WD-40 COMPANY As used in this report, the terms "we," "our," "us" and "the Company" refer to
The following information is provided as a supplement to, and should be read in
conjunction with, the unaudited condensed consolidated financial statements and
notes thereto included in Part I-Item 1 of this Quarterly Report and the audited
consolidated financial statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations included in our
Annual Report on Form 10-K for the fiscal year ended
In order to show the impact of changes in foreign currency exchange rates on our
results of operations, we have included constant currency disclosures, where
necessary, in the Overview and Results of Operations sections which follow.
Constant currency disclosures represent the translation of our current fiscal
year revenues and expenses from the functional currencies of our subsidiaries to
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for certain forward-looking statements. This report contains forward-looking statements, which reflect the Company's current views with respect to future events and financial performance.
These forward-looking statements include, but are not limited to, discussions about future financial and operating results, including: growth expectations for maintenance products; expected levels of promotional and advertising spending; anticipated input costs for manufacturing and the costs associated with distribution of our products; plans for and success of product innovation, the impact of new product introductions on the growth of sales; anticipated results from product line extension sales; expected tax rates and the impact of tax legislation and regulatory action; and forecasted foreign currency exchange rates and commodity prices. These forward-looking statements are generally identified with words such as "believe," "expect," "intend," "plan," "could," "may," "aim," "anticipate," "target," "estimate" and similar expressions. The Company undertakes no obligation to revise or update any forward-looking statements.
Actual events or results may differ materially from those projected in
forward-looking statements due to various factors, including, but not limited
to, those identified in Part I-Item 1A, "Risk Factors," in the Company's Annual
Report on Form 10-K for the fiscal year ended
Overview The Company
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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
Highlights
The following summarizes the financial and operational highlights for our
business during the three months ended
?Consolidated net sales decreased
?Consolidated net sales for the WD-40 Specialist product line were
?Gross profit as a percentage of net sales decreased to 54.3% for the three
months ended
?Consolidated net income decreased
?Diluted earnings per common share for the three months ended
?Share repurchases were executed under our current
Our strategic initiatives and the areas where we will continue to focus our time, talent and resources in future periods include: (i) maximizing WD-40 Multi-Use Product sales through geographic expansion, increased market penetration and the development of new and unique delivery systems; (ii) leveraging the WD-40 brand by growing the WD-40 Specialist product line; (iii) leveraging the strengths of the Company through broadened product and revenue base; (iv) attracting, developing and retaining talented people; and (v) operating with excellence.
?
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Results of Operations
Three Months Ended
2018
Operating Items
The following table summarizes operating data for our consolidated operations (in thousands, except percentages and per share amounts):
Three Months Ended November 30,
Change from
?Prior Year
2019 2018 Dollars Percent
Net sales:
Maintenance products $ 89,670 $ 92,468 $ (2,798) (3)%
Homecare and cleaning products 8,886 8,814 72 1%
Total net sales 98,556 101,282 (2,726) (3)%
Cost of products sold 45,013 45,451 (438) (1)%
Gross profit 53,543 55,831 (2,288) (4)%
Operating expenses 38,839 39,430 (591) (1)%
Income from operations $ 14,704 $ 16,401 $ (1,697) (10)%
Net income $ 12,194 $ 13,279 $ (1,085) (8)%
Earnings per common share - $ $ $
diluted 0.88 0.95 (0.07) (7)%
Shares used in per share
calculations - diluted 13,746 13,882 (136) (1)%
Net Sales by Segment
The following table summarizes net sales by segment (in thousands, except
percentages):
Three Months Ended November 30,
Change from
?Prior Year
2019 2018 Dollars Percent
Americas $ 46,736 $ 47,791 $ (1,055) (2)%
EMEA 39,245 38,745 500 1%
Asia-Pacific 12,575 14,746 (2,171) (15)%
Total $ 98,556 $ 101,282 $ (2,726) (3)%
?
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The following table summarizes net sales by product line for the
Three Months Ended November 30,
Change from
?Prior Year
2019 2018 Dollars Percent
Maintenance products $ 41,690 $ 42,418 $ (728) (2)%Homecare and cleaning products 5,046 5,373 (327) (6)% Total
$ 46,736 $ 47,791 $ (1,055) (2)% % of consolidated net sales 47% 47%
Sales in the
Sales of maintenance products in the
Sales of homecare and cleaning products in the
For the
?
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EMEA
The following table summarizes net sales by product line for the EMEA segment (in thousands, except percentages):
Three Months Ended November 30,
Change from
?Prior Year
2019 2018 Dollars Percent
Maintenance products $ 36,900 $ 36,945 $ (45) -
Homecare and cleaning products 2,345 1,800 545 30%
Total $ 39,245 $ 38,745 $ 500 1%
% of consolidated net sales 40% 38%
(1)While the Company's reporting currency is the
Sales in the EMEA segment, which includes
The countries in
The regions in the EMEA segment where we sell through local distributors include
the
?
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The following table summarizes net sales by product line for the
Three Months Ended November 30,
Change from
?Prior Year
2019 2018 Dollars Percent
Maintenance products $ 11,081 $ 13,105 $ (2,024) (15)%Homecare and cleaning products 1,494 1,641 (147) (9)% Total
$ 12,575 $ 14,746 $ (2,171) (15)% % of consolidated net sales 13% 15%
Sales in the
Sales in
Sales in
Gross Profit
Gross profit decreased to
Gross margin was negatively impacted by the unfavorable impacts of changes to
the sales mix from period to period of 0.7 percentage points. These changes in
sales mix were primarily in the EMEA segment and were due to higher sales in the
first quarter of fiscal year 2020 to the lower margin distributor markets as
well as to lower margin customers, particularly those in the
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These favorable 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. In addition, gross
margin was positively affected by 0.3 percentage points from period to period
due to favorable changes in the costs of petroleum-based specialty chemicals in
the
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
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the three months ended
We continued our research and development investment, the majority of which is
associated with our maintenance products, in support of our focus on innovation
and renovation of our products. Research and development costs were
Advertising and Sales Promotion Expenses
Advertising and sales promotion expenses for the three months ended
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
Amortization of Definite-lived Intangible Assets Expense
Amortization of our definite-lived intangible assets remained constant at
?
