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WDFC > SEC Filings for WDFC > Form 10-Q on 9-Jan-2014All Recent SEC Filings

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Form 10-Q for WD 40 CO


9-Jan-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

As used in this report, the terms "we," "our," "us" and "the Company" refer to WD-40 Company and its wholly-owned subsidiaries, unless the context suggests otherwise. Amounts and percents 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, 2013, which was filed with the Securities and Exchange Commission ("SEC") on October 22, 2013.

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 are subject to certain risks and uncertainties. The words "aim," "believe," "expect," "anticipate," "intend," "estimate" and other expressions that indicate future events and trends identify forward-looking statements. These statements include, but are not limited to, references to the near-term growth expectations for multi-purpose maintenance products and homecare and cleaning products, the impact of changes in product distribution, competition for shelf space, the impact of competition on product pricing, the level of promotional and advertising spending, plans for and success of product innovation, the impact of new product introductions on the growth of sales, the impact of customer mix and costs of raw materials, components and finished goods on gross margins, the impact of promotional programs on sales, the rate of sales growth in the Asia-Pacific segment, direct European countries and Eastern and Northern Europe, foreign currency exchange rates and fluctuations in those rates, the impact of changes in inventory management, the effect of future income tax provisions and audit outcomes on tax rates, and the effects of, and changes in, worldwide economic conditions and legal proceedings and other risk factors. 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, 2013, 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, based in San Diego, California, is a global consumer products company dedicated to delivering unique, high value and easy-to-use solutions for a wide variety of maintenance needs of "doer" and "on-the-job" users by leveraging and building upon the Company's fortress of brands. Our vision is to create positive lasting memories by solving problems in the homes and factories around the world. We market multi-purpose maintenance products - under the WD-40® and 3-IN-ONE® brand names. Currently included in the WD-40 brand are the WD-40 multi-use product and the WD-40 Specialist® and WD-40 BikeTM product lines. We launched the WD-40 Specialist product line in early fiscal year 2012 and currently sell this product line in various regions throughout the Americas, EMEA and Asia-Pacific. The WD-40 Specialist product line has contributed to sales of the multi-purpose maintenance products since its initial launch. In the fourth quarter of fiscal year 2012, we developed the WD-40 Bike product line, which is focused on a comprehensive line of bicycle maintenance products that include wet and


dry chain lubricants, heavy-duty degreasers, foaming bike wash and frame protectants that are designed specifically for the avid cyclist, bike enthusiasts and mechanics. We launched the WD-40 Bike product line in the U.S. during fiscal year 2013. We also market the following homecare and cleaning brands: X-14® mildew stain remover and automatic toilet bowl cleaners, 2000 Flushes® automatic toilet bowl cleaners, Carpet Fresh® and No Vac® rug and room deodorizers, Spot Shot® aerosol and liquid carpet stain removers, 1001® household cleaners and rug and room deodorizers and Lava® and Solvol® heavy-duty hand cleaners.

Our brands are sold in various locations around the world. Multi-purpose maintenance products are sold worldwide in markets throughout North, Central and South America, Asia, Australia and the Pacific Rim, Europe, the Middle East and Africa. Homecare and cleaning products are sold primarily in North America, the United Kingdom ("U.K.") and Australia. We sell our products primarily through mass retail and home center stores, warehouse club stores, grocery stores, hardware stores, automotive parts outlets, sport retailers, independent bike dealers and industrial distributors and suppliers.

Highlights

The following summarizes the financial and operational highlights for our business during the three months ended November 30, 2013:

· Consolidated net sales increased $0.3 million for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates had an unfavorable impact of $0.9 million on consolidated net sales for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year. Thus, on a constant currency basis, net sales would have increased by $1.2 million from period to period.

·

Ų Multi-purpose maintenance products sales, which include the WD-40 and 3-IN-ONE brands, were $83.9 million, up 3% from the same period last fiscal year.

Ų Homecare and cleaning products sales, which include all other brands, were $11.6 million, down 15% from the same period last fiscal year.

· Americas segment sales were $44.0 million, down 3% compared to the same period last fiscal year. EMEA segment sales were $36.5 million, up 3% compared to the same period last fiscal year. Asia-Pacific segment sales were $15.0 million, up 4% compared to the same period last fiscal year.

· Gross profit as a percentage of net sales increased to 52.0% for the three months ended November 30, 2013 compared to 50.1% for the corresponding period of the prior fiscal year.

