As used in this report, the terms "we," "our," "us" and "the Company" refer to
WD-40 Company and its wholly-owned subsidiaries, unless the context suggests
otherwise. Amounts and percentages in tables and discussions may not total due
to rounding.
The following information is provided as a supplement to, and should be read in
conjunction with, the unaudited condensed consolidated financial statements and
notes thereto included in Part I-Item 1 of this Quarterly Report and the audited
consolidated financial statements and notes thereto and Management's Discussion
and Analysis of Financial Condition and Results of Operations included in our
Annual Report on Form 10-K for the fiscal year ended August 31, 2020, which was
filed with the Securities and Exchange Commission ("SEC") on October 21, 2020.
In order to show the impact of changes in foreign currency exchange rates on our
results of operations, we have included constant currency disclosures, where
necessary, in the Overview and Results of Operations sections which follow.
Constant currency disclosures represent the translation of our current fiscal
year revenues and expenses from the functional currencies of our subsidiaries to
U.S. dollars using the exchange rates in effect for the corresponding period of
the prior fiscal year. We use results on a constant currency basis as one of the
measures to understand our operating results and evaluate our performance in
comparison to prior periods. Results on a constant currency basis are not in
accordance with accounting principles generally accepted in the United States of
America ("non-GAAP") and should be considered in addition to, not as a
substitute for, results prepared in accordance with GAAP.
Forward-Looking Statements
The Private Securities Litigation Reform Act of 1995 provides a "safe harbor"
for certain forward-looking statements. This report contains forward-looking
statements, which reflect the Company's current views with respect to future
events and financial performance.
These forward-looking statements include, but are not limited to, discussions
about future financial and operating results, including: growth expectations for
maintenance products; expected levels of promotional and advertising spending;
anticipated input costs for manufacturing and the costs associated with
distribution of our products; plans for and success of product innovation, the
impact of new product introductions on the growth of sales; anticipated results
from product line extension sales; expected tax rates and the impact of tax
legislation and regulatory action; the length and severity of the current
COVID-19 pandemic and its impact on the global economy and the Company's
financial results; and forecasted foreign currency exchange rates and commodity
prices. These forward-looking statements are generally identified with words
such as "believe," "expect," "intend," "plan," "could," "may," "aim,"
"anticipate," "target," "estimate" and similar expressions. The Company
undertakes no obligation to revise or update any forward-looking statements.
Actual events or results may differ materially from those projected in
forward-looking statements due to various factors, including, but not limited
to, those identified in Part I-Item 1A, "Risk Factors," in the Company's Annual
Report on Form 10-K for the fiscal year ended August 31, 2020, and in the
Company's Quarterly Reports on Form 10-Q, which may be updated from time to
time.
Overview
The Company
WD-40 Company ("the Company"), based in San Diego, California, is a global
marketing organization dedicated to creating positive lasting memories by
developing and selling products that solve problems in workshops, factories and
homes around the world. We market a wide range of maintenance products and
homecare and cleaning products under the following well-known brands: WD-40®,
3-IN-ONE®, GT85®, X-14®, 2000 Flushes®, Carpet Fresh®, no vac®, Spot Shot®,
1001®, Lava® and Solvol®. Currently included in the WD-40 brand are the WD-40
Multi-Use Product and the WD-40 Specialist® and WD-40 BIKE® product lines.
Our products are sold in various locations around the world. Maintenance
products are sold worldwide in markets throughout North, Central and South
America, Asia, Australia, Europe, the Middle East and Africa. Homecare and
cleaning products are sold primarily in North America, the United Kingdom
("U.K.") and Australia. We sell our products primarily through
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warehouse club stores, hardware stores, automotive parts outlets, industrial
distributors and suppliers, mass retail and home center stores, value retailers,
grocery stores, online retailers, farm supply, sport retailers, and independent
bike dealers.
Highlights
The following summarizes the financial and operational highlights for our
business during the six months ended February 28, 2021:
?Consolidated net sales increased $37.9 million for the six months ended
February 28, 2021 compared to the corresponding period of the prior fiscal year.
Changes in foreign currency exchange rates had a favorable impact of $5.5
million on consolidated net sales for the six months ended February 28, 2021
compared to the corresponding period of the prior fiscal year. Thus, on a
constant currency basis, net sales would have increased by $32.4 million from
period to period. This favorable impact from changes in foreign currency
exchange rates mainly came from our EMEA segment, which accounted for 44% of our
consolidated sales for the six months ended February 28, 2021.
?Gross profit as a percentage of net sales increased to 55.9% for the six months
ended February 28, 2021 compared to 53.9% for the corresponding period of the
prior fiscal year.
?Consolidated net income increased $14.3 million, or 54%, for the six months
ended February 28, 2021 compared to the corresponding period of the prior fiscal
year. Changes in foreign currency exchange rates had a favorable impact of $1.5
million on consolidated net income for the six months ended February 28, 2021
compared to the corresponding period of the prior fiscal year. Thus, on a
constant currency basis, net income would have increased $12.8 million.
?Although consolidated results for the six months ended February 28, 2021 were
significantly improved from the same period last fiscal year due to a variety of
factors, the Company's operations and business continue to be impacted by the
COVID-19 pandemic. See Significant Developments section which follows for
details.
?Diluted earnings per common share for the six months ended February 28, 2021
were $2.96 versus $1.92 in the prior fiscal year period.
Our strategic initiatives and the areas where we will continue to focus our
time, talent and resources in future periods include: (i) maximizing WD-40
Multi-Use Product sales through geographic expansion, increased market
penetration and the development of new and unique delivery systems; (ii)
leveraging the WD-40 brand by growing the WD-40 Specialist product line; (iii)
leveraging the strengths of the Company through broadened product and revenue
base; (iv) attracting, developing and retaining talented people; and (v)
operating with excellence.
?
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Significant Developments
Sales increased in all three segments during the six months ended February 28,
2021 as compared to the corresponding period of the prior fiscal year. Although
our financial results and operations continued to be impacted by the COVID-19
pandemic that began in early calendar year 2020, we have been able to reduce the
adverse impacts of these challenging times due to the strength of our brands,
increased focus on e-commerce, global expansion in the distribution of our
products and a continued focus on our strategic initiatives. While we
experienced significant sales declines in fiscal year 2020 as compared to the
previous full fiscal year, sales during the six months ended February 28, 2021
increased significantly due to various reasons, including the following:
?Continued increases in renovation and maintenance activities by end-users
during the pandemic, particularly in North America, some countries in EMEA and
in Australia;
?Increased distribution and sales within the e-commerce channel;
?Recoveries we are experiencing in industrial channels globally as well as in
markets where we do not have direct operations (distributor markets),
particularly in our EMEA distributor markets where these distributors have been
participating in more of our promotional activities and have been adjusting to
more normal levels of inventory for our products;
?Significant increases in sales of our WD-40 Bike product; and
?Continued increased sales of many of our homecare and cleaning products due to
the high demand for such products during the pandemic.
These combined impacts produced a 19% increase in our consolidated net sales
during the six months ended February 28, 2021 compared to the corresponding
period of the prior fiscal year, a period in which the COVID-19 pandemic had not
yet resulted in significant government restrictions on movement and commerce in
most regions, with the exception of certain regions within our Asia-Pacific
segment. We are continuing to actively manage and monitor supply chain and
transportation disruptions and constraints that have arisen periodically within
all three of our business segments during the COVID-19 pandemic, which has both
directly and indirectly impacted our suppliers and other third-party
distribution centers and manufacturers. Some of the challenges that we have
experienced at our third-party manufacturers include general capacity
constraints and competition for such capacity by other companies who utilize the
same third-party manufacturers. These challenges were significantly compounded
in the Americas segment during the second quarter of fiscal year 2021 as a
result of severe winter storms in parts of the United States that directly
impacted some of our third-party contract manufacturers and distribution
centers. While we have been successful in managing most of the disruptions in
our supply chain and the distribution of our products as a result of the
pandemic, the timing and magnitude of the challenges that we experienced in our
supply chain in the Americas segment during the second quarter of fiscal year
2021 resulted in us not being able to meet the high level of demand for our
products by customers and end-users in certain markets. In addition, the
Americas has incurred significant additional costs within its supply chain as a
result of these constraints. Although we have positioned ourselves to address
these disruptions in the Americas supply chain and we will continue to manage
these challenges in our global supply chain and distribution networks in future
periods, we are not able at this time to estimate the degree of the impact of
future disruptions within our supply chain or the level of additional costs that
we will continue to incur due to these challenges. Some of these additional
costs are expected to unfavorably impact our cost of goods sold for the
remainder of fiscal year 2021 and this will result in a lower gross margin for
the second half of fiscal year 2021 as compared to the gross margin that we
realized for the first six months of the fiscal year. We are continually
monitoring and actively managing this situation with our supply chain.
