2020, we were in compliance with all debt covenants. We continue to monitor our compliance with all debt covenants. Our consolidated leverage ratio and consolidated interest coverage ratio covenants, andas
well as the restricted payment covenant pertaining to the payment of dividends, are dependent upon our ability to maintain certain levels of EBITDA and net income, respectively, for our most recently completed four fiscal quarters. At the present time, we have no reason to believe it is unlikelythat we will failbe unable to comply with any ofsatisfy these covenants, overbut the next twelve months. We would needCOVID-19 outbreak has limited our ability to have a significant decrease in sales and/or a significant increase in expenses in orderforecast EBITDA and net income for us to not comply with the debt covenants.remainder of the year.
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, share repurchases, dividend payments, acquisitions and new business development activities in the United States.activities. At May 31, 2019,February 29, 2020, we had a total of $35.7$30.5 million in cash and cash equivalents and short-term investments. Although we currently hold a significant amount of debt, primarily due to draws on our credit facility made by our entity in the United States, weequivalents. We do not foresee any ongoing issues with repaying these loansour borrowings and we closely monitor the use of this credit facility.
Cash Flows
The following table summarizes our cash flows by category for the periods presented (in thousands):
Nine Months Ended May 31, | Six Months Ended February 29/28, | |||||||||||||||
2019 | 2018 | Change | 2020 | 2019 | Change | |||||||||||
Net cash provided by operating activities | $ | 36,271 | $ | 41,586 | $ | (5,315) | $ | 23,382 | $ | 17,226 | $ | 6,156 | ||||
Net cash (used in) provided by investing activities | (8,220) | 73,603 | (81,823) | |||||||||||||
Net cash used in investing activities | (10,483) | (4,882) | (5,601) | |||||||||||||
Net cash used in financing activities | (38,824) | (27,289) | (11,535) | (9,816) | (28,498) | 18,682 | ||||||||||
Effect of exchange rate changes on cash and cash equivalents | (2,352) | (1,644) | (708) | 187 | (1,116) | 1,303 | ||||||||||
Net decrease in cash and cash equivalents | $ | (13,125) | $ | 86,256 | $ | (99,381) | ||||||||||
Net increase (decrease) in cash and cash equivalents | $ | 3,270 | $ | (17,270) | $ | 20,540 | ||||||||||
Operating Activities
Net cash provided by operating activities decreased $5.3increased $6.2 million to $36.3$23.4 million for the ninesix months ended May 31, 2019February 29, 2020 from $41.6$17.2 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 ninesix months ended May 31, 2019February 29, 2020 was net income of $47.3$26.5 million, which increased $3.7decreased $2.7 million from period to period. However,period. The changes in our working capital decreased net cash provided by operating activities from period to period were primarily attributable to decreasesa lower level of increases in other long-term liabilitiestrade accounts receivable and income taxes payable ininventory balances during the first ninesix months of fiscal year 2019 asended February 29, 2020 compared to large increases in such balances for the samecorresponding period of the prior fiscal year 2018. This change from period to period is due primarily to account balances that were impacted by the Tax Act and the timing of income tax payments. In addition, planned increases in inventory levels in the first three quarters of fiscal year 2019, primarily in the Americas and EMEA segments, also decreased net cash provided by operating activities from period to period.year.
Investing Activities
Net cash used in operatinginvesting activities was $8.2increased $5.6 million to $10.5 million for the ninesix months ended May 31, 2019 compared to net cash provided by investing activities of $73.6February 29, 2020 from $4.9 million for the corresponding period of the prior fiscal year. This change was significantlyyear, primarily due to net maturitiesincreased capital expenditures. Capital expenditures increased by $5.7 million primarily due to the renovations and equipping of short-term investments of $84.1 million during the nine months ended May 31, 2018, whereas net maturities of short-term investmentsCompany’s new office building in Milton Keynes, England, as well as increased manufacturing-related capital expenditures within the U.K. and the United States. The renovations to the new U.K. office building were completed and employees located in the U.K. were relocated to it during the first three quartersquarter of fiscal year 2019 were insignificant. The $84.1 million of net maturities for the three months ended May 31, 2018 was entirely due to a short-term investment held by our U.K. subsidiary which matured in April 2018 and was not reinvested.2020.