· Consolidated net income increased $0.6 million, or 5%, for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates did not have a material impact on net income for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year.

· Diluted earnings per common share for the three months ended November 30, 2013 were $0.74 versus $0.69 in the prior fiscal year period.

· Progress continues to be made on the development and launch of new multi-purpose maintenance products. The Company launched the WD-40 Specialist product line in early fiscal year 2012 and currently sells this product line in various regions throughout the Americas, EMEA and Asia-Pacific.

· Share repurchases continue to be executed under the current $60.0 million share buy-back plan, which was approved by the Company's Board of Directors in June 2013. During the three months ended November 30, 2013, the Company repurchased an additional 77,983 shares at an average price of $67.48 per share, bringing the total cost of the repurchases to $7.9 million under this plan.

Our core strategic initiatives and the areas where we will continue to focus our time, talent and resources in future periods include: (i) maximizing the WD-40 brand through geographic expansion and market penetration; (ii) leveraging the WD-40 brand to develop new products and categories within the Company's prioritized platforms; (iii) expanding product and revenue base; (iv) attracting, developing and retaining people; and (v) operating with excellence.


Results of Operations

Three Months Ended November 30, 2013 Compared to Three Months Ended November 30, 2012

Operating Items

The following table summarizes operating data for our consolidated operations (in thousands, except percentages and per share amounts):

                                          Three Months Ended November 30,
                                                                Change from
                                                                 Prior Year
                                      2013        2012       Dollars    Percent
Net sales:
Multi-purpose maintenance products  $ 83,986    $ 81,746    $  2,240         3%
Homecare and cleaning products        11,555      13,518      (1,963)      (15)%
Total net sales                       95,541      95,264         277           -
Cost of products sold                 45,868      47,537      (1,669)       (4)%
Gross profit                          49,673      47,727       1,946         4%
Operating expenses                    32,906      31,862       1,044         3%
Income from operations              $ 16,767    $ 15,865    $    902         6%
Net income                          $ 11,482    $ 10,944    $    538         5%
Earnings per common share - diluted $   0.74    $   0.69    $   0.05         7%

Net Sales by Segment

Effective September 1, 2013, we transitioned the management of our India operations to the EMEA segment. As a result, the India financial results are now being included in the EMEA segment for all periods presented. These amounts were previously included within the Asia-Pacific segment in the Company's reported business segment information. The following table summarizes net sales by segment (in thousands, except percentages):

Three Months Ended November 30,

                                          Change from
                                          Prior Year
               2013        2012       Dollars     Percent
Americas     $ 44,062    $ 45,355    $ (1,293)        (3)%
EMEA           36,516      35,585         931          3%
Asia-Pacific   14,963      14,324         639          4%
Total        $ 95,541    $ 95,264    $    277            -

Americas

The following table summarizes net sales by product line for the Americas segment (in thousands, except percentages):

                                         Three Months Ended November 30,
                                                               Change from
                                                                Prior Year
                                     2013        2012       Dollars    Percent
Multi-purpose maintenance products $ 35,922    $ 35,671    $    251         1%
Homecare and cleaning products        8,140       9,684      (1,544)      (16)%
Total                              $ 44,062    $ 45,355    $ (1,293)       (3)%
% of consolidated net sales             46%         48%


Sales in the Americas segment, which includes the U.S., Canada and Latin America, decreased to $44.0 million, down $1.3 million, or 3%, for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates did not have a material impact on sales for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year.

Sales of multi-purpose maintenance products in the Americas segment increased $0.2 million, or 1%, for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year. This increase was driven primarily by higher sales of the WD-40 Specialist product line in the U.S. due to new distribution and the release of additional product offerings in the line during the first quarter of fiscal year 2014. As a result of fluctuations in the promotional patterns with certain of our key customers, particularly those in the mass retail, home center and warehouse club channels in the U.S., it is common for our sales to vary period over period and year over year.