Due to the speed and fluidity with which the situation continues to evolve, it
is very difficult for us to estimate with certainty the extent to which the
COVID-19 pandemic will impact our financial results and operations in future
periods. Although sales increased during the six months ended February 28, 2021,
many regions globally are experiencing continued fluctuations in their COVID-19
case counts. This has resulted in governmental authorities periodically
adjusting temporary closures, lockdowns and restriction policies intended to
combat the COVID-19 pandemic at certain physical store retailers, suppliers and
manufacturers in reaction to those changes. These restrictions may have negative
economic impacts on our customers and may limit the ability of our customers in
certain trade channels and markets to sell our products, which could adversely
impact our financial results and operations for the remainder of fiscal year
2021. We also cannot predict when certain restrictions to protect our customers,
retailers and our employees will be either increased or safely reduced in future
periods. These impacts could be material in all business segments during any
future period affected either directly or indirectly by this pandemic. Also, if
social distancing requirements resulting from the COVID-19 pandemic lessen in
future periods, this may result in a decrease in renovation and maintenance
activities by end-users which could adversely impact our financial results.
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In addition, if there are decreases in future periods in the benefits provided
to our end-users via government assistance programs which have been put in place
due to the pandemic, this may also impact the level of renovation and
maintenance activities that we have experienced in recent periods and this could
adversely impact our financial results.
We have taken a variety of measures during the COVID-19 pandemic to ensure the
availability and functioning of our critical infrastructure, to promote the
safety and security of our employees and to support the communities in which we
operate. These measures have included requiring remote working arrangements for
employees where practicable. We are continuing to follow public and private
sector policies and initiatives to reduce the transmission of COVID-19, such as
the imposition of travel restrictions, the promotion of social distancing and
the adoption of work-from-home arrangements. These policies and initiatives will
continue to impact how we operate for as long as they are in effect. As a result
of these policies and initiatives, travel and meeting expenses have decreased
significantly, positively impacting our net income. If the current social
distancing requirements and policies significantly lessen in future periods,
travel and meeting expenses may return to higher levels. To date, we have been
successful in conducting our daily operations and meeting the requirements in
all areas of our business with these work-from-home arrangements. We are still
working to determine safe and effective phased office reentry plans for
employees at all of our office locations globally. However, the timing and
nature of these reentry plans will vary by location and some of the specifics
related to many of these plans are still uncertain at this time. The safety of
our employees and adherence to public and private sector policies related to the
COVID-19 pandemic will remain our top priorities as we have our employees return
to working at our global office locations.
See the Company's risk factors disclosed in Part I-Item 1A, "Risk Factors," in
its Annual Report on Form 10-K for the fiscal year ended August 31, 2020, which
was filed with the SEC on October 21, 2020 for information on risks associated
with pandemics in general and COVID-19 specifically.
?
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Results of Operations
Three Months Ended February 28, 2021 Compared to Three Months Ended February 29,
2020
Operating Items
The following table summarizes operating data for our consolidated operations
(in thousands, except percentages and per share amounts):
Three Months Ended February 28/29,
Change from
?Prior Year
2021 2020 Dollars Percent
Net sales:
Maintenance products $ 102,729 $ 91,147 $ 11,582 13%
Homecare and cleaning products 9,176 8,902 274 3%
Total net sales 111,905 100,049 11,856 12%
Cost of products sold 49,898 46,447 3,451 7%
Gross profit 62,007 53,602 8,405 16%
Operating expenses 41,352 35,417 5,935 17%
Income from operations $ 20,655 $ 18,185 $ 2,470 14%
Net income $ 17,191 $ 14,327 $ 2,864 20%
Earnings per common share -
diluted $ 1.24 $ 1.04 $ 0.20 19%
Shares used in per share
calculations - diluted 13,729 13,737 (8) -
Net Sales by Segment
The following table summarizes net sales by segment (in thousands, except
percentages):
Three Months Ended February 28/29,
Change from
?Prior Year
2021 2020 Dollars Percent
Americas $ 46,157 $ 46,842 $ (685) (1)%
EMEA 49,813 41,753 8,060 19%
Asia-Pacific 15,935 11,454 4,481 39%
Total $ 111,905 $ 100,049 $ 11,856 12%
?
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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 February 28/29,
Change from
?Prior Year
2021 2020 Dollars Percent
Maintenance products $ 41,310 $ 42,421 $ (1,111) (3)%
Homecare and cleaning products 4,847 4,421 426 10%
Total $ 46,157 $ 46,842 $ (685) (1)%
% of consolidated net sales 41% 47%
Sales in the Americas segment, which includes the U.S., Canada and Latin
America, decreased to $46.2 million, down $0.7 million, or 1%, for the three
months ended February 28, 2021 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 28, 2021
compared to the corresponding period of the prior fiscal year.
Sales of maintenance products in the Americas segment decreased $1.1 million, or
3%, for the three months ended February 28, 2021 compared to the corresponding
period of the prior fiscal year. This sales decrease was mainly driven by
decreased sales of maintenance products in the U.S., which were down $3.5
million or 11%, from period to period due to supply chain constraints and
disruptions related to the COVID-19 pandemic during the second quarter of fiscal
year 2021. In particular, widespread supply chain disruptions within the
consumer products industry during the pandemic has increased competition for
production capacity, particularly at some of our third-party manufacturers.
While we have been successful in managing most of the supply chain and
distribution disruptions related to the pandemic, the magnitude of these
challenges increased during the second quarter of fiscal year 2021 and were
significantly compounded as a result of severe winter storms in parts of the
United States that directly impacted some of our third-party contract
manufacturers and distribution centers. This combination of factors resulted in
us not being able to meet the high level of demand for our products by customers
and end-users in certain markets during the second quarter of fiscal year 2021.
These sales decreases were partially offset by increased sales of maintenance
products in the Latin America region, which were up $1.9 million or 28%. Sales
in Latin America increased primarily due to the transition to the direct
marketing model in Mexico. In the third quarter of fiscal year 2020, we shifted
away from a distribution model for Mexico where we sold products through a large
wholesale customer who then supplied various retail customers, to one where we
sell direct to these retail customers. This shift in distribution model combined
with increased demand for our product, primarily due to decreased COVID
restrictions, resulted in increased sales in Latin America during the first half
of fiscal year 2021 compared to the corresponding period of the prior fiscal
year. Sales of maintenance products in Canada also increased $0.6 million from
period to period primarily as a result of a higher level of renovation and
maintenance activities exhibited by our end-users during the COVID-19 pandemic
as well as increased sales within the ecommerce channel.
Sales of homecare and cleaning products in the Americas increased $0.4 million,
or 10%, for the three months ended February 28, 2021 compared to the
corresponding period of the prior fiscal year. This sales increase was driven
primarily by an increase in sales of the 2000 Flushes brand products in the
U.S., which were up $0.4 million or 31% from period to period. We started to
experience a significant increase in sales of many of our homecare and cleaning
products beginning in the third quarter of fiscal year 2020 due to increased
demand for such products as a result of the COVID-19 pandemic. We are not able
at this time to estimate the duration of this unexpected increase in the demand
for these products and its impact on our financial results and operations in
future periods. While each of our homecare and cleaning products have continued
to generate positive cash flows, we had experienced decreased or flat sales for
many of these products in recent years prior to the COVID-19 pandemic.
For the Americas segment, 72% of sales came from the U.S., and 28% of sales came
from Canada and Latin America combined for the three months ended February 28,
2021 compared to the distribution for the three months ended February 29, 2020
when 78% of sales came from the U.S., and 22% of sales came from Canada and
Latin America.
?
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EMEA
The following table summarizes net sales by product line for the EMEA segment
(in thousands, except percentages):
Three Months Ended February 28/29,
Change from
?Prior Year
2021 2020 Dollars Percent
Maintenance products $ 47,736 $ 38,974 $ 8,762 22%
Homecare and cleaning products 2,077 2,779 (702) (25)%
Total (1) $ 49,813 $ 41,753 $ 8,060 19%
% of consolidated net sales 45% 42%
(1)While the Company's reporting currency is the U.S. Dollar, the functional
currency of our U.K. subsidiary, the entity in which the EMEA results are
generated, is Pound Sterling. Although the functional currency of this
subsidiary is Pound Sterling, approximately 50% of its sales are generated in
Euro and 15-20% are generated in U.S. Dollar. As a result, the Pound Sterling
sales and earnings for the EMEA segment can be negatively or positively impacted
from period to period upon translation from these currencies depending on
whether the Euro and U.S. Dollar are weakening or strengthening against the
Pound Sterling.