Financing Activities
Net cash used in financing activities increased $11.5decreased $18.7 million to $38.8$9.8 million for the ninesix months ended May 31, 2019February 29, 2020 from $27.3$28.5 million for the corresponding period of the prior fiscal year primarily due to higher proceeds provided by the issuance of $20.0Company’s revolving credit facility, which increased $18.1 million in long-term senior notes during the first three quarterssix months ended February 29, 2020 compared to the corresponding period of the prior fiscal year 2018. No such cash inflow occurred in the first three quarters of fiscal year 2019.year. Also contributing to the increase in total cash outflowsinflows was an increase of $4.6 milliona reduction in treasury stock purchases and an increase of $2.4 million in dividends paid from period to period. In addition, thereOffsetting these increases in cash inflows was an increase in dividends paid of $0.6$1.6 million in shares withheldfrom period to cover taxes upon conversions of equity awards and an increase of $0.4 million in repayments on our long-period.
term senior notes during the first three quarters of fiscal year 2019, which increased total cash outflows from period to period. These increases in net cash outflows from financing activities were partially offset by an increase of $16.7 million in net proceeds on our revolving credit facility from period to period.
Effect of Exchange Rate Changes
All of our foreign subsidiaries currently operate in currencies other than the U.S. Dollar and a significant portion of our consolidated cash balance is denominated in these foreign functional currencies, particularly at our U.K. subsidiary which operates in Pound Sterling. As a result, our cash and cash equivalents balances are subject to the effects of the fluctuations in these functional currencies against the U.S. Dollar at the end of each reporting period. The net effect of exchange rate changes on cash and cash equivalents, when expressed in U.S. Dollar terms, was an increase in cash of $0.2 million for the six months ended February 29, 2020 as compared to a decrease in cash of $2.4 million and $1.6$1.1 million for the ninesix months ended May 31, 2019 and 2018, respectively.February 28, 2019. These changes were primarily due to fluctuations in various foreign currency exchange rates from period to period, but the majority is related to the fluctuations in the Pound Sterling against the U.S. Dollar.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined by Item 303(a)(4)(ii) of Regulation S-K.
Commercial Commitments
We have ongoing relationships with various suppliers (contract manufacturers) who manufacture our products. The contract manufacturers maintain title and control of certain raw materials and components, materials utilized in finished products, and of the finished products themselves until shipment to our customers or third-party distribution centers in accordance with agreed upon shipment terms. Although we have definitive minimum purchase obligations included in the contract terms with certain of our contract manufacturers, when such obligations have been included, they have either been immaterial or the minimum amounts have been such that they are well below the volume of goods that the Company has historically purchased. In the ordinary course of business, we communicate supply needs to our contract manufacturers based on orders and short-term projections, ranging from two months to five months. We are committed to purchase the products produced by the contract manufacturers based on the projections provided.
Upon the termination of contracts with contract manufacturers, we obtain certain inventory control rights and are obligated to work with the contract manufacturer to sell through all product held by or manufactured by the contract manufacturer on our behalf during the termination notification period. If any inventory remains at the contract manufacturer at the termination date, we are obligated to purchase such inventory which may include raw materials, components and finished goods. The amounts for inventory purchased under termination commitments have been immaterial.
In addition to the commitments to purchase products from contract manufacturers described above, we may also enter into commitments with other manufacturers to purchase finished goods and components to support innovation initiatives and/or supply chain initiatives. As of May 31, 2019,February 29, 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 89 — Share Repurchase Plan.Plan, included in this report.
Dividends
On June 18, 2019,March 17, 2020, the Company’s Board of Directors declared a cash dividend of $0.61$0.67 per share payable on July 31, 2019April 30, 2020 to shareholders of record on July 19, 2019April 17, 2020. . Our ability to pay dividends could be affected by future business performance, liquidity, capital needs, alternative investment opportunities and loan covenants.covenants.
45
Critical Accounting Policies
Our discussion and analysis of our operating results and financial condition is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.
Critical accounting policies are those that involve subjective or complex judgments, often as a result of the need to make estimates. The following areas all require the use of judgments and estimates: revenue recognition, accounting for income
taxes, valuation of goodwill and impairment of definite-lived intangible assets. Estimates in each of these areas are based on historical experience and various judgments and assumptions that we believe are appropriate. Actual results may differ from these estimates.