Sales of homecare and cleaning products in the Americas segment decreased $1.5 million, or 16%, for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year. Sales of homecare and cleaning products in the U.S. decreased 15% from period to period. This sales decrease was driven primarily by lower sales of the Carpet Fresh and Spot Shot products and the 2000 Flushes automatic toilet bowl cleaners, which were down 52%, 18% and 6%, respectively, in the U.S. for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year. While each of our homecare and cleaning products continue to generate positive cash flows, we have continued to experience decreased sales for these products primarily due to lost distribution, reduced product offerings, competition, category declines and the volatility of orders from and promotional programs with certain of our customers, particularly those in the warehouse club and mass retail channels. In the second half of fiscal year 2013, management started to evaluate the strategic alternatives for certain of the Company's homecare and cleaning products. To date, no decisions have been made to change the strategic plans for these brands. In connection with this evaluation, management assessed the carrying value of the definite-lived intangible assets associated with these trade names in the second half of fiscal year 2013 and determined that the carrying values were not impaired, with the exception of the 2000 Flushes trade name, for which an impairment charge of $1.1 million was recorded. At November 30, 2013, the carrying value of definite-lived intangible assets associated with these trade names was $23.8 million, of which less than $2.0 million was associated with the Carpet Fresh trade name. Management will continue to assess the recoverability of these assets periodically based on changes in events or circumstances. In the event that business conditions change in the future, we may be required to reassess and update our forecasts and estimates used in subsequent analyses. If the results of these future analyses are lower than current estimates, an additional impairment charge may result at that time.

For the Americas segment, 80% of sales came from the U.S., and 20% of sales came from Canada and Latin America combined for each of the three months ended November 30, 2013 and 2012.

EMEA

The following table summarizes net sales by product line for the EMEA segment (in thousands, except percentages):

                                         Three Months Ended November 30,
                                                               Change from
                                                               Prior Year
                                     2013        2012      Dollars    Percent
Multi-purpose maintenance products $ 34,766    $ 33,553    $ 1,213         4%
Homecare and cleaning products        1,750       2,032       (282)      (14)%
Total                              $ 36,516    $ 35,585    $   931         3%
% of consolidated net sales             38%         37%

Sales in the EMEA segment, which includes Europe, the Middle East, Africa and India, increased to $36.5 million, up $0.9 million, or 3%, for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates did not have a material impact on sales for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year.

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). Overall, sales from direct markets decreased $0.5 million, or 2%, for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year. We experienced sales decreases throughout part of the Europe direct markets for the three months ended November 30,


2013 compared to the corresponding period of the prior fiscal year, with percentage decreases in sales as follows: Italy, 17%; the Germanics region, 15%; and the U.K., 9%. The decreased sales in these regions were mostly offset by the sales increase of 24% in Iberia and 18% in France from period to period. The overall sales decrease in the direct markets was primarily due to the timing of customer orders and a lower level of promotional activities from period to period. Sales from direct markets accounted for 56% of the EMEA segment's sales for the three months ended November 30, 2013 compared to 59% of the EMEA segment's sales for the corresponding period of the prior fiscal year.

The regions in the EMEA segment where we sell through local distributors include the Middle East, Africa, India, Eastern and Northern Europe. Sales in the distributor markets increased $1.4 million, or 10%, for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year primarily due to increased sales of WD-40 multi-use products in all markets and initial sales of the WD-40 Specialist product line in Northern Europe. Overall, sales in the distributor markets were increased from period to period primarily due to the continued growth of the base business in key markets, particularly those in Northern and Eastern Europe. The distributor markets accounted for 44% of the EMEA segment's total sales for the three months ended November 30, 2013, compared to 41% for the corresponding period of the prior fiscal year.

Asia-Pacific



The following table summarizes net sales by product line for the Asia-Pacific
segment (in thousands, except percentages):



                                          Three Months Ended November 30,
                                                                Change from
                                                                 Prior Year
                                      2013        2012      Dollars     Percent
Multi-purpose maintenance products $  13,298    $ 12,522    $   776          6%
Homecare and cleaning products         1,665       1,802       (137)        (8)%
Total                              $  14,963    $ 14,324    $   639          4%
% of consolidated net sales              16%         15%

Sales in the Asia-Pacific segment, which includes Australia, China and other countries in the Asia region, increased to $15.0 million, up $0.6 million, or 4%, for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year. Changes in foreign currency exchange rates for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year had an unfavorable impact on sales. Sales for the three months ended November 30, 2013 translated at the exchange rates in effect for the corresponding period of the prior fiscal year would have been $15.4 million in the Asia-Pacific segment. Thus, on a constant currency basis, sales would have increased by $1.1 million, or 8%, for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year.