Sales in the EMEA segment, which includes Europe, the Middle East, Africa and
India, increased to $49.8 million, up $8.1 million, or 19%, for the three months
ended February 28, 2021 compared to the corresponding period of the prior fiscal
year. Changes in foreign currency exchange rates had a favorable impact on sales
for the EMEA segment from period to period. Sales for the three months ended
February 28, 2021 translated at the exchange rates in effect for the
corresponding period of the prior fiscal year would have been $47.9 million in
the EMEA segment. Thus, on a constant currency basis, sales would have increased
by $6.1 million, or 15%, 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 $33.3
million, up $3.7 million, or 13%, for the three months ended February 28, 2021,
compared to the corresponding period of the prior fiscal year primarily due to
increased sales of WD-40 Multi-Use Product and WD-40 Specialist of $2.8 million
or 14% and $1.0 million or 31%, respectively, throughout all of the direct
markets. This increase in sales was primarily due to increased demand for our
products as a result of a higher level of renovation and maintenance activities
exhibited by our end-users during the COVID-19 pandemic. This increased demand
and consumption of our products resulted in increased sales, particularly within
the e-commerce channel. Sales from direct markets accounted for 67% of the EMEA
segment's sales for the three months ended February 28, 2021 compared to 71% for
the corresponding period of the prior fiscal year.
The regions in the EMEA segment where we sell through local distributors include
the Middle East, Africa, India, Eastern and Northern Europe. Sales in the
distributor markets increased $4.3 million, or 35%, for the three months ended
February 28, 2021 compared to the corresponding period of the prior fiscal year,
primarily due to increased sales of the WD-40 Multi-Use Product in India, the
Middle East and Northern Europe, which were up $1.8 million, $1.4 million, and
$1.0 million, respectively. This increase in sales from period to period was
primarily due to the continued recoveries in the EMEA distributor markets which
had previously experienced more severe lockdowns during the second half of
fiscal year 2020 due to the COVID-19 pandemic. During the first half of fiscal
year 2021, many of these regions experienced improved economic conditions as a
result of reductions in COVID-19 related restrictions. This allowed our
marketing distributors to participate in more of our promotional activities and
to adjust to more normal levels of inventory for our product, which resulted in
increased sales. In addition, continued increases in renovation and maintenance
activities by end-users during the pandemic also positively impacted sales in
some of our distributor markets. The distributor markets accounted for 33% of
the EMEA segment's total sales for the three months ended February 28, 2021,
compared to 29% 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):
Three Months Ended February 28/29,
Change from
?Prior Year
2021 2020 Dollars Percent
Maintenance products $ 13,682 $ 9,751 $ 3,931 40%
Homecare and cleaning products 2,253 1,703 550 32%
Total $ 15,935 $ 11,454 $ 4,481 39%
% of consolidated net sales 14% 11%
Sales in the Asia-Pacific segment, which includes Australia, China and other
countries in the Asia region, increased to $15.9 million, up $4.5 million, or
39%, for the three months ended February 28, 2021 compared to the corresponding
period of the prior fiscal year. Changes in foreign currency exchange rates had
a favorable impact on sales for the Asia-Pacific segment from period to period.
Sales for the three months ended February 28, 2021 translated at the exchange
rates in effect for the corresponding period of the prior fiscal year would have
been $15.1 million in the Asia-Pacific segment. Thus, on a constant currency
basis, sales would have increased by $3.7 million, or 32%, from period to
period.
Sales in Asia, which represented 67% of the total sales in the Asia-Pacific
segment, increased $3.0 million, or 39%, for the three months ended February 28,
2021 compared to the corresponding period of the prior fiscal year. Sales in
China increased $3.3 million, or 227%, primarily due to improved market
conditions as a result of the reduction of COVID-19 lockdown measures compared
to the corresponding period of the prior fiscal year when the COVID-19 outbreak
was in its earliest stages. These disruptions in the second quarter of the prior
fiscal year included 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. No such comparable event occurred in the second
quarter of the current fiscal year. Sales in the Asia distributor markets
decreased $0.3 million, or 4%, for the three months ended February 28, 2021
compared to the corresponding period of the prior fiscal year primarily due to a
shift in the timing of customer orders from period to period, particularly in
Indonesia, Singapore and the Philippines, and the delayed shipment of certain
customer orders in the second quarter of fiscal year 2021 as a result of
shipping container shortages.
Sales in Australia increased $1.5 million, or 39%, for the three months ended
February 28, 2021 compared to the corresponding period of the prior fiscal year.
Changes in foreign currency exchange rates had a favorable impact on sales in
Australia. On a constant currency basis, sales in Australia would have increased
by $1.0 million, or 26%, primarily due to increased demand for WD-40 Multi Use
Product and WD-40 Specialist, which were up $0.5 million, or 37%, and $0.4
million or 92%, respectively, due to a higher level of renovation and
maintenance activities undertaken by our end-users during the COVID-19 pandemic
which resulted in increased sales. In addition, demand for homecare and cleaning
products were up $0.6 million or 32%, from period to period, primarily as a
result of the COVID-19 pandemic. Negative sales impacts to Australia due to the
COVID-19 pandemic have continued to be limited in fiscal year 2021 since
COVID-19 case numbers have remained relatively low in Australia since the
initial outbreak and governmental authorities have adopted less severe lockdown
requirements. This has resulted in our key customers remaining open for business
during the COVID-19 pandemic.
Gross Profit
Gross profit increased to $62.0 million for the three months ended February 28,
2021 compared to $53.6 million for the corresponding period of the prior fiscal
year. As a percentage of net sales, gross profit increased to 55.4% for the
three months ended February 28, 2021 compared to 53.6% for the corresponding
period of the prior fiscal year.
Gross margin was favorably impacted by 1.6 percentage points from period to
period due to favorable changes in the costs of petroleum-based specialty
chemicals in all three segments. Beginning in late February 2020, which was late
in the second quarter of our fiscal year 2020, the price of crude oil dropped
significantly for a period of several months. Although the price
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of crude oil has recently recovered to the prices seen in early calendar year
2020, the average cost of crude oil which flowed through our cost of goods sold
was lower during the second quarter of fiscal year 2021 compared to the
corresponding period of the prior fiscal year, thus resulting in favorable
impacts to our gross margin from period to period. There is often a delay of one
quarter or more before changes in raw material costs impact the cost of products
sold due to production and inventory life cycles. Due to the volatility of the
price of crude oil, it is uncertain the level to which gross margin will be
impacted by such costs in future periods. Gross margin was also positively
impacted by 0.5 percentage points due to favorable changes in the costs of
aerosol cans in the EMEA and Americas segments. In addition, gross margin was
positively impacted by 0.2 percentage points from period to period due to sales
price increases, primarily in the EMEA and Asia-Pacific segments during the last
twelve months. Gross margin was also positively impacted by 0.2 percentage
points due to the favorable impacts of changes to product mix and market mix,
primarily in the Asia-Pacific segment resulting from increased sales in China
from period to period. Changes in foreign currency exchange rates from period to
period in the EMEA segment positively impacted by 0.2 percentage points.
These favorable impacts to gross margin were partially offset by higher
warehousing and in-bound freight costs, primarily in the EMEA and Americas
segments, negatively impacting gross margin by 0.6 percentage points from period
to period. Gross margin was also negatively impacted by 0.3 percentage points
from period to period due to increases to advertising, promotional, and other
discounts that we give to our customers, primarily in the EMEA and Americas
segments. In general, the timing of advertising, promotional and other discounts
may cause fluctuations in gross margin from period to period. The costs
associated with certain promotional activities are recorded as a reduction to
sales while others are recorded as advertising and sales promotion expenses.
Advertising, promotional and other discounts that are given to our customers are
recorded as a reduction to sales, whereas advertising and sales promotional
costs associated with promotional activities that we pay to third parties are
recorded as advertising and sales promotion expenses.
Several of the unfavorable impacts to gross margin were caused by the widespread
supply chain disruptions and constraints within the consumer products industry
and distribution networks that occurred during the second quarter of fiscal year
2021 related to the COVID-19 pandemic. These disruptions and constraints have
included increased competition for more limited production capacity at our
third-party manufacturers and reduced availability of freight providers, both of
which have resulted in increased costs to the Company. The recent increase in
the magnitude of these trends combined with the continued increases in the price
of crude oil that we are seeing in the market are expected to unfavorably impact
our cost of goods sold for the remainder of fiscal year 2021 and this will
result in a lower gross margin for the second half of fiscal year 2021 as
compared to the gross margin that we have realized for the first six months of
the fiscal year.