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Income from Operations by Segment
The following table summarizes income from operations by segment (in thousands,
except percentages):
Three Months Ended November 30,
Change from
?Prior Year
2019 2018 Dollars Percent
Americas $ 10,580 $ 11,302 $ (722) (6)%
EMEA 8,592 8,375 217 3%
Asia-Pacific 3,202 3,741 (539) (14)%Unallocated corporate (7,670) (7,017) (653) (9)% Total
$ 14,704 $ 16,401 $ (1,697) (10)%
(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.
Income from operations for the
EMEA
Income from operations for the EMEA segment increased to
Income from operations for the
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Non-Operating Items
The following table summarizes non-operating income and expenses for our consolidated operations (in thousands):
Three Months Ended November 30,
2019 2018 Change
Interest income $ 25 $ 51 $ (26)
Interest expense $ 442 $ 710 $ (268)
Other income (expense), net $ 5 $ 376 $ (371)
Provision for income taxes $ 2,098 $ 2,839 $ (741)
Interest Income
Interest income was insignificant for both the three months ended
Interest Expense
Interest expense decreased
Other Income (Expense), Net
Other income decreased by
Provision for Income Taxes
The provision for income taxes was 14.7% and 17.6% of income before income taxes
for the three months ended
Net Income
Net income was
?
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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 November 30,
2019 2018
Gross margin - GAAP 54% 55%
Cost of doing business as a percentage
of net sales - non-GAAP 38% 37%
EBITDA as a percentage of net sales - non-GAAP (1) 17% 18%
(1)Percentages may not aggregate to EBITDA percentage due to rounding and because amounts recorded in other income (expense), net on the Company's consolidated statement of operations are not included as an adjustment to earnings in the EBITDA calculation.
We use the performance measures above to establish financial goals and to gain an understanding of the comparative performance of the Company from period to period. We believe that these measures provide our shareholders with additional insights into the Company's results of operations and how we run our business. The non-GAAP financial measures are supplemental in nature and should not be considered in isolation or as alternatives to net income, income from operations or other financial information prepared in accordance with GAAP as indicators of the Company's performance or operations. The use of any non-GAAP measure may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies. Reconciliations of these non-GAAP financial measures to our financial statements as prepared in accordance with GAAP are as follows:
Cost of Doing Business (in thousands, except percentages)
Three Months Ended November 30,
2019 2018
Total operating expenses - GAAP $ 38,839 $ 39,430
Amortization of definite-lived intangible assets (650) (733)
Depreciation (in operating departments) (947) (936)
Cost of doing business $ 37,242 $ 37,761
Net sales $ 98,556 $ 101,282
Cost of doing business as a percentage
of net sales - non-GAAP 38% 37%
?
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EBITDA (in thousands, except percentages)
Three Months Ended November 30,
2019 2018
Net income - GAAP $ 12,194 $ 13,279
Provision for income taxes 2,098 2,839
Interest income (25) (51)
Interest expense 442 710
Amortization of definite-lived intangible assets 650 733
Depreciation 1,307 1,192
EBITDA $ 16,666 $ 18,702
Net sales $ 98,556 $ 101,282
EBITDA as a percentage of net sales - non-GAAP 17% 18%
Liquidity and Capital Resources
Overview
The Company's financial condition and liquidity remain strong. Net cash provided
by operations was
Our principal sources of liquidity are our existing cash and cash equivalents,
as well as cash generated from operations and cash currently available from our
existing
The Company maintains a balance of outstanding draws in
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
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Cash Flows
The following table summarizes our cash flows by category for the periods presented (in thousands):
Three Months Ended November 30,
2019 2018 Change
Net cash provided by operating activities
(5,770) (1,234) (4,536)
Net cash used in financing activities (8,520) (24,148) 15,628
Effect of exchange rate changes on cash and
cash equivalents 531 (919) 1,450
Net increase (decrease) in cash and cash $ $ $
equivalents 1,447 (17,292) 18,739
Operating Activities
Net cash provided by operating activities increased
Investing Activities
Net cash used in investing activities increased
Financing Activities
Net cash used in financing activities decreased
Effect of Exchange Rate Changes
All of our foreign subsidiaries currently operate in currencies other than the
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined by Item 303(a)(4)(ii) of Regulation S-K.
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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 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
Share Repurchase Plan
The information required by this item is incorporated by reference to Part I-Item 1, "Notes to Condensed Consolidated Financial Statements" Note 9 - Share Repurchase Plan, included in this report.
Dividends
On
Critical Accounting Policies
Our discussion and analysis of our operating results and financial condition is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in
Critical accounting policies are those that involve subjective or complex judgments, often as a result of the need to make estimates. The following areas all require the use of judgments and estimates: revenue recognition, accounting for income taxes, 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.
There have been no material changes in our critical accounting policies from
those disclosed in Part II-Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and Note 2 to our consolidated
financial statements contained in our Annual Report on Form 10-K for the fiscal
year ended
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Recently Issued Accounting Standards
Information on Recently Issued Accounting Standards that could potentially impact the Company's consolidated financial statements and related disclosures is incorporated by reference to Part I-Item 1, "Notes to Condensed Consolidated Financial Statements" Note 2 - Basis of Presentation and Summary of Significant Accounting Policies, included in this report.
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