Sales in Asia, which represented 69% of the total sales in the Asia-Pacific segment for the three months ended November 30, 2013, increased $0.6 million, or 6%, for the first quarter of fiscal year 2014 as compared to the same period of the prior fiscal year primarily driven by higher sales of WD-40 multi-use products in China. Sales in China increased $0.6 million, or 24%, from period to period primarily due to the ongoing growth of our base business and a higher level of sales which resulted from a significant promotional program that was conducted in the first quarter of fiscal year 2014. Sales in the distributor markets in the Asia region remained constant at $6.9 million for each of the first quarter of fiscal years 2014 and 2013.

Sales in Australia remained constant at $4.6 million for each of the three months ended November 30, 2013 and 2012. Changes in foreign currency exchange rates had an unfavorable impact on sales in Australia. On a constant currency basis, sales would have increased by $0.6 million, or 13%, for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year due to the launch of the WD-40 Specialist product line and increased promotional activities.

Gross Profit

Gross profit increased to $49.7 million for the three months ended November 30, 2013 compared to $47.7 million for the corresponding period of the prior fiscal year. As a percentage of net sales, gross profit increased to 52.0% for the three months ended November 30, 2013 compared to 50.1% for the corresponding period of the prior fiscal year due.


Gross margin was positively impacted by 0.4 percentage points for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year due to sales price increases. These sales price increases were implemented in certain locations and markets in the EMEA and Asia-Pacific segments during fiscal year 2013. Advertising, promotional and other discounts, which are recorded as a reduction to sales, decreased during the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year, primarily in the Americas segment, positively impacting gross margin by 0.7 percentage points. The decrease in such discounts was due to a lower percentage of sales, particularly those for our homecare and cleaning products, being subject to promotional allowances during the three months ended November 30, 2013 compared to the corresponding period in the prior fiscal year. 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 promotional expenses.

In addition, favorable net changes in the costs of petroleum-based materials and aerosol cans positively impacted gross margin by 0.5 percentage points from period to period, primarily in the Asia- Pacific and EMEA segments. There is often a delay of one quarter or more before changes in raw material costs impact cost of products sold due to production and inventory life cycles. We expect that petroleum-based material costs will continue to be volatile and that volatility will impact our cost of products sold in future periods. Changes in foreign currency exchange rates also positively impacted gross margin by 0.5 percentage points primarily due to the significant fluctuations in the exchange rates for the Euro against the Pound Sterling in our EMEA segment. Gross margin was positively impacted by 0.2 percentage points from period to period due to lower manufacturing fees from our third-party contract manufacturers in the Americas segment which we have realized as a result of the restructure of our North American supply chain. Lower manufacturing costs in our Asia-Pacific segment also positively impacted our gross margin by 0.1 percentage points from period to period.

The aforementioned favorable impacts to gross margin were slightly offset by 0.2 percentage points due to higher raw materials costs associated with certain of our homecare and cleaning products. Sales mix changes and other miscellaneous costs negatively impacted gross margin by 0.3 percentage points from period to period.

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 $3.8 million and $4.2 million for the three months ended November 30, 2013 and 2012, respectively.

Selling, General and Administrative Expenses

Selling, general and administrative ("SG&A") expenses for the three months ended November 30, 2013 increased $1.4 million, or 5%, to $26.7 million from $25.3 million for the corresponding period of the prior fiscal year. As a percentage of net sales, SG&A expenses increased to 27.9% for the three months ended November 30, 2013 from 26.6% for the corresponding period of the prior fiscal year. The increase in SG&A expenses was largely attributable to higher employee-related costs, a higher level of expenses associated with travel and meetings and increased professional services costs. Employee-related costs, which include salaries, bonuses, profit sharing, stock-based compensation and other fringe benefits, increased $1.4 million for the three months ended November 30, 2013 compared to the corresponding period of the prior fiscal year. This increase was primarily due to annual compensation increases and higher staffing levels as well as higher bonus expense from period to period. Travel and meeting expenses increased $0.2 million due to a higher level of travel expenses associated with the ongoing support of our strategic initiatives. Professional services costs also increased by $0.2 million period over period primarily due to higher legal fees. Other miscellaneous expenses increased by $0.1 million period over period. These increases in SG&A expenses were partially offset by a $0.3 million decrease in freight costs period over period. This decrease was primarily due to lower sales volumes in the Americas segment as well as optimizations which are being realized on shipping customer orders as a result of the North American supply chain restructure which was completed at the end of fiscal year 2013. Changes in foreign currency exchange rates decreased . . .

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