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 $3.5 million and $3.1 million for the three months
ended February 28, 2021 and February 29, 2020, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the three months ended
February 28, 2021 increased $5.6 million to $35.5 million from $29.9 million for
the corresponding period of the prior fiscal year. As a percentage of net sales,
SG&A expenses increased to 31.7% for the three months ended February 28, 2021
compared to 29.9% for the corresponding period of the prior fiscal year. The
increase in SG&A expenses from period to period was due to a variety of factors,
but most significantly due to increased employee-related costs of $5.9 million
as a result of increased incentive compensation accruals, increased headcount
and higher stock-based compensation from period to period. Changes in foreign
currency exchange rates from period to period increased SG&A expenses by $0.6
million. Increases in freight costs associated with higher sales from period to
period also increased SG&A expenses by $0.3 million. In addition, professional
services fees increased $0.3 million due to increased cloud-based software usage
and license fees and other miscellaneous expenses increased $0.2 million from
period to period. These increases to SG&A expenses were offset by a decrease in
travel and meeting expenses of $1.7 million from period to period. Travel and
meeting expenses decreased primarily due to continued initiatives to reduce the
transmission of COVID-19, including the imposition of business travel
restrictions for all employees and the cancellation of all large meetings, such
as regional sales meetings and global leadership meetings, in support of social
distancing requirements.
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We continued our research and development investment, the majority of which is
associated with our maintenance products, in support of our focus on innovation
and renovation of our products. Research and development costs were $1.3 million
and $1.5 million for the three months ended February 28, 2021 and February 29,
2020, respectively. Our research and development team engages in consumer
research, product development, current product improvements and testing
activities. This team leverages its development capabilities by partnering with
a network of outside resources including our current and prospective third-party
contract manufacturers. The level and types of expenses incurred within research
and development can vary from period to period depending upon the types of
activities being performed.
Advertising and Sales Promotion Expenses
Advertising and sales promotion expenses for the three months ended February 28,
2021 increased $0.6 million, or 13%, to $5.5 million from $4.9 million for the
corresponding period of the prior fiscal year. As a percentage of net sales,
these expenses remained constant at 4.9% for both the three months ended
February 28, 2021 and February 29, 2020. Changes in foreign currency exchange
rates did not have a significant impact on advertising and sales promotion
expenses for the three months ended February 28, 2021. The increase in
advertising and sales promotion expenses was primarily due to a higher level of
promotional programs and marketing support in all three segments as a result of
increased consumer demand and higher sales from period to period.
As a percentage of net sales, advertising and sales promotion expenses may
fluctuate period to period based upon the type of marketing activities we employ
and the period in which the costs are incurred. Total promotional costs recorded
as a reduction to sales was $5.9 million and $4.5 million for three months ended
February 28, 2021 and February 29, 2020, respectively. Therefore, our total
investment in advertising and sales promotion activities totaled $11.4 million
and $9.4 million for the three months ended February 28, 2021 and February 29,
2020, respectively.
Amortization of Definite-lived Intangible Assets Expense
Amortization of our definite-lived intangible assets decreased to $0.4 million
for the three months ended February 28, 2021 compared to $0.7 million for the
corresponding period in the prior year due to decreased amortization associated
with the 2000 Flushes trade name, which became fully amortized during the third
quarter of fiscal year 2020.
Income from Operations by Segment
The following table summarizes income from operations by segment (in thousands,
except percentages):
Three Months Ended February 28/29,
Change from
?Prior Year
2021 2020 Dollars Percent
Americas $ 10,356 $ 11,400 $ (1,044) (9)%
EMEA 14,176 10,582 3,594 34%
Asia-Pacific 5,188 3,106 2,082 67%
Unallocated corporate (1) (9,065) (6,903) (2,162) (31)%
Total $ 20,655 $ 18,185 $ 2,470 14%
Americas
Income from operations for the Americas decreased to $10.4 million, down $1.0
million, or 9%, for the three months ended February 28, 2021 compared to the
corresponding period of the prior fiscal year, primarily due to a $1.2 million
increase in operating expenses and a $0.7 million decrease in sales, partially
offset by a higher gross margin. Operating expenses increased period over period
primarily due to higher accruals for incentive compensation and other
employee-related costs. These increases in operating expenses were partially
offset by lower travel and meeting expenses due to initiatives adopted by the
Company during the third quarter of fiscal year 2020 to reduce the transmission
of COVID-19. In addition, operating
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expenses were favorably impacted by decreased amortization associated with the
2000 Flushes trade name, which became fully amortized during the third quarter
of fiscal year 2020. As a percentage of net sales, gross profit for the Americas
segment increased from 52.4% to 53.5% period over period primarily due to the
combined favorable impacts of decreased costs of petroleum-based specialty
chemicals and aerosol cans from period to period. These favorable impacts to
gross margin were partially offset by increases in warehousing, distribution and
freight costs as well as unfavorable changes in sales mix and higher
miscellaneous costs from period to period. Operating income as a percentage of
net sales decreased from 24.3% to 22.4% period over period.
EMEA
Income from operations for the EMEA segment increased to $14.2 million, up $3.6
million, or 34% from period to period, primarily due to a $8.1 million increase
in sales and a higher gross margin, partially offset by a $1.7 million increase
in operating expenses. As a percentage of net sales, gross profit for the EMEA
segment increased from 55.0% to 56.7% period over period primarily due to the
combined favorable impacts of decreased costs of petroleum-based specialty
chemicals and aerosol cans from period to period, as well as favorable changes
to exchange rates and sales price increases from period to period. These
favorable impacts to gross margin were partially offset by increases in
warehousing, distribution and freight costs, as well as increases to
advertising, promotional, and other discounts that we give to our customers from
period to period. The increased sales were accompanied by a $1.7 million
increase in total operating expenses period over period, primarily due to higher
accruals for incentive compensation and other employee-related costs as well as
increased outbound freight costs due to the higher sales volumes. These
increases in operating expenses were partially offset by lower travel and
meeting expenses due to the Company's reduced travel initiatives as a result of
the COVID-19 pandemic. Operating income as a percentage of net sales increased
from 25.3% to 28.5% period over period.
Asia-Pacific
Income from operations for the Asia-Pacific segment increased to $5.2 million,
up $2.1 million, or 67%, for the three months ended February 28, 2021 compared
to the corresponding period of the prior fiscal year, primarily due to a $4.5
million increase in sales and a higher gross margin, partially offset by a $0.9
million increase in operating expenses. As a percentage of net sales, gross
profit for the Asia-Pacific segment increased from 53.1% to 56.9% period over
period primarily due to decreases to the cost of petroleum-based specialty
chemicals and favorable changes in both sales product mix and market mix, as
well as sales price increases and decreases to advertising, promotional, and
other discounts that we give to our customers from period to period. These
favorable impacts to gross margin were slightly offset by the unfavorable impact
of increased costs of aerosol cans from period to period. The increased sales
were accompanied by a $0.9 million increase in total operating expenses period
over period, primarily due to a higher level of advertising and sales promotion
expenses and higher accruals for incentive compensation. Operating income as a
percentage of net sales increased from 27.1% to 32.6% 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 28/29,
2021 2020 Change
Interest income $ 19 $ 28 $ (9)
Interest expense $ 610 $ 593 $ 17
Other (expense) income, net $ 151 $ (229) $ 380
Provision for income taxes $ 3,024 $ 3,064 $ (40)
Interest Income
Interest income was insignificant for both the three months ended February 28,
2021 and February 29, 2020.
?
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Interest Expense
Interest expense remained relatively constant at $0.6 million for the three
months ended February 28, 2021 compared to the corresponding period of the prior
fiscal year.
Other Income (Expense), Net
Other income (expense), net was insignificant for both the three months ended
February 28, 2021 and February 29, 2020.
Provision for Income Taxes
The provision for income taxes was 15.0% and 17.6% of income before income taxes
for the three months ended February 28, 2021 and February 29, 2020,
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, as well as the release of liabilities related to
uncertain tax positions due to the expiration of statutes during the second
quarter of fiscal year 2021.
Net Income
Net income was $17.2 million, or $1.24 per common share on a fully diluted
basis, for the three months ended February 28, 2021 compared to $14.3 million,
or $1.04 per common share on a fully diluted basis, for the corresponding period
of the prior fiscal year. Changes in foreign currency exchange rates had a
favorable impact of $0.6 million on net income for the three months ended
February 28, 2021 compared to the corresponding period of the prior fiscal year.
On a constant currency basis, net income would have increased by $2.2 million
from period to period.
?