On September 1, 2018, the Company adopted ASC 606, “Revenue from Contracts with Customers”, which resulted in a change in accounting principle related to revenue recognition, a critical accounting policy for the Company, effective in the first quarter of fiscal year 2019. For additional information on this change in accounting principle, see Part I—Item 1, “Notes to Condensed Consolidated Financial Statements” Note 2 — Basis of Presentation and Summary of Significant Accounting Policies; and Note 10 — Revenue Recognition, included in this report. Except as disclosed therein, thereThere have been no other 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, 2018,2019, which was filed with the SEC on October 22, 2018.2019.
Recently Issued Accounting Standards
Information on Recently Issued Accounting Standards that could potentially impact the Company’s consolidated financial statements and related disclosures is incorporated by reference to Part I—Item 1, “Notes to Condensed Consolidated Financial Statements” Note 2 — Basis of Presentation and Summary of Significant Accounting Policies, included in this report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
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 (“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 May 31, 2019,February 29, 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.
ThereBeginning September 1, 2019, the Company implemented the new lease guidance under ASC 842. In connection with the adoption of this standard, the Company made enhancements to its internal controls over financial reporting and procedures related to lease accounting, as well as the associated control activities within them. These enhancements included the development of new policies based on the updated lease guidance, new training, ongoing contract review requirements and gathering of information provided for disclosures.
Other than the updates described above, there were no other changes to the Company’sin our internal control over financial reporting that occurred during the Company’s most recent fiscal quartersix months ended February 29, 2020 that materially affected, or would beare reasonably likely to materially affect, the Company’s internal control over financial reporting. Enhancements were made to the Company’s internal controls over financial reporting, effective beginning on September 1, 2018, due to the implementation of the new revenue guidance under ASC 606. Although the new
revenue standard did not have a material impact on the Company’s consolidated financial statements, the Company did implement changes to its processes related to revenue recognition and the control activities within them.
PART II — OTHER INFORMATION
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 1213 — Commitments and Contingencies, included in this report.report.
Item 1A. Risk Factors
ThereWe have updated our existing risk factor on global economic conditions to include information associated with the current events related to COVID-19 that was first detected in China and impacted global markets due to outbreaks occurring in many countries beginning in early calendar year 2020. Except for the updates to this risk factor set forth below, 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, 2018,2019, which was filed with the SEC on October 22, 2018.2019.
Global economic conditions may negatively impact the Company’s financial condition and results of operations.
A general weakening or decline in the global economy or a reduction in industrial outputs, business or consumer spending or confidence could delay or significantly decrease purchases of the Company’s products by its customers and end users. Consumer purchases of discretionary items, which could include the Company’s maintenance products and homecare and cleaning products, may decline during periods where disposable income is reduced or there is economic uncertainty, and this may negatively impact the Company’s financial condition and results of operations. During unfavorable or uncertain economic times, end users may also increase purchases of lower-priced or non-branded products and the Company’s competitors may increase their level of promotional activities to maintain sales volumes, both of which may negatively impact the Company’s financial condition and results of operations.
In addition, the Company’s sales and operating results may be affected by uncertain or changing economic and market conditions, including inflation, deflation, prolonged weak consumer demand, political instability, public health crises or other changes that may affect the principal markets, trade channels, and industrial segments in which the Company conducts its business. Public health crises, including epidemics or pandemics, may affect the principal markets, trade channels, and industrial segments in which the Company conducts its business. For example, the Company is monitoring the impact of the recent COVID-19 outbreak, which has already caused a significant disruption to global financial markets and supply chains beginning in early calendar year 2020. The significance of the operational and financial impact to the Company will depend on how long and widespread this disruption proves to be. The extent to which COVID-19 impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the outbreak and the international actions that are being taken to contain and treat it. While the Company currently expects this business disruption to be temporary, there is uncertainty around its duration and its broader impact, and therefore the effects it will have on the Company’s financial results and operations. If economic or market conditions in key global markets deteriorate, the Company may experience material adverse effects on its business, financial condition and results of operations.