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Six Months Ended February 28, 2021 Compared to Six Months Ended February 29,
2020
Operating Items
The following table summarizes operating data for our consolidated operations
(in thousands, except percentages and per share amounts):
Six Months Ended February 28/29,
Change from
?Prior Year
2021 2020 Dollars Percent
Net sales:
Maintenance products $ 217,072 $ 180,817 $ 36,255 20%
Homecare and cleaning products 19,392 17,788 1,604 9%
Total net sales 236,464 198,605 37,859 19%
Cost of products sold 104,211 91,460 12,751 14%
Gross profit 132,253 107,145 25,108 23%
Operating expenses 83,206 74,256 8,950 12%
Income from operations $ 49,047 $ 32,889 $ 16,158 49%
Net income $ 40,814 $ 26,521 $ 14,293 54%
Earnings per common share - $ $ $
diluted 2.96 1.92 1.04 54%
Shares used in per share
calculations - diluted 13,718 13,741 (23) -
Net Sales by Segment
The following table summarizes net sales by segment (in thousands, except
percentages):
Six Months Ended February 28/29,
Change from
?Prior Year
2021 2020 Dollars Percent
Americas $ 100,344 $ 93,578 $ 6,766 7%
EMEA 104,563 80,998 23,565 29%
Asia-Pacific 31,557 24,029 7,528 31%
Total $ 236,464 $ 198,605 $ 37,859 19%
?
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Americas
The following table summarizes net sales by product line for the Americas
segment (in thousands, except percentages):
Six Months Ended February 28/29,
Change from
?Prior Year
2021 2020 Dollars Percent
Maintenance products $ 89,812 $ 84,111 $ 5,701 7%
Homecare and cleaning products 10,532 9,467 1,065 11%
Total $ 100,344 $ 93,578 $ 6,766 7%
% of consolidated net sales 43% 47%
Sales in the Americas segment, which includes the U.S., Canada and Latin
America, increased to $100.3 million, up $6.8 million, or 7%, for the six months
ended February 28, 2021 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 six months
ended February 28, 2021 translated at the exchange rates in effect for the
corresponding period of the prior fiscal year would have been $100.8 million in
the Americas segment. Thus, on a constant currency basis, sales would have
increased by $7.3 million, or 8%, from period to period.
Sales of maintenance products in the Americas segment increased $5.7 million, or
7%, for the six months ended February 28, 2021 compared to the corresponding
period of the prior fiscal year. This sales increase was mainly driven by
increased sales of maintenance products in the Latin America and Canada, which
were up $4.7 million and $1.2 million, or 35% and 23%, respectively, from period
to period. Increased demand for our product as a result of a higher level of
renovation and maintenance activities exhibited by our end-users during the
COVID-19 pandemic resulted in increased sales of maintenance products in Canada,
including within the e-commerce channel. In addition, sales in Latin America
increased due to the transition to the direct marketing model in Mexico. In the
third quarter of fiscal year 2020, we shifted away from a distribution model for
Mexico where we sold products through a large wholesale customer who then
supplied various retail customers, to one where we sell direct to these retail
customers. This resulted in increased sales in Latin America during the first
six months of fiscal year 2021 compared to the corresponding period of the prior
fiscal year. Sales of maintenance products in the United States were relatively
constant, down only $0.1 million, or less than 1%, from period to period.
Although sales were significantly higher in the United States during the first
three months of fiscal year 2021 due to increased demand driven by higher
renovation and maintenance activities exhibited by our end users, this was more
than offset by lower sales during the second quarter of fiscal year 2021 as a
result of supply chain constraints and disruptions related to the both COVID-19
pandemic and the severe winter storms that impacted parts of the United States.
For further information on these supply chain disruptions in the United States
during the second quarter of fiscal year 2021, see Results of Operations -
Americas for the three months ended February 28, 2021 within Part I-Item 2,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Sales of homecare and cleaning products in the Americas increased $1.1 million,
or 11%, for the six months ended February 28, 2021 compared to the corresponding
period of the prior fiscal year. This sales increase was driven primarily by an
increase in sales of the 2000 Flushes brand products in the U.S., which were up
$1.2 million or 39% from period to period. We started to experience a
significant increase in sales of most of our homecare and cleaning products
beginning in the third quarter of fiscal year 2020 due to increased demand for
such products as a result of the COVID-19 pandemic. We are not able at this time
to estimate the duration of this unexpected increase in the demand for these
products and its impact on our financial results and operations in future
periods. While each of our homecare and cleaning products have continued to
generate positive cash flows, we had experienced decreased or flat sales for
many of these products in recent fiscal years prior to the start of the COVID-19
pandemic.
For the Americas segment, 75% of sales came from the U.S., and 25% of sales came
from Canada and Latin America combined for the six months ended February 28,
2021 compared to the distribution for the six months ended February 29, 2020
when 79% of sales came from the U.S., and 21% of sales came from Canada and
Latin America.
?
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EMEA
The following table summarizes net sales by product line for the EMEA segment
(in thousands, except percentages):
Six Months Ended February 28/29,
Change from
?Prior Year
2021 2020 Dollars Percent
Maintenance products $ 100,114 $ 75,874 $ 24,240 32%
Homecare and cleaning products 4,449 5,124 (675) (13)%
Total
$ 104,563 $ 80,998 $ 23,565 29%
% of consolidated net sales 44% 41%
Sales in the EMEA segment, which includes Europe, the Middle East, Africa and
India, increased to $104.6 million, up $23.6 million, or 29%, for the six months
ended February 28, 2021 compared to the corresponding period of the prior fiscal
year. Changes in foreign currency exchange rates had a favorable impact on sales
for the EMEA segment from period to period. Sales for the six months ended
February 28, 2021 translated at the exchange rates in effect for the
corresponding period of the prior fiscal year would have been $99.9 million in
the EMEA segment. Thus, on a constant currency basis, sales would have increased
by $18.9 million, or 23%, 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 $68.7
million, up $14.3 million, or 26%, for the six months ended February 28, 2021
compared to the corresponding period of the prior fiscal year primarily due to
increased sales of WD-40 Multi-Use Product and WD-40 Specialist of $9.9 million
or 26% and $2.7 million or 45%, respectively, throughout all of the direct
markets. This increase in sales was primarily due to increased demand for our
products as a result of a higher level of renovation and maintenance activities
exhibited by our end-users during the COVID-19 pandemic. This increased demand
and consumption of our products resulted in increased sales, particularly within
the e-commerce channel. Sales from direct markets accounted for 66% of the EMEA
segment's sales for the six months ended February 28, 2021 compared to 67% for
the corresponding period of the prior fiscal year.
The regions in the EMEA segment where we sell through local distributors include
the Middle East, Africa, India, Eastern and Northern Europe. Sales in the
distributor markets increased $9.2 million, or 35%, for the six months ended
February 28, 2021 compared to the corresponding period of the prior fiscal year,
primarily due to increased sales of the WD-40 Multi-Use Product in Northern
Europe, India, the Middle East and Eastern Europe, which were up $3.3 million,
$2.9 million, $1.4 million and $1.3 million, respectively. This increase in
sales from period to period was primarily due to recoveries experienced during
the first half of fiscal year 2021 in distributor markets that previously
experienced more severe lockdowns during the second half of fiscal year 2020 due
to the COVID-19 pandemic. During the first half of fiscal year 2021, many of
these regions experienced improved economic conditions as a result of reductions
in COVID-19 related restrictions. This allowed our marketing distributors to
participate in more of our promotional activities and to adjust to more normal
levels of inventory for our product, which resulted in increased sales. In
addition, continued increases in renovation and maintenance activities by
end-users during the pandemic also positively impacted sales in some of our
distributor markets. The distributor markets accounted for 34% of the EMEA
segment's total sales for the six months ended February 28, 2021, compared to
33% for the corresponding period of the prior fiscal year.
?
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Asia-Pacific
The following table summarizes net sales by product line for the Asia-Pacific
segment (in thousands, except percentages):
Six Months Ended February 28/29,
Change from
?Prior Year
2021 2020 Dollars Percent
Maintenance products $ 27,146 $ 20,832 $ 6,314 30%
Homecare and cleaning products 4,411 3,197 1,214 38%
Total $ 31,557 $ 24,029 $ 7,528 31%
% of consolidated net sales 13% 12%
Sales in the Asia-Pacific segment, which includes Australia, China and other
countries in the Asia region, increased to $31.6 million, up $7.5 million, or
31%, for the six months ended February 28, 2021 compared to the corresponding
period of the prior fiscal year. Changes in foreign currency exchange rates had
a favorable impact on sales for the Asia-Pacific segment from period to period.
Sales for the six months ended February 28, 2021 translated at the exchange
rates in effect for the corresponding period of the prior fiscal year would have
been $30.3 million in the Asia-Pacific segment. Thus, on a constant currency
basis, sales would have increased by $6.2 million, or 26%, from period to
period.
Sales in Asia, which represented 67% of the total sales in the Asia-Pacific
segment, increased $4.9 million, or 30%, for the six months ended February 28,
2021 compared to the corresponding period of the prior fiscal year. Sales in
China increased $4.5 million, or 119%, primarily due to improved market
conditions as a result of the reduction of COVID-19 lockdown measures compared
to the corresponding period of the prior fiscal year when the COVID-19 outbreak
was in its earliest stages during the second quarter of fiscal year 2020. In
addition, sales in China during the first half of fiscal year 2020 were
negatively impacted due to activities associated with the country's preparation
for the 70th Anniversary National Day in China which resulted in temporary
factory closures and slowed market conditions, as well as government
restrictions imposed in response to the COVID-19 pandemic. The impact to sales
due to these disruptions in the first half of the prior fiscal year 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. No such comparable
event occurred in the first half of the current fiscal year. Sales in the Asia
distributor markets increased $0.4 million, or 3%, for the six months ended
February 28, 2021 compared to the corresponding period of the prior fiscal year.
These increased sales were primarily due to the easing of COVID-19 lockdown
measures in many of the Asia markets during the first half of fiscal year 2021
compared to late in fiscal year 2020, which resulted in a higher level of sales
particularly during the first three months of fiscal year 2021. These reduced
lockdown measures have positively impacted economic conditions in industrial
channels and resulted in marketing distributors adjusting to more normal levels
of our product, which resulted in increased sales during the six months ended
February 28, 2021.
Sales in Australia increased $2.6 million, or 33%, for the six months ended
February 28, 2021 compared to the corresponding period of the prior fiscal year.
Changes in foreign currency exchange rates had a favorable impact on sales in
Australia. On a constant currency basis, sales in Australia would have increased
by $1.8 million, or 23%, partially due to continued increased demand for
homecare and cleaning products, which were up $1.2 million, or 38%, as a result
of the COVID-19 pandemic. In addition, sales of WD-40 Multi Use Product and
WD-40 Specialist were up $0.9 million, or 27%, and $0.5 million, or 57%,
respectively, from period to period primarily due to a higher level of
renovation and maintenance activities undertaken by our end-users during the
COVID-19 pandemic which resulted in increased sales. Negative sales impacts to
Australia due to the COVID-19 pandemic have continued to be limited in fiscal
year 2021 since COVID-19 case numbers have remained relatively low in Australia
since the initial outbreak and governmental authorities have adopted less severe
lockdown requirements. This has resulted in our key customers remaining open for
business during the COVID-19 pandemic.
Gross Profit
Gross profit increased to $132.3 million for the six months ended February 28,
2021 compared to $107.1 million for the corresponding period of the prior fiscal
year. As a percentage of net sales, gross profit increased to 55.9% for the six
months ended February 28, 2021 compared to 53.9% for the corresponding period of
the prior fiscal year.
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Gross margin was favorably impacted by 2.0 percentage points from period to
period due to favorable changes in the costs of petroleum-based specialty
chemicals in all three segments. Beginning in late February 2020, which was late
in the second quarter of our fiscal year 2020, the price of crude oil dropped
significantly for a period of several months. Although the price of crude oil
has recently recovered to the prices seen in early calendar year 2020, the
average cost of crude oil which flowed through our cost of goods sold was lower
during the first half of fiscal year 2021 compared to the corresponding period
of the prior fiscal year, thus resulting in favorable impacts to our gross
margin from period to period. There is often a delay of one quarter or more
before changes in raw material costs impact the cost of products sold due to
production and inventory life cycles. Gross margin was also positively impacted
by 0.8 percentage points due to favorable changes in the costs of aerosol cans
in the EMEA and Americas segments. In addition, gross margin was positively
impacted by 0.3 percentage points from period to period due to sales price
increases, primarily in the EMEA and Asia Pacific segments during the last
twelve months. Changes in foreign currency exchange rates from period to period
in the EMEA segment positively impacted by 0.1 percentage points.
These favorable impacts to gross margin were partially offset by higher
warehousing and in-bound freight costs, primarily in the EMEA and Americas
segments, negatively impacting gross margin by 1.0 percentage points from period
to period. Gross margin was also negatively impacted by 0.1 percentage point
from period to period due to the combined effects of changes to sales mix and
increases in other miscellaneous costs from period to period in the Americas and
EMEA segments, which were significantly offset by favorable market mix changes
in the Asia-Pacific segment. In addition, gross margin was negatively impacted
by 0.1 percentage point from period to period due to increases to advertising,
promotional, and other discounts that we give to our customers, primarily 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 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 $7.7 million and $6.1 million for the six months
ended February 28, 2021 and February 29, 2020, respectively.
Selling, General and Administrative Expenses
Selling, general and administrative ("SG&A") expenses for the six months ended
February 28, 2021 increased $9.0 million to $71.5 million from $62.5 million for
the corresponding period of the prior fiscal year. As a percentage of net sales,
SG&A expenses decreased to 30.2% for the six months ended February 28, 2021
compared to 31.5% for the corresponding period of the prior fiscal year. The
increase in SG&A expenses from period to period was due to a variety of factors,
but most significantly due to increased employee-related costs of $8.9 million
due to increased incentive compensation accruals, increased headcount, and
higher stock-based compensation from period to period. Increases in freight
costs associated with higher sales from period to period also increased SG&A
expenses by $1.4 million. Changes in foreign currency exchange rates from period
to period increased SG&A expenses by $1.2 million. In addition, professional
services fees increased $0.9 million due to increased cloud-based software usage
and license fees, and other miscellaneous expenses increased $0.5 million from
period to period. These increases to SG&A expenses were offset by a decrease in
travel and meeting expenses of $3.9 million from period to period. Travel and
meeting expenses decreased primarily due to continued initiatives to reduce the
transmission of COVID-19, including the imposition of business travel
restrictions for all employees and the cancellation of all large meetings, such
as regional sales meetings and global leadership meetings, in support of social
distancing requirements.
We continued our research and development investment, the majority of which is
associated with our maintenance products, in support of our focus on innovation
and renovation of our products. Research and development costs were $2.9 million
and $3.2 million for the six months ended February 28, 2021 and February 29,
2020, respectively.
Advertising and Sales Promotion Expenses
Advertising and sales promotion expenses for the six months ended February 28,
2021 increased $0.6 million, or 6%, to $11.0 million from $10.4 million for the
corresponding period of the prior fiscal year. As a percentage of net sales,
these expenses decreased to 4.7% for the six months ended February 28, 2021 from
5.3% 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 six months ended February 28, 2021. The
increase in advertising and sales promotion expenses was primarily
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due to a higher level of promotional programs and marketing support in all three
segments as a result of increased consumer demand and higher sales from period
to period. These increases were partially offset by the decrease of physical
marketing and sampling activities from period to period, such as the
cancellations of trade shows, due to the continued indirect effects of the
COVID-19 pandemic during the first half of fiscal year 2021 and this resulted in
a decreased in advertising and sales promotion expenses as a percentage of net
sales from period to period.
As a percentage of net sales, advertising and sales promotion expenses may
fluctuate period to period based upon the type of marketing activities we employ
and the period in which the costs are incurred. Total promotional costs recorded
as a reduction to sales for the six months ended February 28, 2021 were $11.7
million compared to $9.5 million for the corresponding period of the prior
fiscal year. Therefore, our total investment in advertising and sales promotion
activities totaled $22.7 million and $19.9 million for the six months ended
February 28, 2021 and February 29, 2020, respectively.
Amortization of Definite-lived Intangible Assets Expense
Amortization of our definite-lived intangible assets decreased to $0.7 million
for the six months ended February 28, 2021 compared to $1.3 million for the six
months ended February 29, 2020 due to decreased amortization associated with the
2000 Flushes trade name, which became fully amortized during the third quarter
of fiscal year 2020.
Income from Operations by Segment
The following table summarizes income from operations by segment (in thousands,
except percentages):
Six Months Ended February 28/29,
Change from
?Prior Year
2021 2020 Dollars Percent
Americas $ 24,982 $ 21,980 $ 3,002 14%
EMEA 31,919 19,174 12,745 66%
Asia-Pacific 10,247 6,308 3,939 62%
Unallocated corporate (18,101) (14,573) (3,528) (24)%
Total $ 49,047 $ 32,889 $ 16,158 49%
Americas
Income from operations for the Americas increased to $25.0 million, up $3.0
million, or 14%, for the six months ended February 28, 2021 compared to the
corresponding period of the prior fiscal year, primarily due to a $6.8 million
increase in sales and a higher gross margin, partially offset by higher
operating expenses. As a percentage of net sales, gross profit for the Americas
segment increased from 52.8% to 53.9% period over period primarily due to the
combined favorable impacts of decreased costs of petroleum-based specialty
chemicals and aerosol cans from period to period. These favorable impacts to
gross margin were partially offset by increases in warehousing, distribution and
freight costs as well as unfavorable changes in sales mix and higher
miscellaneous costs from period to period. The increased sales were accompanied
by a $1.7 million increase in total operating expenses period over period,
primarily due to higher accruals for incentive compensation and other
employee-related costs, as well as higher outbound freight costs due to the
increase in sales and higher freight costs in the market from period to period.