Adverse economic and market conditions could also harm the Company’s business by negatively affecting the parties with whom it does business, including its customers, retailers, distributors and wholesalers, and third-party contract manufacturers and suppliers. These conditions could impair the ability of the Company’s customers to pay for products they have purchased from the Company. As a result, allowances for doubtful accounts and write-offs of accounts receivable from the Company’s customers may increase. In addition, the Company’s third-party contract manufacturers and their suppliers may experience financial difficulties or business disruptions that could negatively affect their operations and their ability to supply the Company with finished goods and the raw materials, packaging, and components required for the Company’s products
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On June 19, 2018, the Company’s Board of Directors approved a share buy-back plan. Under the plan, which became effective on September 1, 2018, the Company is authorized to acquire up to $75.0 million of its outstanding shares through August 31, 2020. The timing and amount of repurchases are based on terms and conditions as may be acceptable to the Company’s Chief Executive Officer and Chief Financial Officer and in compliance with all laws and regulations applicable thereto. During the period from September 1, 2018 through May 31, 2019,February 29, 2020, the Company repurchased 132,184227,529 shares at a total cost of $22.4$39.3 million under this $75.0 million plan.plan.
The following table provides information with respect to all purchases made by the Company during the three months ended May 31, 2019.February 29, 2020. All purchases listed below were made in the open market at prevailing market prices. Purchase transactions between MarchDecember 1, 2019 and April 12, 2019 January 13, 2020 and between May 17, 2019February 14, 2020 and May 31, 2019February 29, 2020 were executed pursuant to trading plans adopted by the Company pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934.
Total Number | Maximum | ||||||||||
of Shares | Dollar Value of | ||||||||||
Total | Purchased as Part | Shares that May | |||||||||
Number of | Average | of Publicly | Yet Be Purchased | ||||||||
Shares | Price Paid | Announced Plans | Under the Plans | ||||||||
Purchased | Per Share | or Programs | or Programs | ||||||||
Period | |||||||||||
March 1 - March 31 | 18,500 | $ | 173.21 | 18,500 | $ | 59,735,105 | |||||
April 1 - April 30 | 23,000 | $ | 167.05 | 23,000 | $ | 55,892,606 | |||||
May 1 - May 31 | 20,000 | $ | 163.79 | 20,000 | $ | 52,616,409 | |||||
Total | 61,500 | $ | 167.84 | 61,500 | |||||||
Total Number | Maximum | ||||||||||
of Shares | Dollar Value of | ||||||||||
Total | Purchased as Part | Shares that May | |||||||||
Number of | Average | of Publicly | Yet Be Purchased | ||||||||
Shares | Price Paid | Announced Plans | Under the Plans | ||||||||
Purchased | Per Share | or Programs | or Programs | ||||||||
Period | |||||||||||
December 1 - December 31 | 6,488 | $ | 193.80 | 6,488 | $ | 39,161,400 | |||||
January 1 - January 31 | 8,500 | $ | 189.77 | 8,500 | $ | 37,548,178 | |||||
February 1 - February 29 | 9,786 | $ | 187.04 | 9,786 | $ | 35,717,579 | |||||
Total | 24,774 | $ | 189.75 | 24,774 | |||||||
Item 6. Exhibits
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Exhibit No. |
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3(a) |
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3(b) | ||
10(a) | ||
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10(d) | ||
10(e) | ||
31(a) |
| Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
31(b) |
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32(a) |
| Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
32(b) |
| Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
101. INS |
| XBRL Instance Document |
101. SCH |
| XBRL Taxonomy Extension Schema Document |
101. CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
101. DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
101. LAB |
| XBRL Taxonomy Extension Labels Linkbase Document |
101. PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
104 | The cover page from this Quarterly Report on Form 10-Q, formatted in Inline XBRL and contained in Exhibit 101. | |
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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| Garry O. Ridge Chief Executive Officer (Principal Executive Officer) | ||
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| /s/ JAY W. REMBOLT | ||||
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| Jay W. Rembolt Vice President, Finance Treasurer and Chief Financial Officer | ||
By: | /s/ RAE ANN PARTLO | |||||||||
Rae Ann Partlo Vice President, Corporate Controller and Principal Accounting Officer | ||||||||||
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