These increases in operating expenses were partially offset by lower travel and
meeting expenses due to initiatives adopted by the Company during the third
quarter of fiscal year 2020 to reduce the transmission of COVID-19. In addition,
operating expenses were favorably impacted by decreased amortization associated
with the 2000 Flushes trade name, which became fully amortized during the third
quarter of fiscal year 2020. Operating income as a percentage of net sales
increased from 23.5% to 24.9% period over period.
EMEA
Income from operations for the EMEA segment increased to $31.9 million, up $12.7
million, or 66%, for the six months ended February 28, 2021 compared to the
corresponding period of the prior fiscal year, primarily due to a $23.6 million
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increase in sales and a higher gross margin, partially offset by higher
operating expenses. As a percentage of net sales, gross profit for the EMEA
segment increased from 55.4% to 57.6% period over period primarily due to the
combined favorable impacts of decreased costs of petroleum-based specialty
chemicals and aerosol cans from period to period, as well as sales price
increases from period to period. These favorable impacts to gross margin were
partially offset by increases in warehousing, distribution and freight costs, as
well as increases to advertising, promotional, and other discounts that we give
to our customers from period to period. The increased sales were accompanied by
a $2.6 million increase in total operating expenses period over period,
primarily due to higher accruals for incentive compensation and other
employee-related costs, as well as increased outbound freight costs due to the
higher sales. These increases in operating expenses were partially offset by
lower travel and meeting expenses due to the Company's COVID-19 pandemic reduced
travel initiatives. Operating income as a percentage of net sales increased from
23.7% to 30.5% period over period.
Asia-Pacific
Income from operations for the Asia-Pacific segment increased to $10.2 million,
up $3.9 million, or 62%, for the six months ended February 28, 2021 compared to
the corresponding period of the prior fiscal year, primarily due to a $7.5
million increase in sales and a higher gross margin, which were partially offset
by higher operating expenses. As a percentage of net sales, gross profit for the
Asia-Pacific segment increased from 53.6% to 56.8% period over period primarily
due to decreases to the cost of petroleum-based specialty chemicals and
favorable changes in both sales product mix and market mix, as well as sales
price increases from period to period. These favorable impacts to gross margin
were slightly offset by the unfavorable impact of increased costs of aerosol
cans from period to period. The increased sales were accompanied by a $1.1
million increase in total operating expenses period over period, primarily due
to higher accruals for incentive compensation and other employee costs, as well
as increased outbound freight costs and other miscellaneous costs from period to
period. Operating income as a percentage of net sales increased from 26.2% to
32.5% period over period.
Non-Operating Items
The following table summarizes non-operating income and expenses for our
consolidated operations (in thousands):
Six Months Ended February 28/29,
2021 2020 Change
Interest income $ 38 $ 53 $ (15)
Interest expense $ 1,180 $ 1,035 $ 145
Other income (expense), net $ 330 $ (224) $ 554
Provision for income taxes $ 7,421 $ 5,162 $ 2,259
Interest Income
Interest income was insignificant for both the six months ended February 28,
2021 and February 29, 2020.
Interest Expense
Interest expense increased $0.1 million for the six months ended February 28,
2021 compared to the corresponding period of the prior fiscal year primarily due
to higher aggregate outstanding balances on our credit and note agreements
combined from period over period.
Other Income (Expense), Net
Other income (expense), net changed by $0.6 million for the six months ended
February 28, 2021 compared to the corresponding period of the prior fiscal year
primarily due to foreign currency exchange gains of $0.2 million in the current
year compared to $0.4 million of foreign currency losses during the
corresponding period of the prior fiscal year as a result of fluctuations in the
foreign currency exchange rates for both the U.S. Dollar and the Euro against
the Pound Sterling.
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Provision for Income Taxes
The provision for income taxes was 15.4% and 16.3% of income before income taxes
for the six months ended February 28, 2021 and February 29, 2020, respectively.
The decrease in the effective income tax rate from period to period was
primarily due to a benefit from the High Tax Exemption associated with Global
Intangible Low Taxed Income during the first half of fiscal year 2021, as well
as an increase in excess tax benefits from settlements of stock-based equity
awards. The impact of these items on income tax expense percentages was
partially offset by the effect of significantly higher pre-tax income for the
six months ended February 28, 2021 when compared to the corresponding period in
the prior fiscal year.
Net Income
Net income was $40.8 million, or $2.96 per common share on a fully diluted
basis, for the six months ended February 28, 2021 compared to $26.5 million, or
$1.92 per common share on a fully diluted basis, for the corresponding period of
the prior fiscal year. Changes in foreign currency exchange rates had a
favorable impact of $1.5 million on net income for the six months ended February
28, 2021 compared to the corresponding period of the prior fiscal year. On a
constant currency basis, net income would have increased by $12.8 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 Six Months Ended
February 28/29, February 28/29,
2021 2020 2021 2020
Gross margin - GAAP 55% 54% 56% 54%
Cost of doing business as a
percentage
of net sales - non-GAAP 36% 34% 34% 36%
EBITDA as a percentage of net
sales - non-GAAP (1) 20% 20% 22% 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:
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Cost of Doing Business (in thousands, except percentages)
Three Months Ended Six Months Ended
February 28/29, February 28/29,
2021 2020 2021 2020
Total operating expenses - GAAP $ 41,352 $ 35,417 $ 83,206 $ 74,256
Amortization of definite-lived
intangible assets
(362) (654) (720) (1,304)
Depreciation (in operating
departments) (1,077) (1,049) (2,119) (1,996)
Cost of doing business $ 39,913 $ 33,714 $ 80,367 $ 70,956
Net sales $ 111,905 $ 100,049 $ 236,464 $ 198,605
Cost of doing business as a
percentage
of net sales - non-GAAP 36% 34% 34% 36%
EBITDA (in thousands, except percentages)
Three Months Ended Six Months Ended
February 28/29, February 28/29,
2021 2020 2021 2020
Net income - GAAP $ 17,191 $ 14,327 $ 40,814 $ 26,521
Provision for income taxes 3,024 3,064 7,421 5,162
Interest income (19) (28) (38) (53)
Interest expense 610 593 1,180 1,035
Amortization of definite-lived
intangible assets 362 654 720 1,304
Depreciation 1,396 1,432 2,738 2,739
EBITDA $ 22,564 $ 20,042 $ 52,835 $ 36,708
Net sales $ 111,905 $ 100,049 $ 236,464 $ 198,605
EBITDA as a percentage of net
sales - non-GAAP 20% 20% 22% 18%
Liquidity and Capital Resources
Overview
The Company's financial condition and liquidity remain strong. Net cash provided
by operations was $42.5 million for the six months ended February 28, 2021
compared to $23.4 million for the corresponding period of the prior fiscal year.
Although there continues to be a certain level of uncertainty related to the
anticipated impact of the current COVID-19 pandemic on the Company's future
results, we believe our efficient business model and the steps that we have
taken leave us positioned to manage our business through this crisis as it
continues to unfold. We continue to manage all aspects of our business
including, but not limited to, monitoring the financial health of our customers,
suppliers and other third-party relationships, implementing gross margin
enhancement strategies and developing new opportunities for growth.
Our principal sources of liquidity are our existing cash and cash equivalents,
as well as cash generated from operations and cash currently available from our
existing unsecured Credit Agreement with Bank of America. We use proceeds of the
revolving credit facility primarily for our general working capital needs. The
Company also holds borrowings under a Note Purchase and Private Shelf Agreement.
See Note 8 - Debt for additional information on these agreements. Included in
Note 8 - Debt is information on the Credit Agreement that we amended with Bank
of America on September 30, 2020, and a third amendment to the Note Agreement.
In the first quarter of fiscal year 2021 we refinanced existing draws under our
Credit Agreement in the United States through the issuance of new notes under
the Note Agreement in the amount of $52.0 million.
We have historically maintained a balance of outstanding draws on our line of
credit in U.S. Dollars in the Americas segment, as well as in Euros and Pound
Sterling in the EMEA segment. Euro and Pound Sterling denominated draws will
fluctuate in U.S. Dollars from period to period due to changes in foreign
currency exchange rates. During the first quarter of fiscal year 2021, we repaid
$50.0 million of our U.S. borrowings outstanding under our line of credit using
$52.0 million in proceeds
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that we received on September 30, 2020 from the issuance and sale of the Series
B and C Notes which mature in November 2027 and 2030, respectively. Our
remaining outstanding balance under our line of credit is denominated completely
in Euros and Pound Sterling as of February 28, 2021. We regularly convert many
of our draws on our line of credit to new draws with new maturity dates and
interest rates. We have the ability to refinance any draws under the line of
credit with successive short-term borrowings through the September 30, 2025
maturity date of the Credit Agreement. Outstanding draws for which we have both
the ability and intent to refinance with successive short-term borrowings for a
period of at least twelve months are classified as long-term. As of February 28,
2021, we had a $47.9 million balance of outstanding draws on the revolving
credit facility, all of which was classified as long-term. In addition, we paid
$0.4 million in principal payments on our Series A Notes during the first six
months of fiscal year 2021, which had an outstanding balance of $17.6 million as
of February 28, 2021. There were no other letters of credit outstanding or
restrictions on the amount available on our line of credit or notes. Per the
terms of both the Note Agreement and the Credit Agreement, our consolidated
leverage ratio cannot be greater than three and a half to one and our
consolidated interest coverage ratio cannot be less than three to one. See Note
8 - Debt for additional information on these financial covenants. At February
28, 2021, we were in compliance with all debt covenants. We continue to monitor
our compliance with all debt covenants. At the present time, we believe that the
likelihood of being unable to satisfy these covenants is remote.
We believe that our future cash from domestic and international operations,
together with our access to funds available under our unsecured revolving credit
facility, will provide adequate resources to fund both short-term and long-term
operating requirements, capital expenditures, dividend payments, acquisitions,
new business development activities and share repurchases. On April 8, 2020, we
suspended repurchases under our most recent share buy-back plan, which
subsequently expired on August 31, 2020, in order to preserve cash while we
monitor the long-term impacts of the COVID-19 pandemic. Management will continue
to evaluate future authorizations under its share buy-back program and the Board
will consider approval based on management's recommendations. At February 28,
2021, we had a total of $72.4 million in cash and cash equivalents. We do not
foresee any ongoing issues with repaying our borrowings and we closely monitor
the use of this credit facility.
Cash Flows
The following table summarizes our cash flows by category for the periods
presented (in thousands):
Six Months Ended February 28/29,
2021 2020 Change
Net cash provided by operating activities $ 42,510 $ 23,382 $ 19,128
Net cash used in investing activities
(7,366) (10,483) 3,117
Net cash provided by (used in) financing
activities (20,311) (9,816) (10,495)
Effect of exchange rate changes on cash and
cash equivalents 1,086 187 899
Net increase in cash and cash equivalents $ 15,919 $ 3,270 $ 12,649
Operating Activities
Net cash provided by operating activities increased $19.1 million to $42.5
million for the six months ended February 28, 2021 from $23.4 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 six months ended
February 28, 2021 was net income of $40.8 million, which increased $14.3 million
from period to period. The changes in our working capital which decreased net
cash provided by operating activities were primarily attributable to increases
in trade accounts receivable balances during the six months ended February 28,
2021 compared to the corresponding period of the prior fiscal year as a result
of significantly increased sales from period to period. These working capital
changes were partially offset by increases in accrued payroll and related
expenses during the first six months of fiscal year 2021 primarily due to
increased accruals of incentive compensation from period to period. In addition,
accounts payable in the EMEA segment increased due to higher levels of
production and the timing of payments to vendors from period to period. In
addition, the change in working capital was also impacted by increases to income
tax accruals related to the higher pre-tax income during the first six months of
fiscal year 2021 compared to the corresponding period of the prior fiscal year.
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Investing Activities
Net cash used in investing activities decreased $3.1 million to $7.4 million for
the six months ended February 28, 2021 from $10.5 million for the corresponding
period of the prior fiscal year, primarily due to decreased capital
expenditures. Capital expenditures decreased by $3.1 million primarily due to
the renovations and equipping of the Company's office building in Milton Keynes,
England that were completed in the first quarter of fiscal year 2020 and a lower
level of manufacturing-related capital expenditures within the U.K. and the
United States from period to period. Capital expenditures during the first half
of fiscal year 2021 were primarily related to manufacturing equipment which is
currently under construction and will be located at our third-party
manufacturers in the United States and the United Kingdom once completed.
Financing Activities
Net cash used by financing activities increased $10.5 million to $20.3 million
for the six months ended February 28, 2021 from $9.8 million for the
corresponding period of the prior fiscal year. This change was primarily due to
a decrease in net proceeds from our debt instruments of $18.5 million. In the
first quarter of fiscal year 2021, we repaid $50.0 million of our U.S.
borrowings outstanding under our line of credit using $52.0 million in proceeds
that we received from the issuance and sale of senior notes during the quarter.
This resulted in a $2.0 million cash inflow during the period compared to $20.5
million in net proceeds on our line of credit in the corresponding period of the
prior fiscal year. In addition, increases in shares withheld to cover taxes on
conversion of equity rewards of $0.9 million and increases in dividends paid to
our shareholders of $0.8 million, respectively, resulted in higher cash outflows
from period to period. Offsetting these increases in cash outflows was a
decrease in treasury stock repurchases due to the suspension of such repurchases
beginning in the third quarter of fiscal year 2020, which resulted in a decrease
in cash outflows of $9.7 million from period to period.
Effect of Exchange Rate Changes
All of our foreign subsidiaries currently operate in currencies other than the
U.S. Dollar and a significant portion of our consolidated cash balance is
denominated in these foreign functional currencies, particularly at our U.K.
subsidiary which operates in Pound Sterling. As a result, our cash and cash
equivalents balances are subject to the effects of the fluctuations in these
functional currencies against the U.S. Dollar at the end of each reporting
period. The net effect of exchange rate changes on cash and cash equivalents,
when expressed in U.S. Dollar terms, was an increase in cash of $1.1 million and
$0.2 million for six months ended February 28, 2021 and February 29, 2020,
respectively. These changes were primarily due to fluctuations in various
foreign currency exchange rates from period to period, but the majority is
related to the fluctuations in the Pound Sterling against the U.S. Dollar.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements as defined by Item 303(a)(4)(ii) of
Regulation S-K.
Commercial Commitments
We have ongoing relationships with various suppliers (contract manufacturers)
that manufacture our products and third-party distribution centers who warehouse
and ship our products to customers. The contract manufacturers maintain title
and control of certain raw materials and components, materials utilized in
finished products, and of the finished products themselves until shipment to our
customers or third-party distribution centers in accordance with agreed upon
shipment terms. Although we have definitive minimum purchase obligations
included in the contract terms with certain of our contract manufacturers, when
such obligations have been included, they have either been immaterial or the
minimum amounts have been such that they are well below the volume of goods that
the Company has historically purchased. In the ordinary course of business, we
communicate supply needs to our contract manufacturers based on orders and
short-term projections, ranging from two to six months. We are committed to
purchase the products produced by the contract manufacturers based on the
projections provided.
Upon the termination of contracts with contract manufacturers, we obtain certain
inventory control rights and are obligated to work with the contract
manufacturer to sell through all products held by or manufactured by the
contract manufacturer on our behalf during the termination notification period.
If any inventory remains at the contract manufacturer at the termination date,
we are obligated to purchase such inventory which may include raw materials,
components and finished goods. The amounts for inventory purchased under
termination commitments have been immaterial.
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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 February 28, 2021, no such commitments were
outstanding.
Share Repurchase Plan
The information required by this item is incorporated by reference to Part
I-Item 1, "Notes to Condensed Consolidated Financial Statements" Note 9 - Share
Repurchase Plan, included in this report.
Dividends
On March 16, 2021, the Company's Board approved a 7% increase in the regular
quarterly cash dividend, increasing it from $0.67 per share to $0.72 per share.
The $0.72 per share dividend declared on March 16, 2021 is payable on April 30,
2021 to shareholders of record on April 16, 2021. Our ability to pay dividends
could be affected by future business performance, liquidity, capital needs,
alternative investment opportunities and loan covenants.
Critical Accounting Policies
Our discussion and analysis of our operating results and financial condition is
based upon our consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America.
Critical accounting policies are those that involve subjective or complex
judgments, often as a result of the need to make estimates. The following areas
all require the use of judgments and estimates: revenue recognition, accounting
for income taxes and impairment of definite-lived intangible assets. Estimates
in each of these areas are based on historical experience and various judgments
and assumptions that we believe are appropriate. Actual results may differ from
these estimates.
There have been no material changes in our critical accounting policies from
those disclosed in Part II-Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," and Note 2 to our consolidated
financial statements contained in our Annual Report on Form 10-K for the fiscal
year ended August 31, 2020, which was filed with the SEC on October 21, 2020.
Recently Issued Accounting Standards
Information on Recently Issued Accounting Standards that could potentially
impact the Company's consolidated financial statements and related disclosures
is incorporated by reference to Part I-Item 1, "Notes to Condensed Consolidated
Financial Statements" Note 2 - Basis of Presentation and Summary of Significant
Accounting Policies, included in this report.
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